(2024) A Level H2 Econs CSQ 2 Suggested Answers Outline (Draft)

Note: This is a draft outline, did it in 40 minutes, have not yet checked through, so please use with care.

Will revise at a later date.

ai. From around Mid 2020 to early 2022, the Chinese yuan appreciated against the USD. It initially cost around 7.2 Chinese Yuan to buy 1 USD but by early 2022 it was around 6.4 Chinese Yuan to buy 1 USD, which meant that the Chinese Yuan appreciated.

aii. An increase in demand for Chinese exports would result in an increase in demand for Chinese yuan from DD0 to DD1. This will result in the price of Chinese yuan in USD to increase from P0 to P1, resulting in an appreciation of the Chinese yuan against the USD.

Note: Can also discuss investment inflows.

b. From March 2018 to Sept 2018, there was a very sharp depreciation of the Chinese yuan. This depreciation would have resulted in Chinese exports becoming cheaper to foreign buyers, resulting in an increase in demand for Chinese exports. As the same time, imported goods will become more expensive for Chinese buyers, which will result in a fall in demand for imported goods. Export revenue will thus increase while import expenditure will fall, which should result in an improvement in balance of trade (this is subject to Marshall-Lerner condition).

An improvement in balance of trade will see an improvement in the current account and thus an improvement in the balance of payments.

c. The increased exports of health supplies and equipment from China would increase net exports. Net exports (X-M) is a component of AD.

AD will thus shift right from AD0 to AD1.

Real national income should increase from Y0 to Y1.

Given that this happened during the midst of the pandemic, the economy would not likely be at full employment level (there is likely some unemployment during this period), which means that general price levels would either increase marginally or not increase at all.

(Draw diagram reflecting the above)

d. Positive impacts to Vietnam, Malaysia and Taiwan from the US-China trade dispute

Due to the US-China trade dispute, consumers and manufacturers have shifted demand to countries producing similar products such as Vietnam, Malaysia and Taiwan.

As (X-M) increases, AD increases from AD0 to AD1 which increases real national income from Y0 to Y1. This brings about higher economic growth for Vietnam, Malaysia and Taiwan. As firms hire more factor inputs such as labour, unemployment will also fall. 

Balance of trade will improve, as seen in the widening balance of trade deficit that US is incurring against Vietnam.

As firms shift their production from countries like China and US to countries like Vietnam, Malaysia and Taiwan, this will bring about an inflow in FDI.

Inflow in FDI will increase investments, which is part of AD. AD increases from AD0 to AD1 which increases real national income from Y0 to Y1. This brings about higher economic growth for Vietnam, Malaysia and Taiwan. As firms hire more factor inputs such as labour, unemployment will also fall. 

The increased spending in capital goods will also shift LRAS rightwards, bringing about increased potential economic growth.

There will also be an improvement in the capital and financial account.

Negative impacts to Vietnam, Malaysia and Taiwan from the US-China trade dispute

US and China are two of the largest economies in the world, and will likely be a key trading partner of countries like Vietnam, Malaysia and Taiwan.

As they suffer a fall in incomes and employment levels due to the trade war, this will reduce their ability to buy goods and services, which will include imports from countries such as Vietnam, Malaysia and Taiwan.

Evaluative conclusion

In the immediate term / short run, it will appear that the Vietnam, Malaysia and Taiwan are ‘winners’ in the US-China trade dispute.
But with a fall in global trade volume and incomes of their 2 largest trading partners, in the long run, it remains to be seen whether Vietnam, Malaysia and Taiwan will see overall benefits.

e. Benefits to UK from joining CPTPP

Joining the CPTPP would provide the UK with a significant opportunity to expand its trade with a broad coalition of countries, including Japan, Canada, and Australia. Given the UK’s comparative advantage in high-value services, such as finance, technology, and professional services, joining the CPTPP could enable it to export these services tariff-free. This comparative advantage exists because the UK incurs a relatively lower opportunity cost in producing technologically advanced and knowledge-intensive services than in manufacturing labour-intensive goods.

By eliminating tariffs on goods and services traded within the CPTPP, the UK stands to gain from specialising in its most competitive industries. This follows the theory of comparative advantage, which suggests that countries benefit from specialising in producing goods or services they can produce at a lower opportunity cost. For the UK, this means concentrating on high-value services and high-tech goods. By importing labour-intensive goods from countries in the CPTPP with resource endowments, such as low-cost labour in Vietnam or agricultural products from New Zealand, the UK could enjoy a broader range of goods at lower prices, enhancing consumer welfare and reducing inflationary pressures on imported goods.

Moreover, the UK's entry into the CPTPP could foster economic growth by increasing output in sectors where it has a comparative advantage. This expansion allows for greater economies of scale and productivity improvements in these sectors, potentially leading to higher national income levels and increased consumption possibilities.

Benefits to China from joining CPTPP

By gaining access to a larger market, China would enhance its export potential, potentially increasing net exports (X-M) and boosting aggregate demand (AD). An increase in AD from AD0 to AD1 could raise real national income from Y0 to Y1, thus promoting higher economic growth. Additionally, as firms expand output to meet greater demand, employment opportunities may increase, thereby reducing unemployment levels.

China also benefits from joining the CPTPP as it seeks to diversify its trading partners. The recent US-China trade war has dampened China’s trade prospects with the United States, historically one of its largest trading partners. By participating in the CPTPP, China can potentially offset some of the trade losses with the US, expanding its exports within the Asia-Pacific region. Furthermore, China’s balance of trade could improve if exports rise relative to imports, thereby generating a current account surplus that strengthens its economic resilience and stability.

Who will likely benefit more?

While both the UK and China stand to gain, the extent of benefits largely depends on each country’s current economic context and trade needs. For the UK, joining the CPTPP offers a timely opportunity to compensate for lost trade with the EU, which previously accounted for a significant portion of its imports and exports. In this light, the UK’s participation in the CPTPP could offset some of the adverse effects of Brexit, providing an alternative market for UK goods and services, especially in sectors where the UK is competitive. 

For China, joining the CPTPP presents a means to mitigate the impact of the US-China trade war. However, as China already has substantial trade relationships with many CPTPP countries through bilateral agreements or regional frameworks, the marginal benefit of CPTPP membership might be less pronounced. 

The relative benefits for each country may also hinge on the share of trade in GDP. Trade forms a higher percentage of the UK’s GDP compared to China’s, indicating that changes in trade volumes might have a larger proportional impact on the UK economy. Consequently, an increase in CPTPP-related trade may contribute more to the UK’s economic growth on a relative basis.