HWA CHONG INSTITUTION

C2 H1 Economics Preliminary Exam 2009

Answer & Mark Scheme
SECTION A: CASE STUDY
Question 1
(a) (i) With reference to Chart 1, explain why the price of photovoltaic (PV) energy is [2]
expected to drop in 2010.

Chart 1: Production of PV energy has seen an exponential increase from 1995 onwards. [1m]
Assuming that this trend continues and that market demand stays the same, this would result in
an exponential increase in market supply [1m], contributing to a fall in price.
(ii) Analyse how the entrance of PV energy is expected to impact the demand for [4]
coal-fired electricity.

PV energy is a substitute source of electricity. [1m]

Given that PV energy is getting increasingly cheaper, coal-fired electricity will experience a fall in
demand. [1m]
Moreover, the demand for coal-fired electricity is likely to become more price elastic [1m].
Reason: Availability of cheaper substitutes. Based on the data, it seems that consumers can
easily switch to PV energy. [1m]

(b) (i)

Define the term merit good.

[1]

Goods or services that have been deemed socially desirable through the political process, i.e. by
the government.
Usually generate positive externalities.

Remarks:
- Students are required to define the concept completely and accurately in order to gain the full 1
mark.
(ii) Explain how social allocative inefficiency will result in the market for PV [4]
energy.

In integrating (consuming) PV systems into for eg. buildings / rooftops, firms will only consider
the private benefit. Students are to provide at least an eg of the private benefit. Egs include cost
savings as PV energy is cheaper than current sources of electricity.
o 1m Correct identification of the source of the positive externalities Consumption.
But in doing so, there are positive externalities generated (in terms of conserving the
environment associated with lower carbon emissions & greenhouse gases), creating a
divergence between social values and that of the individual firms, the former being larger in
magnitude.
o 1m Generating examples of ext benefits.
o 1m Recognising that social (true) benefit > private benefit.
As a result, firms would under-consume [1m] clean energy.
o 1m Correct identification of how market fails.

Remarks:
- While it would be useful for students to illustrate how the market will fail, they are not required to
do so. As long as the explanation is clear, students will be given due credit.

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(iii) Evaluate the Singapores government policy of using subsidies to overcome [6]
the market failure.

Explain how the subsidy (=EMB) might increase the consumption of PV energy.
Students are to evaluate / discuss the effectiveness of the policy. Examples include the inherent
difficulty of measuring EMB; strain on public finance.
Students are to suggest a supplementary policy. Examples include:
o Regulation New building codes
o Education / Campaigns encouraging property developers to install PV systems.

Mark scheme:
L1
Clear and accurate explanation of how subsidy helps to overcome
the market failure concerned.
[1 - 3m]
L2
[4 5m]

As above.
Evaluated the policy measure (if the students merely stated the
limitation points, max mark 1)

Bonus 1m students who suggested a supplementary policy.

(c) (i)

Explain why Singapore might have a potential comparative advantage in the [3]
production of clean energy.

Definition of CA [1m]
A country is deemed to have CA in the production of a good if it incurs a lower opportunity cost than
another country.

Why Singapore might have potential CA in the production of clean energy? [2m]
** Factor endowment: Evidence: Ext 2 Para 4 Manufacturing solar wafers, cells and modules
has many parallels with semiconductor and electronics manufacturing processes [which
Singapore excels in] Singapore already has the physical facilities, technology and skilled
labour that allows it to have CA in the production of goods/services that are knowledge-based,
capital intensive in nature. Hence it would be easier to adapt the existing infrastructure to
facilitate the development of the clean energy sector.

Remarks:
- As with any definition, students must do so completely and accurately. Otherwise, the 1m would
not be awarded.
- In explaining for the potential CA, students must refer to the concept of factor endowment. In
addition, they must refer to the text to provide specific egs of the factors / resources.
(ii) In the light of an increasingly globalised world, discuss the potential benefits [10]
and threats pertaining to Singapores strategy of developing clean energy for
export.

Rationale behind this strategy:

Driven by the fact that the external demand is the key driver of Singapores growth.
In addition, given how globalised Singapore is, it is especially vulnerable to any threats posed by
foreign competition. Hence Singapores strategy of shifting towards high-end manufacturing and
services.
Clean energy is just another form of diversification of its manufacturing.

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Benefits:
Singapore can leverage on the positive impacts of globalization to drive her development of this
industry.
- If Singapore successfully develops CA in the production of clean energy, it would secured itself a
market that is predicted to flourish given the increasing concerns wrt climate change, high oil
prices, and energy security.
- With existing intellectual property right laws, Singapore will also be able to attract inbound FDI
from different countries, eg Norways Renewable Energy Corporation has invested $3 billion to
set up a complex in Singapore.
- Singapore will attract scientists and foreign talents who work in this sector. Singapore will
consciously build up its capability and reputation as a regional centre for photovoltaic energy.
- There will be spin-off when new businesses and workers are needed in the maintenance and
logistic industry as Singapore develops the clean energy industry too.

Threats:
The ownership of factors of production for clean energy will initially be in the hands of large
foreign companies that have invested in Singapore. EDB has played an important role in
attracting these FDI. In the long run, for potential growth of Singapore to increase on a sustained
basis, it is necessary to have a pool of local entrepreneurs and scientists to play a greater role in
expanding this industry.
Meanwhile, there is also the problem of workers in sunset industries whose jobs have
disappeared. One possible example would be retrenchment of workers involved in reading
electricity consumption when Singapore Power faced a decline in demand for its service.
Conclusion / Judgment / Comments:
The market for clean energy can only expand as cost fall. Consumer awareness and acceptance
of positive externality involved in the consumption of clean energy is important to how Singapore
can develop a global market for clean energy.
Globalisation has helped in the transfer of technology and information but this comes with a
higher level of competition to all existing industries. There is always the possibility that even
while the clean energy is an infant industry, the high cost of production in Singapore may lead to
off- shoring before the industry can develop further.

L3
(6 -7m)

For an answer that analyses the potential benefits and threats according to short
term and long term effects on Singapore.

L2
(3-5m)

For an answer that discusses the potential benefits and threats to Singapore when
building clean energy industry as supported by the case study materials.
Max 3m for answer that explains either benefits or threats only.

L1
(1-2m)

For a sketchy answer that just lists or briefly explains how Singapores try to
develop a clean energy industry.

E2
(2-3m)

For substantiated evaluations on why the clean energy industry would be important
to Singapores potential growth.

E1
(1m)

For an evaluation that tries to weigh the potential benefits against the potential
threats of developing the clean energy industry in Singapore.

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Question 2
(a)

Summarise and account for the changes in the S$NEER since October 2007.

[5]

Summary [1m]:
From Extract 3
Gradual appreciation from Oct 07 Oct 08.
Zero percent appreciation from Oct 08 onwards.
Explanation [4m]:
Initially from the period October 2007 to Sept 2008, MAS followed a policy of allowing slightly
steeper appreciation of the S$ nominal effective exchange rate. This was to prevent importprice-push inflation [1m].
This is especially so since external prices of imports were going up as a result of rapid
increases in global commodity prices. This had translated into higher production costs, and
hence higher costs of domestic goods (build-up in domestic cost pressures), whose content
was mainly import-based. [1m]
In October 2008, however, the MAS shifted to a zero per cent appreciation of the S$NEER
policy band. When the currency shifted to zero per cent appreciation, this would make
Singapore exports more price competitive vis--vis other countries exports. [1m].
This was a necessary move because there was a further deterioration in the external outlook
after Sept 2008 (current account surplus worsened based on Table 1 stats), so to encourage
demand for Singapore exports, the currency was not appreciated further so as to make
Singapore goods seem relatively more attractive and more export price competitive [1m].
Acceptable: explanation on why depreciation is bad for Singapore due to import price push
inflation making our exports less price competitive since Singapores exports have high import
content
Must make reference to the evidence from the passage for full 4m.
(b)

(i)

Explain one protectionist measure that can be adopted by the UK government to

save local jobs.

[3]

1m : Correct identification / stating of a protectionist measure.

2m: Clear explanation of how the measure concerned helps to decrease unemployment.
(ii)

Discuss the view that ultimately nobody wins from protectionism.

Students should briefly describe the context of the quote. Iain Begg from LSE said this with
reference to the current worsening economic climate in Britain, whereby Britain (and the rest of
the world) is trying to deal with the global recession, and there is a temptation to turn inwards
(and thus resort to protectionism). Although students are not given the downside of
protectionism in the extract, they are ALSO expected to infer (and based on their own
background knowledge of theory) come up with the downsides of protectionism. The direction
word is discuss and not explain so students need to show both sides of the argument with
reference to the context given.
Thesis: somebody wins from protectionism
Extract 2 states that protectionism will 1) save local jobs and 2) help aid declining industries.
So students will need to justify these points.
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1) Save local jobs: already explained in (b)(i) so no need to explain. Can just state.
2) Help aid declining industries: in the case of the UK, the infant industry argument might
not apply so much (though to some countries it might). Of more significance could also
be helping sunset/declining industries from foreign competition. Some sunset industries
have lost comparative advantage in the production of certain goods to foreign firms.
These sunset industries may face increased financial losses especially during
recessions especially when people become more price conscious, and realise that the
goods from these countries are overpriced. Thus they may face potential shut-downs.
The government may deem it necessary to protect these struggling industries from
mass unemployment. Obviously, the protection provided is also a buffer for workers in
those declining or sunset industries with the opportunity to retrain and seek employment
in other expanding sectors of economy (buy time for declining industries to restructure).
Anti-thesis: somebody loses from protectionism
1) Other countries are likely to retaliate with their own trade barriers, thereby sparking
global trade wars. The net result is the rapid contraction in world output and income,
worsening the global recession. Protectionism often breeds more protectionism. UK
consumers may suffer from higher prices of goods whether imported or domestically
produced. This would lead to welfare loss in consumption for UK consumers. In the long
run, UK economy suffers from inefficiency, low productivity and resource misallocation
due to the existence of inefficient / uncompetitive firms that can survive only under
government protection.
2) In addition, protectionism is likely to delay economic recovery as countries closed their
markets to each other thus foregoing the possibility that internal recovery could be
sparked off by multiplier effects created from external demand through exports.
Evaluation: ultimately nobody wins
1) Protectionist measures are merely stop-gap measures to help save jobs and alleviate
unemployment in the short-term. If the countries have lost comparative advantage in the
production of certain goods, propping up the industries by giving them subsidies, etc
incurs a large opportunity cost and financial drain on the countrys resources. Ultimately,
the jobs will still be lost and restructuring of the economy will occur, i.e. local jobs cant
be saved and struggling/declining industries will still be eliminated.
2) Furthermore, the danger of prolonged recessions is that they lead to idle capacity, waste
and inefficiency in the use of scarce resources. In terms of social implications too, this
will lead to social unrest and great economic hardship.

L3
(5-6m)

For an answer that discusses the disadvantages and advantages of

protectionism, and applies well to the context of recession.

L2
(3-4m)

For an answer that explains some of the advantages and disadvantages of

protectionism, without applying to the context of recession.
For an answer that only explains the advantages or disadvantages of
protectionism (one-sided) cap at 4 marks.

L1
(1-2)

(c)

A very sketchy answer, with brief / poor explanation of advantages or

disadvantages of protectionism. May state the definition of protectionism
vaguely.

Consider whether the data would lead you to expect a further deterioration in the
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balance of payments of Singapore in 2009.
Thesis: Yes, there will be further deterioration in the BOP
Deterioration of capital and financial account means that Singapore is facing an
increasing amount of outflows, hence BOP will worsen.

In spite of an improvement in current account as % of GDP from 15.2% to 15.5%, the

absolute value of the current account has actually worsened (15.5% of 240.9 is less
than 15.2% of 257.4).

Productivity levels fall to -8.7%, implies unit cost of production will increase, hence
SRAS shifts to the left, resulting in higher general price levels. Sg exports lose price
competitiveness. Assuming PEDx>1, BOT worsens

Anti-thesis: No, there will not be further deterioration in the BOP

Inflation seems to be moderating, from a high of 6.5% in 2008 to an estimated 0.1% in
2009. This means that Singapore exports will be relatively cheaper to foreigners and
assuming PEDx>1, then Singapores export revenue will increase and improve BOT.

GDP growth at constant prices shows a declining trend. In 2009, this is estimated to be
a fall of 8.8%. This falling trend of GDP growth is likely to continue, especially given the
fact that productivity growth is also expected to fall and given that it takes time for
productivity falls to filter through to GDP, there will be further deterioration in GDP
growth. This is accompanied by an increase in unemployment rate. Thus, Singaporeans
will have less income to spend on imports. Hence import expenditure decreases and
BOT improves.

Evaluation:
Based on data that is forecasted as at 2nd quarter 2009, it seems that the BOP will further
deteriorate. However, we could project that there are greenshoots in the form of
improvements in the BOT, hence the situation may not be all that pessimistic. Besides, there
has been an upward revision of the projected contraction of Singapores economic growth at
the beginning of 2009 Q3 (from -9% to -6%, to -6% to -4%)

L2
(3-4m)

Considers at least 2 pieces of information each for and against the deterioration of
health of the Singapore economy in 2009 and explains interpretation well.
Credit to be given for students who take a stand.

L1
(1-2)

(d)

Identifies limited data and interpretation of whether this bodes well for the
Singapore economy in 2009 is limited.

Discuss and compare the choice of growth policies adopted by Singapore and the UK in
response to the current global downturn.
Use data to justify the use of growth policies
a. Real GDP: projected negative for both economies Sg (-8.8%); UK (-4.1%)
b. Increase in unemployment rate Sg (2.2% to 3.6%); UK (5.6% to 7.4%)
c. Productivity: negative growth Sg (worsen to -8.7%); UK (from positive to -2.4%)
d. Inflation: All time low (be careful of possible deflation) Sg (0.1%); UK (0.8%)

SIMILARITIES (Similar problems caused by the global downturn)

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Fiscal Policy
Evidence [Ext 1 and 3]:
UK 750 million Strategic Investment Fund; Additional 1.7 billion to support
employment; 75 billion programme of asset purchases
Singapore $20.5 billion Resilience Package (expansionary Budget)
Effects of FP:
Increase in G ==> Increase in AD ==> unplanned fall in stocks + via multiplier effect ==>
Increase in Real National Income ==> Economic growth improves
Limitations of FP:
UK Borrowing to pump-prime the economy is forecast to peak at 12.4% of GDP in
2009-10 [Ext 1]. This could signal large budget deficits, which could lead to the crowding
out effect on UK private investments. Future generation may suffer as they will need to
service the debt if borrow from abroad
Singapore [contextual knowledge] Unlikely to borrow due to large reserves. Moreover,
small size of k makes FP relative ineffective (explain why small k)
For both opportunity costs of government spending (as opposed to economic boom
time)
Supply-side Policy
Evidence [Ext 1 and 3]:
UK 750 million Strategic Investment Fund; guaranteed job, training or work
placement; new training courses
Singapore Jobs Credit Scheme; Skills Programme for Upgrading and Resilience
(SPUR)
Effects of SSP:
UK Investment Fund will enable UK to increase its productive capacity in the future as
capital accumulation takes place. The work placement and training courses will enhance
skills of workers
Singapore Jobs Credit Scheme will lower business costs for firms, whilst SPUR will
enhance skills of workers. Will also help position Singapore better for the recovery,
when there is a pick-up in the demand for exports
Overall effect Increase in human capital investment ==> Increase in productivity and
both SRAS and LRAS will shift to the right ==> Increase in Real National Income ==>
Economic growth improves
Limitations of SSP:
Singapore Job Credit Scheme might not be as effective if cyclical demand for exports
is still low worldwide and firms will still shut down if total revenue cannot cover total
variable costs in the SR and/or cannot make normal profit in the LR
The inherent problem with training, skills upgrading and education lies chiefly on the
attitudes of the workers. Additionally, the skills and knowledge attained may take a while
to internalize (long gestation period), this is especially so for the older workers. With an
ageing population, this will be one of the main limitations for UK and Singapore
[contextual knowledge]

DIFFERENCES
Monetary Policy
Evidence [Ext 1 and 3]:
UK The Bank of England has cut Bank Rate to half a per cent
Singapore zero per cent appreciation of the S$NEER
Effects of MP:
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UK MP is interest rate centred. Fall in cost of borrowing for the firm and hence
increase expected rate of return, I increases. Increase in demand for consumer durables
(eg cars, furniture and big purchases) due to lower interest repayments [lower cost of
borrowing for the household], hence C increases. Also people will tend to save less
since the opp cost of consumption is now lower, C increases. With a lower domestic
interest rate, there will be hot money outflows to countries with higher interest rates,
since the returns on these short-term investments will be higher. Supply of domestic
currency in the forex market will increase as investors convert to the foreign currency.
The domestic currency will depreciate and net exports will rise if Marshall-Lerner
condition holds. the collective increase in C, I, and (X-M) will increase AD. This would
mean a run-down on unplanned stocks and producers will produce more ==> Increase in
Real National Income ==> Economic growth improves
Singapore MP is exchange rate centred due to smallness and openness of the
economy. Effects and rationale would have been explained in (a)(ii). With an
improvement in BOT ==> AD increases ==> Increase in Real National Income ==>
Economic growth improves

Limitations of MP:
UK poor economic outlook implies an interest inelastic
confidence so C also interest inelastic. Hence lowering of
effect on raising I and hence AD and Real National Income
Singapore exchange rate policy is a short-term measure
thing is to improve the quality of the exports (through R &
not so easily substitutable with that of competitors

MEI, plus poor consumers

interest rates will have little
because the most important
D, etc) so as to make them

Fiscal Policy (tax policy)

Evidence [Ext 1 and 3]:
UK Corporate tax kept the same at 21%
Singapore Reduction of the corporate income tax rate from 18% to 17%
Effects of tax policy:
UK Instead of raising corporate taxes, which might deter investments, keeping it
constant is a wait-and-see approach to the recession.
Singapore Lowering corporate tax rates would increase firms expected rates of return
on investment and encourage I, which will increase AD and hence enhance growth.
Moreover, with increase in I, productive capacity will increase, LRAS increase and
economic growth will be achieved
Limitations of tax policy
UK Since the recession is steep [ext 1], adopting a wait-and-see approach may slow
down the economic recovery in the UK. However, with an increasing budget deficit
looming, lowering corporate tax would worsen the budget deficit.
Singapore the recession could be so severe that the 1%-point fall in corporate tax
rates might do little to stimulate investment in Singapore. Moreover, a small k would
make this policy less effective.
Other Policy used by Sg
Evidence [Ext 3]: FTA
Effects of the policy:
Singapore aggressive pursuit of FTAs can lead to trade creation and extension of
markets for Singapores exports plus encourage FDI
Limitations of the policy:
Singapore trade diversion

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Conclusion:
The UK and Singapores choice of growth policies are largely similar in terms of FP and SSP.
However, there are different approaches to using MP as a solution for the recession.
It should be noted that SSP alone is not good enough as that might possibly lead to deflation
with a sustained fall in GPL. Hence, both economies will still need dd-mgmt policies to achieve
sustained economic growth.
Basically, tackling a downturn of this nature and dealing with its consequences requires a
comprehensive policy / multi-pronged response to support the economy: fiscal and monetary
policy, financial sector interventions, and targeted support for individuals and businesses.
L3
(7-9m)
L2
(4-6m)
L1
(1-3m)
E2
(2-3m)
E1
(0-1m)

For an answer that discusses the policies very well, and compares the difference
in focus of the 2 countries policies.
For an answer that explains and/or compares the choice of policies between the
UK and Singapore.
Sketchy answer, just lists or briefly explains the policies of both countries briefly
without comparison.
For substantiated evaluation on the type of policies the 2 governments employ.
For some relevant judgments on the type of policies the 2 governments employ.

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SECTION B: ESSAY
3

Air travel for leisure purposes is growing worldwide and is set to skyrocket over
the coming decades. However, aircraft emissions are one of the fastest growing
contributors to global warming. In an effort to control pollution, the European
Union plans to impose the carbon trading scheme on the air travel industry.
(a) Explain the factors that influence the market demand for air travel.

[10]

(b) Discuss whether the carbon trading scheme would be effective in correcting the
negative externalities arising from air travel.
[15]

Suggested Answer & Mark Scheme

Part (a)
Students are expected to explain, with the use of egs, 3-4 determinants (price & non-price) of
market demand.
Possible determinants:
Price
Decrease in air fare caused by an increase in market supply (eg. deregulation precipitating
an increase in the number of airline companies). This would cause an increase in the
quantity demand for air travel services. Would be ideal if the students could illustrate this
with a DD-SS diagram; in this case, an increase in quantity demand (caused by a fall in
price) is reflected as a rightward movement along the given DD curve.

Increase in air fare caused by a fall in supply (eg. higher cost of production due to higher
fuel prices).

Non-price
Growing affluence of households in the emerging economies [TJC Prelim 2008 Case Study:
Consumers spending power in emerging economies is estimated to rise to more than US$9
trillion] Increase in demand for travelling as a leisure activity (normal goods).

With the proliferation of guide books, travel websites, television shows and etc. greater
availability of travel information with respect to the destinations greater incentive for
families to venture overseas for a holiday.

There are increasingly more well-established places to visit, with governments pumping in
more resources as well as welcoming FDIs to develop its infrastructure.

Seasonal demand peak versus non-peak period.

Taste & preferences fear of air travel after the shock of Sep 11 attacks.

Diagrammatically, changes in non-price factors would cause a rightward shift of the DD curve.

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Mark scheme
L1: 1 4m

L2: 5 6m

For an answer that has major mis-conceptual errors / poor grasp

and/or use of economic knowledge.

For an answer that merely lists the various determinants of market

demand, with no attempt to develop the content.

For an answer that explains adequately and clearly 2 (either price

or non-price) determinants of market demand, with the use of
appropriate egs.

OR
For an answer that lists the various determinants of market
demand. Elaboration is lacking or there is little attempt to apply
with ref to the context.
L3: 7 10m

7 8m: For an answer that explains adequately and clearly 3

(either price or non-price) determinants of market demand.

Max 8 marks: For an answer that focuses only on non-price factors.

9 10m: For an answer that struck a good balance in explaining

both price and non-price factors, using appropriate egs and
accurate economic analysis.

Part (b)
Students are expected to explain how carbon emissions (negative externalities) will result in
market failure; hence providing grounds for the government to intervene. From which, they are
to explain and discuss whether carbon trading is effective in curbing the negative externality
concerned. Discussion includes benefits and costs / difficulties encountered. Students are to
explain other possible measures that EU could adopt to correct the market failure holistically.
Explanation of how the air travel industry is an eg of market failure.
Explain how carbon emission generates external costs (negative externalities), with the use
of egs.
Airlines, in providing their service (ie transporting passengers from one destination to
another) only considers their PMC (eg. the cost of aviation fuel, cost of labour pilots, air
stewards) and PMB (eg. the revenue earned from the sale of tickets).
In maximizing profits, they would produce where PMC = PMB.
However, they ignore the external costs generated, hence the true opp cost of providing the
services (SMC) is higher than PMC at every output level.
Hence, the socially efficient level of production is where SMB = SMC it will be lower than
the level achieved under free market.
Over-production over-allocation of resources (partial market failure).
Hence, the government ought to intervene to minimize inefficiency.
Explain and discuss how the carbon trading scheme works to correct negative externality.
Each polluting firm can choose to buy a permit which gives it permission to emit a certain
amount of pollution. If not, it will have to clean up the pollution. These permits are
marketable, so firms are able to buy and sell such permits.

The government will estimate the socially efficient level of emission before it decides on the
number of permits to issue. The price of each permit will then be determined in the market.
The higher the price of permit, the greater the incentive for the firms to reduce emission.

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Advantage
This effectively establishes a market for pollution; that is, carbon trading scheme controls
pollution through market forces and internalising an external cost.
Disadvantages (avoid cut-and-paste from lecture notes)
Large airlines may use this platform as an opportunity to engage in anti-competitive acts to
ooze out smaller players buy bidding very high price for the permits. (Smaller airlines without
permits will not be able to fly!)
The demand for air travelling is price-inelastic and airlines can easily pass the permits
charges or fuel tax to consumers without reducing the number of flights much. I.e. Even
though the consumers are bearing most of the rise in cost, the quantity demanded will fall
less than proportionate so long the passengers are willing and able to pay. As people get
more affluent, they will be willing to absorb such costs and the truth is transatlantic travellers
cant just row from London to New York!
Supplement with other policies Students are required to just explain the alt policies. No need
to discuss pros and cons.
Long term measures: Governments should pump resources into developing greener
methods of air travel, since it is an indispensable way of travel.
Mark scheme
L1: 1 5m

For an answer that has major mis-conceptual errors / poor grasp

of economic knowledge.

Max 5: For an answer that has only explained how carbon

emissions give rise to market failure, using the air travel industry
as the context.

L2: 6 7m

For an answer that has not only explained how carbon emissions
give rise to market failure, using the air travel industry as the
context, but also explained how carbon emissions work to correct
the problem. However, explanation is inadequate / has flaws.

L3: 8 11m

8 9m: As in L2, but explanation of the carbon trading scheme

was done well; the candidate was able to show clear
understanding of how the scheme works.

10 11m: Suggest and explain alternative policies.

E1: 1 2m

For an unexplained judgment that is not supported by analysis.

In other words, mere listing of evaluative points (adv and disadv)
associated with the implementation of marketable permits; there is no
attempt to evaluate with ref to the context. Alternatively, judgment
tends to be sweeping.

E2: 3 4m

For an evaluative judgment based on analysis and supported with a

strong conclusion.

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4(a)

Explain what might cause an appreciation of a countrys currency in a floating exchange

rate system.
[10]

(b) Discuss how the Singapore government might use the concept of price elasticity of
demand to determine the impact of an appreciation in exchange rates on the current
account of the Singapore balance of payments.
[15]

Suggested Answer & Mark Scheme

Part (a)
Introduction
Assume a floating exchange rate regime, briefly explain.
State that exchange rate is determined by interaction of demand and supply of
currency in the forex market.
Body
Explain and illustrate with the use of a diagram how an appreciation takes place,
using Singapore as an eg.
US$ per Sing$

SSS$
SSS$

US $0.6

US $0.5

DDS$

DDS$

Qty of Sing$

With ref to figure above, a rightward shift in the DD curve for Sing $ and/or a leftward shift
of the SS curve for Sing$ would cause the Sing$ to appreciate against the USD.
Explain the causes of an exchange rate APPRECIATION
Since demand for currency is a DERIVED demand, it is necessary to examine the
UNDERLYING determinants that would cause a shift in dd/ss of the currency in the forex
market.
Underlying determinants:
Linked to mainly Trade and Capital flows.
Trade [X and M] flows
Trade flows are in turn influenced by the following major economic fundamentals:

Differences in price levels

Differences in growth rates and economic performance (income effect on

consumption of imports)

Differences in productivity etc (costs competitiveness)

Changes in taste/preferences (new products; new rivals)

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Capital [Real and Money] flows
Capital flows are in turn influenced by:

Differences in interest rates (hot money flows)

Speculative activities (to make windfall gains from currency fluctuations)

Biz confidence / prospects FDI inflows

Mark scheme
L1: 1 4m

L2: 5 6m

For an answer that has major mis-conceptual errors / poor grasp

and/or use of economic knowledge.

For an answer that merely lists the various determinants of

currency appreciation, with no attempt to develop the content.

For an answer that explains adequately and clearly 2

determinants, with the use of appropriate supply and demand
analysis within correctly drawn and well-labelled diagrams. The
answer explains clearly the underlying reasons for both demand
and supply side movements that would lead to an appreciation of
the currency.

OR
For an answer that is lop-sided, concentrating solely on the
demand side, or factors that involve the current account (trade
flows) / financial account (investment flows).
L3: 7 10m

7 8m: For an answer that explains adequately and clearly 3

determinants, both trade and investment.

9 10m: As above, plus the use of real-life egs.

Part (b)
Intro
Explain the concept of PED: Definition, formula, sign, magnitude & determinants.
o Students must explain the concept as it was not tested in part (a).
Body
Explain how the Singapore govt might use PED to assess the impact of an appreciation
in S$ on the current account of the BOP.
Define current account; or more specifically, the main international economic
transactions it captures trade: exports and imports of goods and services.

A stronger S$ would result in the price of exports to increase and the domestic price
of imports to decrease.

The effect on the trade balance (export revenue import expenditure) will depend on
the PED of Singapore's exports and imports. Application (Singapore's pattern of
trade):
o Imports: Our demand for imports is likely to be price inelastic. This is because of
our heavy dependence on imports for consumption as well as production.
Singapore is a small country with hardly any natural resources to produce goods
and services for our own consumption, let alone production for external
consumption.

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o

Exports: The demand for our exports is likely to be price inelastic. Reasons:
The rival products available in the global market and their attractiveness
relative to our key exports Singapore's tops in the world production of
electronic goods (e.g. computer peripherals); pharmaceuticals and
petrochemicals, and financial services and tourism (MICE).
Marketing / branding
The competitiveness of our exports is not just on pricing but also non-price
factors e.g. quality, reliability, and value.

Based on the analysis, a stronger S$ could still be in our favour, that is, trade balance
will improve.

Suppress domestic inflation boost trade balance.

Evaluation:
SR vs LR The demand for Singapore's exports may become more price elastic, as
foreign consumers have more time to adjust.

The Singapore govt does not rest on its laurels; it emphasizes on high productivity
and innovation (with the use of strong SSP) to gain a competitive adv in the world
market.

The prices of exports in general may not necessarily increase. Singapore's

manufactured exports has high import content (this is a result of Singapore lacking
natural resources, hence requires imports for final consumption and production).

Mark scheme
L1: 1 5m

For an answer that has major mis-conceptual errors / poor grasp

of economic knowledge.

Max 5m: For an answer that has only explained the concept of PED.
L2: 6 7m

L3: 8 11m

For an answer that makes use of PED to explain the effect of a

stronger currency on BOT.
Little attempt to apply to Singapore context / attempt to do so is
incorrect.
For an answer that effectively makes use of PED to explain how
the stronger S$ would impact on the BOT.
Strong application to Singapore's context.

E1: 1 2m

For an unexplained judgment that is not supported by analysis.

E2: 3 4m

For an evaluative judgment based on analysis and supported with a

strong conclusion.

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