Tut 16-18 - Case Study (PJC & VJC)_revised by David

7/24/2019 Tut 16-18 - Case Study (PJC & VJC)_revised by David

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HWA CHONG INSTITUTIONYear One H1 & H2 Economics 2013

Tutorials 13!1"# $acroeconomics II % Internal $acroeconomic ro'lems & olicies

TUTO(IA) 1*!1"# $AC(OECONO$IC O)ICIES

SECTION A# Case Stu+, ractice % -C relim 200.

Economic er/ormances o/ German, an+ rance

(a) (i) escri'ethe trend in the government budget balance as a percentage of GDP inGermany between 2003 an+ 200. [2]

Ta'le 3# German,s $acroeconomic In+icators

German, 2003 2004 2005 200* 200

Government udget (! of GDP) "# "$.% "$.$ "&.' .&

With reference to Table 3:he government budget balance as a percentage of GDP in Germany has im6ro7e+ [&]from +e/icit to a sur6lus[&].

Note: Those candidates who described budget as negative/positive will not begiven credit. Students are expected to present answers in an economic context, not amathematical one.

(ii) Com6are this trend with the change in the *rance+s government+s budgetbalance as a percentage of GDP in the same period. [2]

Ta'le 3# German,s $acroeconomic In+icators

German, 2003 2004 2005 200* 200

Government udget (! of GDP) "# "$.% "$.$ "&.' .&

Ta'le 4# rances $acroeconomic In+icators

With reference to Tables 3 & 4:

8OTHcountries+ budget balances have im6ro7e+ over time [&].HOWE9E(, rances 'u+:et 'alance remains in +e/icit ;


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(b) 3tract # indicates that wages in Germany are 4ept low. E>6lain a 6ossi'lereason for Germany+s unemployment rates shown in able $. [2]

Note for tutors: age rates and emplo!ment

hile wages are low "#xtract $%, the unemplo!ment rates "Table &% seem fairl! high.'owever, according to mar(et forces "for labour%, low wage rate would induce higher)t! demanded for wor(ers "b! firms%, ceteris paribus. 'ence the data ma! not beexplained b! simple **/SS theor!.

German, 2003 2004 2005 200* 200

5nemployment rate (!) 6.$ 6.% &.0 6.% %.#

ith reference to Table &:+erman!s unemplo!ment rate was between .$ to -.0. The figures seemincompatible with the fact that wage rates were (ept low "i.e. real wageunemplo!ment was not an issue%.

Su::este+ ans;ers#

&m 7 identify a possible reason&m 7 elaborate the reason using information from the e3tracts or otherwise.

?1@ Tec


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(c) ;ith reference to the data, account for the +i//erence in the current accountbalance between *rance and Germany. [0]

Note: 3efer to 4ase Stud! S(ills 5ac(age. Since the command word is account, this

)uestion is still considered a t!pe of 6ower 7rder S(ills 8uestion. 2ut the weighting is high,therefore the answers have to be detailed and !et concise.

General $arB Sc


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:dentify thedifference

*rance/ current account balance +eteriorate+ /rom sur6lus to a +e/icit


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Note: 3efer to 4ase Stud! S(ills 5ac(age This is a t!pical 'igher 7rder S(ills )uestion. So itshould be written in a form of miniessa!.

The st!le and approach would be similar to writing an ;#some essa! using thesis, antithesis and s!nthesis for structure. Nonetheless, it does not mean the! are the same.

9n terms of emphasis given to s!nthesis and conclusion, it is less demanding than an essa!.

General $arB Sc


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TIS#or suc< a


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iscusswhether the data are sufficient to assess changes in the standard of living inthese economies over the period. [%]

1= T


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economy was doing well due to animprovement in e3port sector. heincrease in goods and services is not forlocal consumption and thus current

standard of living may not haveimproved.

spending+and that it may suggest bettermaterial well"being of the *rench andthus higher H>?. his is especially so ifconsumers in *rance indulge in better"

Cuality imports or enEoys a wider rangeof consumer goods that enhance theirmaterial and non"material well"being.

Non!material ualit, o/ li/e in+icatorshe significant e3penditure on healthcare (more than &! of GDP) and the longerlife e3pectancy are evidence to support that Germany+s and *rance+s H>? hasimproved over the period (2#"21).

German+s wor4ers may be under morestress out of fear of losing their Eobssince managers can threaten to move

wor4 to central urope+ i.e. go offshoreand capital seems to be replacing labour(3t #).

3tract ' seems to suggest that with thehelp of strong unions, *rench wor4ersmay not be subEected to a competitive

wor4 environment (e.g. less stressfulwor4 or shorter wor4ing hours), and theirfringe benefits may be secured toimprove their Cuality of life.

Conclusion ?e7aluati7e Ju+:ment@he data provided is clearly insufficient to assess accurately=conclusively changes in H>? for bothcountries over the given period of time. his is because the most basic indicator of material well"being which is (EA) G 6er ca6itais not available. *urthermore even if this available there areother issues which must be considered such as whether income disparity has worsened.

@oreover the information provided which pertain to the Cuality of life is far too inadeCuate. here areother issues besides health care and life e3pectancy that impact on Cuality of life e.g. stressN Cualityof the environment. -t best, the information provided is only indicative of changes in the H>?. >therindicators such as PL?: are needed.

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(e) ;ith reference to the data, evaluate the measures that *rance can adopt to achieve itsmacroeconomic aims. [&]

Note: This is another t!pical 'igher 7rder S(ills )uestion. So it should be written in a form

of miniessa!.

The st!le and approach would be similar to writing an ;#some essa! using thesis, antithesis and s!nthesis for structure.

General $arB Sc


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TIS#or suc<


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(e) ;ith reference to the data, evaluate the measures that *rance canadopt to achieve itsmacroeconomic aims. [&]

Intro+uctiono be a successful economy is to achieve the four macroeconomic.goals 7 one that is characterisedby sustained growth, stable price level, full"employment and favourable >P.

Kowever, with reference to able #, it appears that the *rench economy is facing/

Hlow Growth rates (&.&"2.2!) and Kigh 5nemployment rates (%"6!)

5nfavourable or deficit in the current account

Note: inflation is least of the concerns here. But the use of expansionary policies if not

acco!panied "ith ##$ can lead to de!and%pull inflation.

his part of the case study shall discuss on the measures that *rance can adopt to achieve itsmacroeconomic aims.

8o+,# ossi'le 6olicies t


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EKT(A>ther possible adverse effects on the economy of mounting public debts/

Cut s6en+in: or Austerit, $easures# Government may adopt austerity or 8belt"tightening9

measures such as cutting G spending on welfare benefitsN healthcare and education. Huch

cutbac4s on G spending may adversely impact on Cuality of life and standard of living for theaverage resident of the country.

rint $one,/ Government may have to resort to 8printing9 money i.e. monetiOing the debt to

finance the deficit. his would lead to hyperinflation if economy is flushed=flooded with e3cessiveliCuidity.

Increase+ T#aising ta3es to finance the deficit. Kefty ta3 increases may lead to a sapping of

productivity due to its disincentive effects on individuals and firms willingness to wor4, save andinvest. his in turn may hinder future growth as productivity and innovation shrin4s.

?8i@ E>6ansionar, $onetar, olic,

3plain how e3pansionary @P can stimulate -D, hence lead to actual growth and lower cyclical

unemployment (refer to notes)/


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?@ Su66l,!si+e olicies

he root of the problems may be due to the fact that *rance has lost its comparative advantage and

the s4ills of the wor4ers are obsolete.

5se HHP

o gain e3port competitiveness to correct for the unfavourable current account position.

o upgrade the s4ills of wor4ers to fit them in the new Eobs+

Possible ways to carry out such policy would be to reduce to reduce=cut business costs and=ore3pand productive capacity

3amples/

Government+s investment in infrastructure.

a3 incentives/ :ntroduce ta3 incentives to those firms in the e3port sector and those which can

develop new comparative advantage through MD. -ccording to 3tract ', *rance+s comparativeadvantages seem to be : and services and they are attracting substantial investment.

Hubsidies/ Hubsidises education=training e.g. : industry

ositi7e s6in!o//s#;ith more firms engaging in production, more ta3 revenue can be collected although with lowercorporate ta3 rate, the ta3 collected from each firm is lower, the increase no. of firms wouldcompensate for the lower ta3 rate imposed, to end up with higher ta3 revenue at the end of the day.his could also help to address the high debt burden and the persistent budget deficit.

)imitations

ime"lags 7 long"gestation period to bear fruit e.g. MD.

Government+s investment in infrastructure may be limited since the budget deficit is a concern atpresent (based on 3tract ').

a3 and subsidies=benefits to e3porters might be construed by trade partners as a form of

protection or unfair competitive advantage given by the government and thus might attractretaliatory measures.

?E@ )a'our marBet re/orms inclu+in: ;a:e 6olic,

-ccording to 3tract ', 8poor labour mar4et performance9 appears to be a maEor source of *rance+spoor economic performance in terms of e3ports and growth. Holution institute reforms in the labourmar4et to ma4e wages and hiring more fle3ible to changes in economic conditions.

3amples/an union militancy (e.g. ban stri4eN give employers the right to hire=fire)

-dopt fle3"wage policy ( wages can rise=fall in tandem with economic conditions)-dopt performance"based wage policy ( wage growth is tied to productivity growth)

)imitationsHtrong political resistance "he *rench people are ardent supporters of 8socialist9 or pro"labourpolicies. Difficult to brea4 this culture. -s mentioned in 3tract ', it may be difficult to garner supportto implement wage or labour mar4et reforms to ma4e the labour force more fle3ible and nimble.

H;a C


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Conclusion ?Justi/ie+ Ju+:ment@

Given the special circumstances, it would appear that the *rench government has indeed 7er,limite+ 6olic, o6tionsto address the macroeconomic problems on hand i.e. unemployment, slow

growth and unfavourable >P.

-s a member of the uroOone it does not have the option of using monetary policy and e3changerate policy. :ts ability to use fiscal stimulus is also curtailed by its mounting public debt. @oreover, itsstrong unions and socialist culture pose formidable challenges to implementing labour mar4etreforms.

Perhaps, the silver lining seems to come from *rench comparative advantages in : and services.hus effective policies targeted at ma4ing the Paris region urope+s Hilicon Ralley+ and a service hubmay be a promising proposition in dealing with the current economic problems.

Note: >nder exam conditions, !ou need not have all the points. ?ust ensure there are at least& policies with a balance of short and long run measures.

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SECTION A# Case Stu+, ractice % 9-C relim 2010

T6lain 6ossi'le reasons /or ttract 4 an+ C


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verall, the downturn in the -merican economy has a negative impact on the


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Kowever, as the supply side effects of the spending manifest over time, the productive capacity ofthe economy would also increase, leading to potential growth and a shift in -H from -H to -H&. hisis li4ely to reduce inflation from P& to P2 as well as increase GDP growth from S&to S2in the long run.

-n increase in actual growth would lead to an increase in income and in turn consumer spending onimports. his may add on to P isli4ely to depend on the e3tent to which the business confidence of foreign investors would berestored.

E7aluation on t


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As suggested in Extract -last para in(est!ent in /hina is already high as a share of

'$ it !ay be better to spur consu!ption through inco!e%tax cuts to achie(e a highercurrent !aterial standard of li(ing.

ConclusionDespite the small multiplier that


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he higher borrowing costs may deter people from buying properties and speculation, thus

dampening the rising property and rental prices.E( 6olic, % re7aluation o/ t

Documents

Tut 16-18 - Case Study (PJC & VJC)_revised by David