tjc 2007 prelim h1 qn paper

TEMASEK JUNIOR COLLEGE

PRELIMINARY EXAMINATION 2007

ECONOMICS 8816/01

HIGHER 1

PAPER 1

TUESDAY 18 SEPTEMBER 2007 1400 – 1700 HOURS READ THESE INSTRUCTIONS FIRST Write your CG and name on all the work you hand in. Write in dark blue or black pen. You may use a soft pencil for any diagrams, graphs or rough working. Do not use staples, paper clips, highlighters, glue or correction fluid. Do NOT turn over this page until you are told to do so. Section A Answer all questions. Section B Answer one question. At the end of the examination, fasten all your work securely together with the string provided. The number of marks is given in brackets [ ] at the end of each question or part question.

This question paper consists of 8 printed pages. [Turn over

2007 Preliminary Examination / Economics H1 8816/01

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Section A Answer all questions in this section.

Question 1 Extract 1: Global Warming and the Kyoto Protocol Global temperatures seem to be rising, which can lead to rising sea levels and greater incidence of extreme weather all over the world. Environmentalists point to a build-up of greenhouse gases, especially carbon dioxide, with the burning of fossil fuels for energy as the main cause. Given that greenhouse gases stay in the atmosphere for up to 200 years, reducing the emissions of such gases will help slow down the processes of global warming.

Figure 1: Emissions of Carbon Dioxide*

Total yearly emissions (billions of tons)

*from consumption and flaring of fossil fuelsSource: Economist.com, Emissionary Position, 7 Jun 2007

On Dec 11, 1997, 39 of the world's developed countries made an agreement at a United Nation’s meeting to curb greenhouse-gas emissions at Kyoto, Japan. The Kyoto protocol, aimed to reduce by 2008 to 2012, the emissions of greenhouse gases to levels that will be on average 5.2% lower than the 1990 levels of the participating countries.

One problem with the treaty is that USA, the biggest carbon emitter in the world, has refused to take part. One of the key reasons for the US absence is that developing countries such as China have not been included in the treaty. The American argument is that the treaty will allow such countries to get a free ride on emissions reductions.

However, the UN’s view is that the developed world had created much of

today’s problem by emitting greenhouse gases while industrialising over the past century hence it is only fair that such countries act first to curb emissions. The developing countries can do their part at a later stage when they are more ready.

Adapted from: Economist.com, Backgrounder on Global Warming, 14 March 2007 & The Economist, Oh No Kyoto, 5 April 2001


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Extract 2: The European Union Emissions Trading Scheme (ETS) Established in January 2005, the European Union’s Emissions Trading Scheme (ETS) is a cap-and-trade carbon-emission permits market. Under this scheme, overall pollution of greenhouse gases will be capped at a desired level after which a fixed number of permits to produce greenhouse gases will be allocated to businesses. Some 13,000 factories and power stations in five different industries have been allocated such permits. Firms without enough permits to cover their emissions would either have to pollute less, or buy up spare ones from firms that had managed to cut back. In theory, such a system of tradable pollution permits allows for overall emissions levels to be reduced at the lowest possible cost to society.

Many companies view the ETS as a regulatory burden. For small firms, the cost of the resources required to effectively make use of the system could outweigh the benefits. For example, virtually all the 55 eligible paper mills in Britain opted to join a more rigid emissions-capping scheme instead of the ETS, simply to avoid the extra administrative burden of figuring out how to best optimise the use of tradable permits. Other firms are so big that the profits to be made from the permits, though substantial, would not be worth their managers' time.

Source: Climate Change Capital

Figure 2: Prices of ETS permits

Since inception, permits prices have faced great volatility. In Europe, gas and coal are the main alternative sources of fuels used for power generation, though coal is much dirtier than gas in terms of carbon emissions. The rising prices of permits were partly attributed to rising prices of natural gas. In addition, as firms received their share of permits free, many firms hoarded their permits in case of last-minute surges in their emissions left them short. Unutilised permits after all do not incur any outright costs for the firm. Many economists, however, believe that it would have been better for permits to be auctioned off instead. When the scheme first started there was little information about how much pollution was being emitted by the participating firms. The original levels claimed by the various member governments of EU were largely guesswork. However, as levels were being monitored more carefully after the onset of ETS, it turned out that many EU countries were not emitting as much as it was thought to be. When this news emerged, the price of carbon allowances crashed.

Adapted from: The Economist, Cleaning Up, 4 May 2006, & Lightly Carbonated, 2 Aug 2007


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Questions

(a) (i) Referring to Figure 1, compare China’s emission of carbon dioxide with

other countries’ emissions.

[2]

(ii) Does the data in Figure 1 support US’s argument for not participating in the Kyoto protocol?

[2]

(b) (i) With reference to Figure 2, describe the trend in the price of ETS permits from January 2005 to May 2006.

[3]

(ii) Using the concepts of demand and supply, account for the trend described above.

[5]

(c) Using the relevant economic concepts and diagrams, explain why global warming is an example of market failure.

[6]

(d) To what extent is the auctioning of tradable permits a better system as compared to the current practice of free allocation?

[6]

(e) Comment on whether the cap-and-trade policy is the best way of reducing the emissions of greenhouse gases.

[6]

Total : 30 marks


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Question 2

Table 1 Singapore dollar (S$) vs various currencies

Period S$ Per Unit of US

Dollar

S$ Per Unit of Euro

S$ Per 100 Units of

Japanese Yen

S$ Per 100 Units of

Malaysian Ringgit

S$ Per 100 Units of

Hong Kong Dollar

S$ Per 100 Units of

Renminbi

2001 1.8510 1.6397 1.4105 48.71 23.74 22.36

2002 1.7365 1.8193 1.4632 45.70 22.27 20.98

2003 1.7008 2.1388 1.5909 44.76 21.91 20.55

2004 1.6338 2.2243 1.5916 42.99 21.02 19.74

2005 1.6642 1.9754 1.4189 44.03 21.46 20.63

2006 1.5336 2.0176 1.2887 43.43 19.73 19.64

Source: Monetary Authority of Singapore

TABLE 2 Balance of Payments, Singapore (2002 – 2006)

Balance of Payments 2002 2003 2004 2005 2006

Current Account Balance ($m)

21,284.0 38,909.0 36,414.5 47,616.5 57,660.6

Capital & Financial Account Balance ($m)

-18,478.0 -30,735.7 -12,868.4 -31,923.3 -33,261.5

Overall Balance ($m) 2287.0 11,774.5 20,468.9 20,396.7 26,995.7

Source: Monetary Authority of Singapore

Table 3 Selected Economic Indicators, Singapore

Period GDP at Current Market Prices

($m)

Consumer Price Index (2004=100)

Unemployment Rate (%)

(Average)

2002 158,410.3 97.8 3.6

2003 160,890.4 98.3 4.0

2004 181,539.8 100.0 3.4

2005 194,241.7 100.4 3.1

2006 209,990.9 101.4 2.7

Source: Ministry of Trade and Industry


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EXTRACT 1: MAS maintains status quo on trade-weighted Singapore Dollar Singapore’s monetary policy is centred on the exchange rate. The Monetary Authority of Singapore (MAS) manages the Singapore dollar against a basket of currencies of Singapore’s main trading partners and competitors. The basket is composed of the currencies of those countries which are the main sources of imported CPI inflation and competition in export markets. The objective of the exchange rate policy is to promote sustained and non-inflationary growth for the Singapore economy. The trade-weighted Singapore dollar is allowed to float within an undisclosed target band. The level and width of the band are reviewed and managed periodically to ensure that they are consistent with economic fundamentals and market conditions. The MAS intervenes in the foreign exchange market from time to time to ensure that the movements of the S$ exchange rate are orderly and consistent with the exchange rate policy. Amidst reports that the Singapore economy is set to expand further for a fourth consecutive year, the Monetary Authority of Singapore (MAS) said yesterday that it will continue to maintain a policy of modest and gradual appreciation of the trade-weighted Singapore dollar or nominal effective exchange rate (S$NEER), with no re-centring of the policy band within which it is allowed to trade and no change in the width or slope of the band either. It said that this policy has contributed to the low and stable inflation environment amidst the robust economic growth of the past few years.

The S$NEER has fluctuated near the upper end of the policy band during the past six months (Chart 1). This reflected a number of factors, including the broad-based weakness of the US$, a resurgence of capital inflows into the region, as well as a relatively buoyant Singapore economy.

Chart 1 Nominal Effective Exchange Rate (S$NEER)

Source: The Business Times 11 April 2007 & MAS Monetary Policy Statement


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Questions (a) (i) Using the data in Table 1, describe the trend in the S$/US$ exchange

rate between 2001 and 2006.

[2]

(ii) State how a change in the foreign exchange rate of an economy's currency would affect the price of that economy's exports and imports over a period of time.

[1]

(iii) Is the data in Tables 1 and 2 consistent with the statement that the changes in the S$/US$ exchange rate over the period have caused changes in the Current Account balance of the Singapore economy?

[3]

(iv) Explain how two other factors might account for changes in the Current Account balance of the Singapore economy.

[6]

(b) Discuss the effects of an appreciating Singapore dollar on the Singapore economy.

[9]

(c) How far can the data lead you to conclude that there is a rising standard of living in Singapore?

[9]

Total : 30 marks


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Section B

Answer one question from this section.

1 (a) Explain and illustrate what is meant by the term ‘externalities’? [10]

(b) If a good or service gives rise to an externality, should it be provided by the government?

[15] 2 Free trade stimulates economic growth. Under a Free Trade Agreement (FTA), member

countries provide each other favourable treatment of goods, services and investment such as the removal of import restrictions. Singapore has so far inked 13 FTAs.

(a) Explain how Free Trade Agreements could lead to economic growth in an economy. [10]

(b) Discuss the economic reasons for restricting imports. [15]


tjc 2007 prelim h1 qn paper

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