HWA CHONG INSTITUTION Year 2 Preliminary Examination 2007

ECONOMICS
Higher 2 PAPER 1 Case Study

9732/01
10 September 2007 2 hours 15 minutes

Additional Materials: Paper

READ THESE INSTRUCTIONS FIRST

Write your name and CT on all the work you hand in. Write in dark blue or black pen on both sides of the paper. You may use a soft pencil for any diagrams, graphs or rough working. Do not use staples, paper clips, highlighters, glue or correction fluid. Answer BOTH questions. You are advised to spend several minutes per question reading through the data before you begin writing your answers. At the end of the examination, fasten your answers to questions 1 and 2 separately with the string provided. The number of marks is given in brackets [ ] at the end of each question or part question.

This document consists of 8 printed pages. HWA CHONG INSTITUTION

Year 2 Prelims 9732_07 HCI 2007

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2 Answer ALL questions Case Study Question 1 Extract 1 Singapore MRT System Singapore's mass rapid transit (MRT) system has been known for its reliability, efficiency and comfort. It is run by two companies - Singapore MRT (SMRT) and SBS Transit. The 89.4-km North-South and East-West Lines, operated by SMRT, began in 1987. The NorthEast Line (NEL) is one of the latest additions to the MRT network. Opened in 2003, it is the first fully automated heavy rail lines in the world and is operated by SBS Transit. The introduction of a second rail operator is an outcome intended by the Singapore government to inject competition. SMRT and SBS Transit have been adjusting their fares in recent years due to rising fuel price. Such fare adjustments must be first approved by the Public Transport Council (PTC). As an independent regulator of public transport fares, PTC is entrusted with the challenging mission of both safeguarding the interest of the public and ensuring the longterm viability of public transport operators.

Table 1 Maximum Adult Fare per Ride (2004 2007) 2004 SMRT $1.69 SBS $1.69 2005 SMRT $1.69 SBS $1.69 2006 SMRT $1.72 SBS $1.72 2007 SMRT $1.75 SBS $1.75

Table 2 SMRT Fare Structure (by commuter category) Fares $0.66 $1.75 $0.65 $0.40 $0.50

Adult Senior Citizen Child & Student

Table 3 SMRT Fare Structure (by distance) Distance travelled Up to 3.2 km 3.21 km to 5.6 km : 28.01 km to 30.0 km Over 30.0 km Fare per ride $0.66 $0.88 : $1.70 $1.75

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Extract 2 Derailment of Competition There has been intense speculation of a merger between SBS Transit and SMRT. In its first year of operation, the NEL incurred a loss of S$35 million as the housing estates along the NEL were underdeveloped. The potential of a deal between the transport operators was first floated by Transport Minister Yeo Cheow Tong in 2003, when he said the Government would not object to a merger of rail operations. With one company in charge he added, a lot of the overheads could be saved. He reiterated it soon after, saying 'that competition for certain industries doesn't work in a small economy such as ours' and that, commuters suffered in terms of higher NEL fares (up to 25 cents more than on other MRT lines) and greater inconvenience. In the present set-up, commuters find they require more transfers to get to their destinations because SBS Transit slashed too many of its bus services to avoid duplicating its MRT services. Transport analysts are shocked by the suggestion made by the Government. They do not see the point, for either operator or commuters. According to them, the economies of scale would be limited as the two rail systems are different and separated by 15 years of technological know-how. Moreover, NEL commuters are also unlikely to benefit, because the higher fares are to make up for the higher cost of running the fully automated line. Source: Adapted from The Straits Times, September 2004 & October 2003

Extract 3 'Raility' Bites Transport companies say the reality is that despite the privatised fronts, they are still obliged to run the companies like statutory boards. They say their work is a tightrope walk between living up to private-sector performance indicators - in profit and productivity - and Singaporeans' sky-high service expectations, and a public-service provider's responsibility to keep prices down to earth. The fact that both SMRT and SBS Transit are publicly listed companies adds a thorny third dimension. 'As any business textbook will tell you, shareholders come first; or else, there will be a lot of yelling come the annual general meeting,' says a senior industry source. This is worsened by the fact that transport costs remain a flaming-hot political potato. A five-cent fare hike can translate into public outrage and lost votes at election time. Source: The Straits Times, November 10th 2003

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4 Figure 1 Affordability Trend for a Typical Family in Singapore

Source: PTC Report, May 2005

Tasks: (a) (i) Summarise the changes in the maximum adult fare per ride charged by [2] SMRT and SBS Transit from 2004 to 2007. Using the information provided, account for the above changes. [2]

(ii)

(iii) Explain why pricing policies by SMRT are examples of price [4] discrimination. (b) With the aid of a diagram, explain the losses incurred by SBS Transit [4] from operating the North-East Line in 2003. How far does the data suggest that the level of competition is raised in [2] the MRT system? The transport analysts were skeptical about the potential benefits of a [6] merger between SMRT and SBS Transit as the 'economies of scale would be limited'. To what extent do you agree with the above view? (d) "When market dominance exists, consumer exploitation is inevitable." Discuss whether the data supports this view. [10]

(c) (i)

(ii)

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5 Case Study Question 2

Extract 4 Singapores Changing Trade Pattern Economic growth is often accompanied by increased capital accumulation and a deepening pool of skills. These changes have transformed Singapore from a labourabundant third world to a relatively capital and skill-abundant first world country during the last few decades, with far-reaching implications for the countrys trade. The rise of lowercost competitors and government policies to encourage higher value-added investments are also significant influencing factors.

Table 4 Singapore Domestic Exports by Selected Commodity Commodity 1998 2004 % Change 1998 - 2004 57.2 150.3 43.6

1 2 3

Total Oil Non-oil

Million Dollars (S$) 105,917.60 166,502.50 13,472.90 92,444.70 33,724.60 132,777.90

3a 3b 3c 3d 3e 3f

Chemicals Veneer/Plywood Office Machines Radio/TV Receivers Electronic Components Clothing

7,163.20 12.00 39,916.10 2,762.20 17,108.80 717.80

28,684.80 9.00 32,476.20 1,899.50 27,316.10 551.20

300.5 25.0 18.6 31.2 59.7 23.2

Source: Dept of Statistics, Singapore

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Extract 5 Singapore The Dual Economy According to a Citigroup study, globalisation may be giving rise to a two-speed dual economy in Singapore: a fast-growing globally-oriented sector and a slower domesticoriented sector. Businesses catering to international markets are expanding strongly since 2001, spurred by strong growth in drug-making, private banking and oil rig building. However, those that sell to the domestic market are seeing sluggish growth. Divergent growth patterns between different income groups and businesses have become quite stark. Average monthly household income has, for the top 10 per cent group, risen by 2.8 per cent annually from 2000 to 2005. In contrast, the second-lowest 10 per cent group saw a 4.3 per cent fall annually. Policies on Central Provident Fund (CPF) contributions, free trade agreements, foreign talent and a greater reliance on indirect tax, while necessary to increase competitiveness, may also have accentuated these divergent forces. These policies to restructure the economy mean that employers will increasingly have a wider pool of international workers to choose from, with some more suitably qualified and yet willing to work for lower wages than their local counterparts whose median age has risen rapidly, from 33 years in 1990 to 40 years in 2006. Source: Adapted from The Straits Times August 20th 2006

Figure 2 GDP Growth of Asian Countries, 2006

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Extract 6 China - Asias Manufacturing Powerhouse . Over the last two decades, Chinas emergence as a manufacturing powerhouse in Asia was largely driven by huge Foreign Direct Investment (FDI) inflows which surged over 900 times between 1980 and 2004, during which Chinas share of FDI inflows into Asia rose from 2% to 65%. This has in turn led to significant changes in the global trade pattern. While Chinas exports of low-end labour intensive consumer goods to G3 (U.S., EU, and Japan) increased five-fold since 1990, those from the EA-7 economies (Korea, Taiwan, Singapore, Malaysia, Indonesia, the Philippines and Thailand) have stagnated. This period also saw China moving up the value chain and diversifying its manufacturing base to become a significant exporter of low and mid-range capital and intermediate goods. In 1990, Chinas exports of capital and intermediate goods to the G3 were just one-fifth of those of EA-7. By 2004, this proportion has risen to more than four-fifths. Contrary to Chinas predominance as a world exporter, Chinese exports contained a relatively low proportion of domestic inputs. Labour costs comprised only an estimated 10% to 30% of total manufacturing costs, the rest being the cost of component parts and raw materials, half of which are imported. This has led to Chinas rapidly growing demand for high-end capital and intermediate goods, as well as raw materials. This has helped spur the growth of intra-Asian trade. Chinas trade deficit with the EA-7 has nearly tripled since 2001. EA-7 exports to China as a proportion of the groups total exports rose from 5% to 22% during 1980 2003. In the long-run, the rise of Chinas middle-income consuming market will also boost its demand for imports. Chinas dependence on high-end foreign inputs is expected to persist in the foreseeable future. Weak intellectual property rights are likely to discourage foreign companies from shifting production of high-end goods into China. Some foreign governments continue to maintain restrictions on the transfer of certain types of high-end technology to China. Notwithstanding Chinas attraction as an investment destination, there are reasons to believe that the EA-7 economies will not hollow out. Foreign companies will still want to maintain operations outside China to diversify their risk. The EA-7 economies have carved out a niche in higher value-added activities, while Chinas advantage remains largely as a manufacturing and assembly base for low-end products. Moreover, investment in China may not necessarily be profitable due to hidden non-wage costs. For example, manufacturing a car in China is actually more expensive than in Germany because labour only accounts for a small portion of the overall cost. As a result, some foreign companies have left China. Source: Adapted from Monetary Authority of Singapore, Dec 2005

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Tasks (a) (i) (ii) (b) (i) Explain the concept of comparative advantage. Account for the changing pattern of Singapores domestic exports. With reference to Figure 2, suggest a reason for the relative importance of external demand to the Singapore economy. Identify three economic problems facing Singapore in Extract 5. [2] [6] [1]

(ii)

[3] [8]

(iii) Economic growth often gives rise to a host of problems. To what extent does the openness of the Singapore economy aggravate the economic problems identified above? (c) Evaluate the impact of Chinas rise as Asias manufacturing powerhouse on trade and investment in Singapore.

[10]

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