(2017) A Level H1 Econs Paper 1 CSQ Q1

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ai.

The 2 indicators that showed a significant difference in economic performance are the GDP growth rate and balance of trade. The GDP annual growth rate for China was 7% which is rather high while that of the US is 2.3%. 

(This part of the answer is no longer tested in 8843 H1 syllabus)

The balance of trade for China reflected a surplus while the US recorded a deficit.

aii. The World Bank forecasts both the US and China to continue to see positive growth, albeit the growth is declining. China was forecasted to have a constant decline in growth while the US is expected to have an initial increase followed by a decrease.

b. (no longer tested in H1 curriculum) 

c.

The government investment projects such as the building of railway routes will cause an increase in G, therefore increasing AD from AD0 to AD1 initially. This causes RNY to increase from Y0 to Y1 which is near Yf. This suggests a lack of spare capacity at the start due to the government spending on investment projects.

Upon completion of the projects, we can expect these investment projects on infrastructure to greatly improve the efficiency of production and quantity of goods produced in the economy. For example, workers will be able to commute to and from work within a shorter duration, opening up more time for them to produce more. We would expect the productive capacity of the economy to increase, shifting the LRAS curve to the right from AS0 to AS1. The full employment level shifts from Yf1 to Yf2. The new RNY is at Y2. Since consumption is low, there may not be any further increases in AD to utilize the spare capacity between Y2 and Yf2, thus leading to excess spare capacity in China.

However, extract 2 mentions a change in the Chinese government's priorities to now focus on a more “sustainable domestic-led growth”. This suggests that there will be a greater policy push to increase consumption in China. If successful, we should expect that C will increase in the long term, which then causes AD to continue increasing. As a result, the excess spare capacity will diminish. Otherwise, we should expect our above analysis to remain the same.

d.

A devaluation of the Yuan could lead to Chinese exports becoming cheaper for the rest of the world while imports become relatively more expensive. The demand for Chinese exports will increase while the Chinese will demand less imports from the rest of the world. From the point of view of China’s trading partners, the above causes a decrease in export revenue (X) and a rise in import expenditure (M), resulting in a fall in net exports (X-M). This in turn leads to a fall in aggregate demand AD from AD0 to AD1, real national income decreases from Y0 to Y1, ultimately leading to lower economic growth. Additionally, firms may reduce hiring and use fewer factors of production in response to falling real output, thus increasing cyclical unemployment.

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