P-Cube

Session 3
Todays objectives
1. Key points for case study skills
2. Understanding 2009 Promos Case study
3. Sample answers for (d)
Key case study skills
Case material
+
Concepts
Key case study skills
Should not just paraphrase the extracts (no
concepts)
Neither should it be just regurgitation of notes (no
application to context)
Whenever possible use numbers
We will be looking at samples later
Key case study skills
Data handling skills
Be sensitive eg. change vs absolute figures,
real vs nominal, etc
Trend
Key case study skills
Time management
Key case study skills
Do refer to case study skills package
for more details and tips
Dissecting the question
ai) Using AD/AS analysis, explain how an increase in
FDI inflows affect economic growth. [3]
Actual and potential growth
Dissecting the question
aii) Describe the trend in growth in FDI inflows and
growth in real GDP observed in Table 1. [2]
Dissecting the question
aiii) To what extent is the relationship described in
(ai) consistent with the observation made in (aii). [3]
2 sides
Dissecting the question
b) Discuss whether the data provided is sufficient to
suggest an improvement in the living standard of an
average Chinese resident from 2000 to 2008. [8]
Across time comparison
Schematic plan (b)
Introduction
Body
Thesis Data provided shows
improvement in SOL
Real GDP growth is positive
Anti-thesis 1 Data provided is insufficient
1. Not per capita
2. Distribution and composition of NI is unknown
3. Lack of concrete information on non-material
aspects
Conclusion Data is insufficient to show improvement in SOL
Dissecting the question
ci) Describe the trend in the Chinese government
budget balance (% of GDP) from 2003 to 2008.
[2]
Position of the balance surplus/deficit
Direction of change increasing/decreasing
Dissecting the question
cii) With reference to data, predict the change in
government budget balance in 2009. [2]
Government revenue Government expenditure
Dissecting the question
d) To what extent can the Chinese governments
stimulus plan power her economy to lead the rest of
the world to recovery. [10]
1. Stimulus plan to raise Chinas growth
2. With Chinas growth, other countries will recover too
Schematic plan (d)
Introduction
Body
Explain how the Chinese governments stimulus plan can help China achieve
EG
Explain how Chinas growth can help other countries achieve growth as well
Limitations of stimulus plan on Chinas growth
Synthesis & Conclusion Whether Chinas growth can be propped up by the stimulus plan is
unknown. Even if Chinas growth does increase she still may not be able to help other countries.
Your feedback/request
SMS your feedback to 92293072
Hci survey 691 <your feedback/request>



Answer all questions.
Question 1

Extract 1: Chinas Rise

China's economy during the past 30 years has changed from a centrally planned system that was
largely closed to international trade to a more market-oriented economy that has a rapidly growing
private sector and is a major player in the global economy. Reforms started in the late 1970s with
the phasing out of collectivized agriculture, and expanded to include the gradual liberalization of
prices, increased autonomy for state enterprises, the foundation of a diversified banking system, the
rapid growth of the non-state sector, and the opening to foreign trade and investment.

China has generally implemented reforms in a gradualist fashion. Although it has opened up its
economy in recent years, still China has invigorated its support for leading state-owned enterprises
in sectors it considers important to "economic security," explicitly looking to foster globally
competitive national champions. This is carried out while it still continued its effort to privatize the
inefficient state owned industries that falter in the face of growing competition from the
multinationals that have moved operations to China to take advantage of its low labour cost and
huge domestic market. Today, China is one of the worlds largest recipients of foreign direct
investment (FDI) which has not only provided employment opportunities for the locals, but has also
become an important source for technology transfers.

Measured on a purchasing power parity (PPP) basis that adjusts for price differences, China in
2008 stood as the second-largest economy in the world after the US, although in per capita terms
the country is still lower middle-income. The Chinese government faces numerous economic
development challenges, including: spending more to strengthen its social safety net, including
pension and health system reform, to counteract a low domestic demand; sustaining adequate job
growth for rural-urban migrant workers and those laid off from state-owned enterprises; reducing
corruption and other economic crimes; and containing environmental damage related to the
economy's rapid transformation. Economic development has been more rapid in coastal provinces
than in the interior, and approximately 200 million rural laborers and their dependents have
relocated to urban areas to find work.

Adapted from Thomson Reuters J an 2009 and CIA Factbook 2009


Extract 2: Can China save the World?

With the U.S., J apan and all of Europe mired in the worst global recession in 30 years, China has
shown a restorative strength that six months ago many doubted it had. A devastating slump in
exports crippled growth late last year, but on the back of a US$586 billion government stimulus
program, China has snapped back. The economy grew 7.9% in the second quarter and will now
probably expand 8% or more this year. Factory production has begun to edge up, in part because
Chinese consumers continue to spend money at a healthy pace. Auto sales, helped significantly by
government subsidies for small-car purchases, hit an all-time record in April. Overall, retail sales in
China this year are up 16%.

Nations that depend on producing commodities, such as Australia and Brazil, have benefited
immensely over the past six months as demand from China has driven up the price of raw
materials. Helped by trade with China, Asia's export-driven economies are sputtering back to life.
Overall, the International Monetary Fund (IMF) forecasts that in the three years from 2008 to 2010,
China will, astonishingly, account for almost three-quarters of the world's economic growth. As
Shanghai-based economist Andy Xie puts it, "Everyone wants to know the same thing: Can China
save the world?"



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The speed and relative success so far of China's stimulus stands in stark contrast with that of the
U.S. According to a recent study by the World Bank, Beijing's government spending will generate
more than 80% of the country's overall economic growth this year. This is partly because China was
already in the midst of a nationwide infrastructure program when the recession hit. Emergency
spending measures simply added to existing schemes already under way.

Still, the best possible answer to the question of whether China can save the world is: Not yet.
Plenty of economists doubt that China's economy is as sound as it appears. Even though Chinas
economy continues to power ahead, it will probably not, on its own, be enough to drag the rest of
the world into a recovery. Ultimately, China is not yet the leader of the global economy, although it
appears to be getting there.

Moreover, economists do not believe that the relatively poor Chinese consumers have the
purchasing power to rescue China's economy, let alone the rest of the world. Brisk though auto
sales may be, most Chinese still can't afford a Volkswagen, let alone a BMW. Even as China's
consumers feel richer, their share of its economy may not change much until Beijing enacts reforms
to the rural infrastructure, health-care and social-security systems -- steps that would give people
more confidence to spend rather than save.
Some aspects of China's glimmers of economic turnaround do seem as though they might offer
hope to the country's trading partners. Take car sales, which rose in March for the third straight
month, once again making China the largest market for automobiles in the world, ahead of the U.S.
Those statistics, you'd think, would bring good news to the worlds automobile industry; but the
recovery may only be temporary.
Without a recovery in China's hugely important export sector, the economy may resume its
downward track later in the year. In addition, China still faces a number of internal challenges a
massive shift of population from rural areas to cities, cleaning up decades of environmental
degradation, continuing to provide the increase in prosperity that has underpinned political stability.
Given their scale, it should surprise nobody that it is still most concerned with saving itself
economically not anyone else.
Adapted from Time, 10 Apr and 10 Aug 2009


Table 1: Selected Key Macroeconomic Indicators for China, 2000-2008
2000 2001 2002 2003 2004 2005 2006 2007 2008
Real GDP (US$ bn) 1457 1578 1722 1894 2085 2303 2570 2904 3165
Growth in real GDP
(% change) 8.4 8.3 9.1 10.0 10.1 10.4 11.6 13 9
FDI Inflows (US$ bn) 193 203 217 228 245 272 293 327 NA
Growth in FDI Inflows
(% change) 3.8% 5.2% 6.9% 5.1% 7.5% 11.0% 7.7% 11.6% NA
Budget balance (% of
GDP) -2.5 2.3 2.6 -2.2 -1.3 -1.2 -0.8 0.6 -0.4
Consumer prices (%
change) 0.3 0.7 -0.8 1.1 3.8 1.8 1.8 4.8 5.9

Adapted from EIU Statistics


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Table 2: U.S. Economy versus Chinas Economy
Macroeconomic Indicator United States China
GDP US$14 trillion US$4.4 trillion
GDP (as % of global GDP) 21% 6.4%
Domestic consumption (as % of GDP) 70% 40%
Annual per capita income US$39,000 US$6,000

Adapted from Time, 10 Apr 2009

Questions



(a) (i) Using AD-AS analysis, explain how an increase in FDI inflows could affect
economic growth.
[3]
(ii) Describe the trend of growth in FDI inflows and growth in real GDP
observed from Table 1.
[2]
(iii) To what extent is the relationship described in a(i) consistent with the
observation made in a(ii)?
[3]


(b) Discuss whether the data provided is sufficient to suggest an improvement in the
living standard of an average Chinese resident from 2000 to 2008.
[8]

(c) (i) Describe the trend in the Chinese government budget balance (% of GDP)
from 2003 to 2008.
[2]
(ii) With reference to the data, predict the change in the Chinese government
budget balance in 2009.
[2]

(d) To what extent can Chinas government stimulus plan power her economy to lead
the rest of the world to a recovery?
[10]

[Total: 30]










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a) (i) Using AD-AS analysis, explain how an increase in FDI inflows could affect economic
growth. [3]

Components of Aggregate demand C, I, G and (X-M). Increase in FDI will increases AD which
causes an unplanned decrease in stocks. Firms will increase production to bring the stocks to
desired levels. This increase in output level is actual growth.

In the long run, increase in FDI causes capital accumulation which raises the productive capacity
(Potential growth) this is illustrated by the shifting of AS rightwards.
Both increase in AD and AS will bring about increase in national income, hence economic growth.

Comments:
Weak AD analysis increase in I will lead to increase in C and hence increase in NY and then AD
(hence making the argument sound like it is going on in circles). Should have looked at the direct
impact given I is part of AD. The increase in C is induced consumption.


(ii) Describe the trend of growth in FDI inflows and growth in real GDP observed from Table
1. [2]

Growth in real GDP showed rising trend in general from 2000-2008, except for 2000 2001 and
2007-2008.
Growth in FDI inflows showed increasing trend in general from 2000-2007, except from 2002-2003
and 2005-2006.

Comment:
Quite a number commented that growth of GDP/FDI increase at increasing rate. This is incorrect.
Table 4 shows growth of GDP/FDI. For growth to increase at increasing rate the percentage
change must be increasing and at a larger and larger percentage. It is only true if the comment is
GDP/FDI is increasing at increasing rate. However, this does not answer the question as the
focus of the question is on growth.
Missed out on exceptions / pointed out the less obvious year (2001) when stating exception for
growth in real GDP.
Focused on describing peaks rather than on describing the trend.
Many COMPARE instead of DESCRIBE. This is a very strange phenomenon. When question
asks for compare students tend to just describe and when the question only requires description,
students compared. Please read the command word carefully.


(iii) To what extent is the relationship described in a(i) consistent with the observation made
in a(ii)? [3]

There is a positive relationship between FDI inflows and real GDP, as with the rate of change has
broadly suggested.
However, differences in the rate of increase in the 2 variables suggest that FDI inflows are not the
only factor affecting real GDP growth in China.
When the FDI growth slowed down from 2002-03 and 2005-06 while real GDP growth continued on
the rise, other factors could be affecting growth in China e.g. consumption (40% of GDP) and
exports.

Comments:
Most candidates only focused on the data skills and did not provide the economic analysis to
explain why the relationship is not consistent throughout the whole period.
To what extent already hinted the need to look at the other side. However not many of the
students explored the other side.

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Not acceptable to explain the inconsistency by merely quoting 911 and SARs without links to
how these may affect the other components of AE.




b) Discuss whether the data provided is sufficient to suggest an improvement in the living
standard of an average Chinese resident from 2000 to 2008. [8]

Define SOL material and non-material aspects

Thesis the data suggest an improvement in living standards

Evidence from Table 1 real GDP growth shown is positive indicating real GDP has increased.
GDP measures the market value of all final goods and services newly produced within the
geographical boundaries of an economy in a given period of time (usually one year). Real GDP
means that the effect of inflation has been removed. Hence with an increase in real GDP, there is
an increase in physical quantities of goods and services produced and thus available for
consumption, and hence improving SOL.

Anti-thesis shortcomings of the data to indicate improvement in SOL/data shows worsening of
living standards

However, to have a better gauge of whether there is improvement in living standards of an average
Chinese, increase in real GDP figures alone is grossly insufficient. Population tends to grow over
time, so one has to consider how the rate of change in population compares with the rate of change
in national income. If the population of China has grown faster than the real GDP then what this
means is that on the average, less is available for each individual. Hence, by focusing only on real
GDP may overstate the actual increase in SOL.

Even with growth in real GDP per capita, the growth may benefit certain sectors more than others
evidence e,g, those who are employed in the selected state-owned firms and those residing in the
coastal provinces. Structural unemployment may be quite high given the displaced rural farmers
and those previously hired workers in the state-owned firms which have now been privatized. This is
especially so given that an average Chinese is likely still trapped in the lower middle-income group,
thus the purchasing power has probably not improved in tandem with the growth in GDP. Hence,
income inequality may be widening though GDP is growing and supplementary indicators eg the
Gini coefficient is needed to have a better assessment of the improvement in living standards.

Although manufacturing is the activity driving economic growth in China, most of the goods
produced are exported. Hence, though GDP may be growing, its growth could be attributed more to
the growth in exports and FDI, rather than domestic consumption.

Non-material well-being may also have been shortchanged given the rising environmental
degradation brought about by the growth in the manufacturing activities and rising crime rates that
could be attributed partially by the widening rich-poor gap and rising rural-urban unemployment. In
addition, Extract 2 also hints at the lack of spending on healthcare which implies the quality of
healthcare may be lacking in China.

Hence, the information does not clearly point towards an improvement in living standards.

Comment:
Lack of application to the case. Sounded more like just answering an essay question without
using the evidences from the case.
Did not realize the changes in price already accounted for since real GDP is given in Table 1.
PPP is useful when comparing SOL over space. This question is for over time.

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For students who tried to use evidence, some merely lifted from the extracts without much
attempt to explain clearly how they can be applied in the analysis of the answer.


c) (i) Describe the trend in the Chinese government budget balance (% of GDP) from 2003 to
2008. [2]

The Chinese government budget balance as a percentage of GDP is in a deficit but is getting
smaller.

Comments:

Negative budget balance is not accepted.
Some students looked at the wrong years like 2001 to 2008.


(ii) With reference to the data, predict the change in the Chinese government budget balance
in 2009. [2]

Likely to continue to run a budget deficit and the size of the deficit is likely to increase.

Comments:

Budget Balance (T G) is NOT the same as government expenditure (G). This misconception is
very clear when students explained that the govt will increase its spending and thus the budget
balance will increase.
There is no need to give exact numerical figures for the size of change.
There is no need to give page worth of explanation for the prediction.
Students did not take into account the economic situation presented in the extracts and simply
looked at the trends in the table while doing the prediction.



d) To what extent can Chinas government stimulus plan power her economy to lead the rest
of the world to a recovery? [10]

The Chinese governments $586 billion stimulus plan is an expansionary fiscal policy to help
Chinas economic growth. An expansionary fiscal policy is the use of government spending and
taxation to stimulate economic activity and hence economic growth. We will discuss the extent to
which the expansionary fiscal policy helps Chinas growth and also the rest of the world.

Explain how expansionary fiscal policy can bring about economic growth to China through the
multiplier effect. Need to give a brief account of the multiplier process.

With the expansionary fiscal policy, government expenditure (G) increases hence the aggregate
demand (AD) increases as G is a component of AD. With a reduction in income tax, the disposable
income increases and consumer expenditure (C) increases, and with a reduction in corporate tax,
the after-tax profits of firms increases shifting MEI to the right and level of investment (I) increases.
Since C and I are also components of AD, AD increases. With G, C and I increasing, AD shifts from
AD0 to AD1. This causes an unplanned decrease in stocks and firms will increase production to
bring the stocks levels to desired range. This increase in output will increase the national income.
Through the multiplier effect, the higher income induces an increase in aggregate consumption.
This leads firms to hire more workers again to meet the rising demand for goods and services and
national income rises a second round. This second round increase in national income induces
another round of consumption, leading to a third round increase in national income. With each
successive round of increase in income, the amount of leakages, in terms of savings, taxes and

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import expenditure, also rises. This process will continue until the total change in leakages is
equal to the initial increase in C+I+G, by which time, national income would have increased by a
multiple and employment would also have risen significantly.

Since 80% of Chinas growth is due to G (Extract 2 para 3) signifying that G takes up a significant
proportion of AD and the increase in G can help China to achieve growth.

Moreover, the problem of time lag seems to be less of an issue in China given that the government
has already put in place plans for infrastructure spending. Hence, less time is wasted in getting the
stimulus plan into action.

Explain how, with Chinas growth, it will help other countries export sectors and hence growth

When China grows, it could bring about positive spillover effects for other countries (as evidenced in
para 2 of Extract 2). China will demand for more imports of both raw materials and end-consumer
goods which could help boost export growth for these trading partners. Countries that export to
China will see an improvement in the net exports and hence their AD and hence economic growth.


Explain how the stimulus plan may not help Chinas growth significantly
Limitations:
- MPC may not be very high given the tendency of the Chinese to save especially if the slow
down in the economy sparks fears in losing of jobs especially in the export-oriented sectors
(extract 2 para 5 implies people are saving)
- Growth still very dependent on exports (extract 2 para 7) which is very much dependent on
the economic performance of its trading partners, of which many are undergoing recession
- Recent spike in consumption may be temporary with use of tools such as subsidies.
Moreover, C is only 40% of GDP in China, compared to 70% in US. (Table 2)
Given these limitations, the extent of effectiveness of the fiscal plan in boosting growth in China is
questionable.

Conclusion:
Ultimately, size still matters and China is no where near U.S. in terms of size (as seen in Table 2).
Hence, though Chinese consumption seems to be growing but is not sufficient to lift the worlds
advanced economies out of recession.
(Even with Chinas growth, its demand is not as significant as US given the vast difference in the
size of the 2 economies.)

Comments:

Students do not realize that there is two parts in the question
China using the fiscal stimulus plan to power her economy
China, with the plan, is able to lead the rest of the world to recovery
Quite a handful disregarded the explanation of how the stimulus plan could lead to a multiplied
increase in NY, hence helping to power Chinas economy.
Some answers are very theoretical. The points of discussion lack support from the extracts. For
example, quite a handful mentioned that crowding out effect will be experienced when govt
borrows to spend, hence I will decrease. But extract 1 and Table 1 pointed out that FDI has been
increasing. Even if domestic investment may be crowded out by government spending, overall
there could still be increase in I if FDI increase more significantly.
Some merely lifted phrases from passage without making the attempt to link to relevant
economics analysis, for e.g. consumers lack confidence to spend. Students should add on
to argue that this could imply that MPS is quite high and this has implications on size of k, hence
the multiplier effect.
Not much reference to Table 2 to support argument that China may not have the economic clout
to power the rest of the economies in the world. Merely quoted that China is not the leader yet.

(d) To what extent can Chinas government stimulus plan power her economy to lead
the rest of the world to a recovery?

[10]

Sample answer 1

Chinas government stimulus plan of $586 billion has helped China to grow. In 2008 with the
unfolding of the US sub-prime crisis, China was also affected with its growth falling to only 9%
from 13% growth the previous year. Hence the Chinese government used the stimulus plan and
it helped China to achieve 7.9% growth in the second quarter of 2009 and experts are predicting
that growth for China for the year may be more than 8%. Considering that US is still in
recession, Chinas growth of 8% for 2009 means that the stimulus plan worked.

There is also evidence that China is doing well with the stimulus plan. The consumption of cars
has increased with small-car purchases hitting an all-time record. Retail sales have also
increased by 16%.

In addition, compared to US, Chinas stimulus plan is more successful as it will generate 80% of
the economic growth for China.

If China were to continue growing, the other countries like Australia and Brazil will grow too as
Nations that depend on producing commodities, such as Australia and Brazil, have benefitted
immensely over the past six months as demand from China has driven up the price of raw
materials. Helped by trade with China, Asia's export-driven economies are sputtering back to
life. These are all evidence that China can lead the rest of the world to recovery.

However, China will not be able to save the world as China is not yet the leader of the global
economy. As many Chinese are not consuming enough and are not able to consume
Volkswagen and BMW. In addition, China has a lot of other problems to deal with.

Thus in conclusion the stimulus plan will not help the rest of the world to recover.


Examiners Comments:

This answer lack economic analysis. Although the student did attempt to address how the
stimulus plan can help China to grow and with Chinas growth, other countries will benefit, the
answer is mainly a rehash of the information in the Extracts. There is no attempt to bring in
economic analysis in the discussion. Hence this script was awarded a level 1 mark.

Take for example, the most basic analysis which should have been used would be to at least
identify the stimulus plan is an expansionary fiscal policy. And from there explain how in theory
the expansionary fiscal policy helps an economy to achieve growth.



























































Sample answer 2

The stimulus plan is an expansionary fiscal policy to help Chinas economic growth. An
expansionary fiscal policy is the use of government spending and taxation to stimulate
economic activity and hence economic growth.

With the expansionary fiscal policy, government expenditure (G) increases hence the aggregate
demand (AD) increases as G is a component of AD. With a reduction in income tax, the
disposable income increases and consumer expenditure (C) increases, and with a reduction in
corporate tax, the after-tax profits of firms increases shifting MEI to the right and level of
investment (I) increases. Since C and I are also components of AD, AD increases. With G, C
and I increasing, AD shifts from AD0 to AD1 illustrated in figure 1. This causes an unplanned
decrease in stocks and firms will increase production to bring the stocks levels to desired range.
This increase in output will increase the national income. Through the multiplier effect, the
higher income induces an increase in aggregate consumption. This leads firms to hire more
workers again to meet the rising demand for goods and services and national income rises a
second round. This second round increase in national income induces another round of
consumption, leading to a third round increase in national income. With each successive round
of increase in income, the amount of leakages, in terms of savings, taxes and import
expenditure, also rises. This process will continue until the total change in leakages is equal to
the initial increase in C+I+G, by which time, national income would have increased by a multiple
and employment would also have risen significantly.











However, there are limitations to fiscal policy. Firstly, the size of the multiplier may be small.
Given that China is also Asian country, the value of thriftiness is important and hence MPC may
be small leading to a small multiplier. With a small multiplier, NI will increase insignificantly and
hence the expansionary fiscal policy will not work.

If the relative size of government spending relative to the other components of AD is small,
government would have to increase government expenditure more than proportionally to offset
the fall in AD. For example, a fall in export revenue of 5% would require an increased
government spending by some 100% in Singapore, as export revenue is more than 20 times
government spending. This makes fiscal policy a more difficult tool for the Singapore
government to stimulate AD compared to other economies with government spending
occupying a large proportion in the AD.

There may also be crowding out effect if the government chooses to finance their increased
expenditures through borrowing from the banking system, there will be an increase in demand
for loanable funds and hence an increase in interest rate. As a result, private businesses will cut
back on their investments. Therefore the increased government spending will simply be offset
by lower private household consumption and lower private sector investment.
GPL
Real national income
AS
AD
0

AD
1

Y
0

Y
1

P
0

P
1

Figure 1

There is often a serious time lag between the identification of the problem to be dealt with and
the time when the fiscal measures begin to take effect. This may mean that fiscal policy takes
effect at the wrong time.

In addition, consumers do not base consumption simply on current income levels but also on
future expected income. Thus, tax cuts may not stimulate consumption if consumers view such
attempts as only temporary measures. Hence, fiscal policy will only have a weak impact on the
economy. Moreover, private investment depends on business confidence and large tax cuts
may not bring about huge increase in private investment if businessmen are not optimistic about
future prospects.

Finally, in times of recession when the government needs to increase spending, problems may
arise. Budgets are usually drawn up only once a year and governments are very reluctant to
increase government expenditure as parliamentary debates and approval may take months.

Hence, expansionary fiscal policy may not be able to help China achieve economic growth.

Examiners comments:
This script on the other hand is purely regurgitation of theory. In terms of theory, this script
displays quality. Other than recognizing that the context is China by using the word China in
the answer, there was no other indication that the student understands the Extracts.

In addition, the answer is incomplete in the sense that there is no attempt to discuss if the rest
of the world will recover with Chinas growth. Hence this student did not understand the full
requirement of the question.

Hence, this script is a level 1 script as well because of the lack of awareness of the evidence
given and failing to grasp the full requirement of the question.

An example of how the script demonstrates lack of awareness of the evidence is the
explanation of limitation.
1. Relative size of G in AD the exemplification given was that of Singapore!!!
2. Failing to eliminate relative inflexibility and crowding out effect as limitations
a. Relative inflexibility - as stated in Extract 2 para 3, Chinese government was
already spending on programmes, hence when the slowdown began, it was just
adding on to existing schemes.
b. Crowding out effect table 1 shows positive growth in FDIs.