2021 H2 Economics Paper 1 Case Study 2: Suggested Answers
The case study examines foreign direct investment flows in South-East Asia, drawing on Singapore and Vietnam to test the recording of FDI in the balance of payments, the opportunity cost of investment, infrastructure on the production possibility curve, export diversity, and domestic versus external investment.
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A two mark question asking what is meant by foreign direct investment (FDI) and to identify the component of the balance of payments accounts in which FDI is recorded.
Foreign direct investment, or FDI, is investment in capital goods by an entity from an external source, such as setting up a business to produce goods and services in another country.
FDI is recorded in the capital and financial account of the balance of payments.
Define FDI as cross border investment in productive capital and correctly place it in the capital and financial account.
Tests: Balance of payments
A two mark question asking for the opportunity cost of investment expenditure that uses domestic funds.
Opportunity cost is the value of the next best alternative forgone. When domestic funds are used for investment, the opportunity cost is the alternative uses those funds could have served. Chief among these is consumption, whether as household purchases of consumer goods that directly satisfy wants, or as government spending on public goods and services that raise welfare. The opportunity cost of using domestic funds for investment is therefore the forgone benefits of these alternative consumption avenues.
Define opportunity cost as the next best alternative forgone and identify forgone consumption as the cost of using domestic funds for investment.
Tests: Demand and supply analysis
A two mark question asking, using a production possibility curve diagram, to show the impact of infrastructure improvements in a country such as Singapore or Vietnam.
Infrastructure improvements are shown on a production possibility curve as an outward shift of the curve. The PPC shows the maximum output of two goods given fixed resources and technology. Better infrastructure raises efficiency and productivity, so more can be produced with the same resources. On the diagram the curve shifts outward from its original position, illustrating that the country can now produce more of both goods, or more of one without sacrificing the other, expanding its productive capacity.
Identify the outward shift of the PPC and link it to greater productive capacity from improved infrastructure.
Tests: Demand and supply analysis
A six mark question on how the current account of the balance of payments of Singapore or Vietnam is likely to be affected in the long run by increased FDI.
- Set up a worked example of inward FDI and the balance of payments components it touches.
- Trace the outflows it creates in the short run through profit repatriation and worker remittances on the primary income balance.
- Trace the longer run channel through the effect of the investment on export capacity.
- Net the long run effect against the short run outflows to reach a judgment on the current account.
This part is gated. The full model answer tracing fdi through the current account over time, with the diagrams and the full evaluation, is in the ETG TYS Answers book from SAP and is worked live in the TYS Crashcourse. ETG students also get the AI TYS coach that guides them through this exact question. Message the team to find out more.
Tests: Balance of payments
An eight mark discussion of whether broad export diversity or specialisation in a narrow range of exports is more likely to be beneficial for an economy engaged in international trade.
- Anchor the case for specialisation in comparative advantage and the efficiency gains from trade.
- Identify the vulnerability of narrow specialisation to sector specific shocks.
- Build the case for diversification as economic insurance against such shocks.
- Bring in the trade off, that excessive diversification can dilute the efficiency gains of specialisation.
- Conclude with a judgment that frames the choice as a balance rather than a binary.
This part is gated. The full model answer weighing specialisation against export diversity, with the diagrams and the full evaluation, is in the ETG TYS Answers book from SAP and is worked live in the TYS Crashcourse. ETG students also get the AI TYS coach that guides them through this exact question. Message the team to find out more.
Tests: Comparative advantage, Protectionism
A ten mark discussion of whether a government should encourage domestic investment rather than investment from external sources to improve the standard of living.
- Set up the common channel by which any investment raises aggregate demand, national income and the standard of living.
- Develop the case for domestic investment and the saving versus consumption trade off it can impose.
- Develop the case against relying on external sources, focusing on the volatility of footloose foreign capital.
- Weigh the material and non material effects of each source against the other.
- Conclude with a judgment, arguing for a balance that manages the risks of foreign capital.
This part is gated. The full model answer with the worked ad and as analysis and the evaluation, with the diagrams and the full evaluation, is in the ETG TYS Answers book from SAP and is worked live in the TYS Crashcourse. ETG students also get the AI TYS coach that guides them through this exact question. Message the team to find out more.
Questions students ask
Where can I get the full worked answers to the 2021 H2 Economics paper 1 case study 2?
The full model answers, with the diagrams and the higher mark evaluation, are in the ETG TYS Answers book published by SAP and sold at Popular, and are worked live in the TYS Crashcourse. Every ETG student also gets the AI TYS coach on our learning management system, which guides you through how to tackle every essay and every case study question from the last ten years.
Are these the official 2021 A Level Economics answers?
No. SEAB sets and marks the A Level paper. These are suggested answers by Mr Eugene Toh, author of the H1 and H2 A Level Economics TYS answer keys, published by SAP and sold at Popular.
How are these case study suggested answers structured?
The lower mark parts are answered in full. The higher mark parts are outlined here, with the full worked answers reserved for the ETG TYS Answers book and the TYS Crashcourse.
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