OECD Report on China, Brazil and the Russian Federation

N2007 Case Study Question

With reference to the data where appropriate, explain the

factors that might have caused the projected changes in

Brazil’s current account balance shown in Table 2 (6)

Identify position of CA balance: ________

Projected changes: ___________

Factors (link to factors affecting trade): Rise in incomes in Brazil (E2 & T2: ____________________)

- link to which component in CA?

- what could affect the extent of worsening of CA?

Appreciation of Brazil’s exchange rate (E2)

- condition to use

Depreciation of China’s currency (E1) suggested that China is a

major destination for Brazil’s exports (E2)

Brazil’s rate of inflation relative to other countries’ rate of inflation

(eg Russia)

With reference to the data where appropriate, explain the

factors that might have caused the projected changes in

Brazil’s current account balance shown in Table 2 (6)

Identify position of CA balance: surplus

Projected changes: decline

Factors (link to factors affecting trade): Rise in incomes in Brazil (E2 & T2: positive growth rate)

- increase DDm c.p BOT worsens c.p CA worsens

- Extent to which CA worsens depends on YEDm higher YED

greater increase in DDm greater worsening of BOT & CA

Appreciation of Brazil’s exchange rate (E2)

- condition to use (ML condition: Ex + Em >1)

- Px in foreign currency dearer, Pm in domestic currency cheaper

- ML condition satisfied BOT worsens c.p CA worsens

With reference to the data where appropriate, explain the

factors that might have caused the projected changes in

Brazil’s current account balance shown in Table 2 (6)

Depreciation of China’s currency (E1)

- E2 suggests China is a major destination for Brazil’s exports

- P of Brazil’s X in Chinese currency more expensive now

↓DDx by China BOT worsens c.p CA worsens

Brazil’s rate of inflation relative to other countries’ rate of inflation

(eg Russia)

Discuss whether the data provided are sufficient to assess

changes in SOL in these economies over the period. (8)

Clarify what is meant by SOL

mat (indicator:_________________) and

non mat

Thesis:

Annual rate of growth in real GDP positive in all 3 economies

- Explain how higher Y is linked to higher mat and non mat SOL

Higher Y higher ability to buy and hence consume more

goods & services higher mat SOL

Higher Y ability to achieve improvements in non mat SOL

Discuss whether the data provided are sufficient to assess

changes in SOL in these economies over the period. (8)

Antithesis: Changes in mat SOL

- Pop growth rates

- Changes in Gini coefficient worsening of Y distribution?

- Government’s budget balance deficit for both China and Brazil

More info on expenditure items needed productive or non

productive purposes? Promote welfare directly or smaller higher

Y group

Changes in non mat SOL

- Pollution index: changes in pollution levels

- changes in amount of leisure time available

Conclusion

- Necc but insuff indicators to make a holistic

judgement wrt SOL of these countries over time

Discuss and compare the likely impact of an unexpected

decline in world economic activity on any two of these

economies (10)

Introduction:

Clarify what is meant unexpected decline in world activity

Clarify the yardsticks that will be used to assess the likely impact on

these economies

Clarify the 2 economies under analysis

Body:

Unexpected fall in world economic activity fall in global incomes

Impact on _______________

Impact on _______________

Impact on _______________

Impact on _______________

Discuss and compare the likely impact of an unexpected

decline in world economic activity on any two of these

economies (10)

Body:

Economic framework

Unexpected fall in world economic activity fall in global incomes

Impact on BOT, FDI and hence BOP

- X falls as other countries reduce amount demanded of their M

BOT and hence CA worsens cp

- FDI fall due to growing pessimism and uncertainty among investors

KA worsens

- BOP worsens

Impact on NY

- Fall in X and FDI fall in AD more than proportionate fall in

NY cp (multiplier process)

Impact on unemployment (DDL is a derived dd fall in AD fall in DDL increased Un)

Impact on inflation (dampen inflationary pressures)

Discuss and compare the likely impact of an unexpected

decline in world economic activity on any two of these

economies (10)

Body:

Apply to selected 2 countries

China and Brazil which of these 2 countries will be less adversely

affected

- China? Why? (make use of relevant evidence)

- Brazil? Why? (make use of relevant evidence)

More information required as extent of impact also depends on other

factors like:

- _____________________

Conclusion

Discuss and compare the likely impact of an unexpected

decline in world economic activity on any two of these

economies (10)

Body:

Apply to selected 2 countries

China and Brazil which of these 2 countries will be less adversely

affected

- China? Why? (make use of relevant evidence)

Depreciation of yuan (E1) help offset impact upon X

- Brazil? Why? (make use of relevant evidence)

Less reliant on international trade E2 strong consumer dd in home market help cushion fall in AD & hence NY

T2 CA balance <1% of GDP even at its peak in 2004. China’s on the other hand >4% of GDP much higher than Brazil

More information required as extent of impact also depends on other factors like:

- size of multiplier larger k greater fall in NY for a given fall in X

Conclusion: make a stand and explain

Discuss and compare the likely impact of an unexpected

decline in world economic activity on any two of these

economies (10)

Sample:

The Russian Federation might be most badly hit as E3 suggests that its

domestic dd as well as external dd is very weak due to the “absence of

steps to restore shaken business confidence”. In addition, its CA

balance as a % of GDP is significantly higher than the other 2

economies. This indicates a strong reliability on IT among the 3

countries, making it the most vulnerable to a decline in world activity.

HOWEVER, the Russian Federation is exporting commodities like

hydrocarbons and metals and oil. DD for these X might be relatively

income inelastic impact on Russian’s X and hence on its NY and Un

might not be as adverse as predicted.

Identify the trade positions of Singapore and Indonesia in

2008 decrease in CA surplus for both countries

Singapore less worrying trade position relatively

healthy

Thesis: Appropriateness of expenditure reducing policies

Anti-thesis: Expenditure reducing policies not appropriate

Synthesis: Does not address root cause of problem

Suggest alternative policies

Thesis: Appropriateness of expenditure reducing policies Explain what expenditure reducing policies are contractionary FP /

MP

FP reduce G / increase T ↓AD ↓NY ↓ddm ↓TEm cp

BOT improves

MP increase i/r ↓C / I ↓AD & hence NY ……….

Anti-thesis: Expenditure reducing policies not appropriate will tend to reduce rate of economic growth / usually used for

overheating economies

evidence to show that economic conditions do not allow for further fall in economic growth

Table 1 S’pore’s growth rate (USD) fell from 13.6% (07) to 7.7% (08)

Extract 4 forecast to be in recession (09) falling GDP (-6% to -9%)

Table 1 Indonesia recession (08) -ve GDP growth rate 3.2%

Synthesis: Expd reducing policy does not address root cause of problem

need to identify cause of fall in CA surplus

Indonesia

subsidies on imported oil ↑TEm

reduction in subsidies inflation ↑Px affect BOT (Extract 3)

Singapore

global fall in ddx (Extract 4)

appreciation of S$ affects export price competitiveness

fall in labour productivity (T1)

Suggest alternative policies

SS side measures improve X competitiveness (esp for Indonesia)

0% appreciation of SGD (E4) + SS side + cost cutting measures (esp

S’pore – falling TRx and rising world commodity prices)

Identify current problem

How policies suggested in the question work to solve the

unemployment Fiscal stimulus: used in Asia (Extract 5)

Protectionist measures: US adopting ‘Buy American’; Russia

imposed taxes on imported cars; Indonesia’s tariffs on steel

(Extract 6)

Identify current problem: ↑Un caused by global

recession

How policies suggested in the question work to solve the

unemployment Fiscal stimulus: used in Asia (Extract 3)

↑G c.p ↑AD ↑NY ↓unemployment rate (DDL is a derived DD)

Protectionist measures: US adopting ‘Buy American’; Russia

imposed taxes on imported cars; Indonesia’s tariffs on steel

(Extract 4)

US ↑C on domestic goods keeps jobs at home

Tariffs protects inefficient domestic firms workers get to keep jobs

↑C (switch away from M) ↑AD ↑NY ……..

Compare usefulness of policies Both can lead to job creation / reduce job losses in SR

Fiscal stimulus – useful

Esp when ↑G is large (E3) greater increase in Asia than other countries fiscal package >4% of GDP; 2X larger than US stimulus

Availability of unemployed resources hence less likely to cause overheating (E3 – recession in Asian economies; T1 – M’sia’s high Un rate; E2 – S’pore’s –ve growth forecast)

G spent on infrastructure raises productivity capacity ↑AS; more jobs; dampens inflationary pressure; induces C and I

Possibly larger multiplier effect (‘tax cuts or cash handouts likely to be spent than saved high MPC’ / but E3 ‘low rate of C and borrowing’ as counter argument; implies smaller MPC)

Fiscal stimulus – not useful

Economies more dependent on X G as an interim measure at best (E3)

Compare usefulness of policies Protectionist measures – useful

ST measure in saving jobs in targeted industries

Complemented with LT SS side measures raise productive capacity

Used when inefficient firms are able to dev EOS compete

Protectionist measure – not useful

If imposed on important inputs (E6 – steel) ↑COP of other related industries ↓ price competitiveness of X ↓TRx more Un (E4)

May cause trading partners to slide & hence affects their ability to buy

retaliation Un especially in X sector (E4 – ‘mirror image trade

restrictions)

Indonesia not likely to have CA in steel pdn (‘foreign steel made from more advanced technology and is cheaper’) short sightedness better off creating jobs by developing or focusing on areas of CA

Compare usefulness of policies Other acceptable ideas

Size of domestic market must be large enough to be a substitute to world market save jobs (Indonesia larger domestic market than S’pore, less dependent on trade CA ration of GDP lower)

Fiscal stimulus direct injection into circular flow; protectionist measures depend on other factors like PED of M

However fiscal stimulus depends on govt’s ability to finance spending

Conclusion Both can reduce Un in SR

Use of G has SS side effects (retraining) ↑AS more jobs in LR; induce price competitiveness ↑X

Protectionism perpetuates ineff; more job loses in LR (contrast with eff and EOS from free trade and specializn based on CA)