HWA CHONG INSTITUTION

College 2 Preliminary Examination 2009 General Certificate of Education Advanced Level

Higher 2

ECONOMICS
PAPER 1 Case Study Additional Materials: Answer Paper

9732/01
14 September 2009 2 hours 15 minutes

READ THESE INSTRUCTIONS FIRST Write your name and CT on all the work you hand in. Write in dark blue or black pen on both sides of the paper. You may use a soft pencil for any diagrams, graphs or rough working. Do not use staples, paper clips, highlighters, glue or correction fluid and tape. Answer ALL the questions. At the end of the examination, fasten the answer scripts to Questions 1 and 2 separately with the cover pages provided. The number of marks is given in brackets [ ] at the end of each question or part question. You are advised to spend several minutes per question reading through the data before you begin writing your answers.

This document consists of 9 printed pages and 1 blank page.

HWA CHONG INSTITUTION

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2 Answer all questions. Question 1 Rail travel in the UK Extract 1: Pay up, pay up, and board the train A GOOD way to be unpopular at dinner parties is to praise the British railway system. In many ways, the railways are in rude health. Plenty of commuter routes into big cities are standing-room only. So many trains crowd the rails that timetables are sensitive to even small delaysone broken-down train can cause long waits for dozens of others. Though passenger growth has slowed due to the recession, the appeal of trains is likely to keep rising. One estimate has passenger numbers doubling over the next 20 years, thanks to a mix of road congestion, the expansion of urban employment and green concerns. However, Britains rail network as a whole has never been profitable. In recent years, costs have exploded due to rising fuel costs. Another cause is the recession. The drop in passenger growth was particularly sharp for profitable first-class travellers, as firms cut back on their travel budgets. Furthermore, the cost of rail travel has risen more than the cost of motoring, encouraging people to ignore advice about the virtues of rail and switch from trains to cars. As rail companies continue to make losses, the official subsidy has exceeded 4 billion a year since 2006. A spokesman said: "The reality is that 6% of the population travels on railways. So why should people who don't use railways regularly fund the people who do?" Rail journeys account for just 6% of total travel while roads for 84%, but subsidising rail consumes around 20% of the governments transport budget. The same amount that spent on the west-coast railway line could have added to around 450 miles of motorway. The cabinet ministers decided in 2007 that passengers would shoulder more of the burden through higher fares. In many ways that is sensible, since trains are by and large used by the better-off and the poor rarely use. Others are proposing to spend on making the busiest lines better rather than keeping little used ones open. After all, half the train journeys made in Britain involve only 3% of all the stations. But fewer than half of passengers think the trains are good value now. Governmentcommissioned research from Passenger Focus found that British fares were the highest in Europe. Commuter tickets to London are around twice as expensive for the same distance as in the next-priciest country, France. All this leaves the government in a bind: new capacity is desperately needed; increasing the subsidy is politically distasteful; and forcing passengers to pay more would be explosive. Although the current recession is not expected to dampen passenger growth for long, ballooning government debt will constrain spending for years. The Department for Transport is already desperate for funds to keep a clutch of badly needed projectssuch as a 6 billion road-building programmeon course. If passengers are unwilling to pay for the improvements, they may not get them at all. Source: Adapted from the Economist, 4 June 2009
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Figure 1: Railway Passenger Traffic, UK: 1955 to 2009

Source: Economist, 4 June 2009

Figure 2: Car Traffic volume and year-on-year growth rate, UK: 1950 to 2008

*Billion vehicle kilometers refers to the distance travelled by vehicles)

Source: www.dft.gov.uk/pgr/statistics

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Extract 2: Railway reforms The Department for Transport (DfT) has announced that some 5.5 billion is to be spent by 2015 upgrading London's Thameslink route; 1,300 new carriages will be ordered and hundreds of millions of pounds are to go on improving capacity at overcrowded stations in Birmingham and Reading by lengthening platforms. More controversial is how trains will be paid. The DfT proposes to shift some of the burden from taxpayers to ticket-holders, slashing its subsidy to 3.2 billion a year by 2009 and hoping that a combination of more passengers and pricier tickets will boost fare revenue. Passengers are already feeling the heat. Fares on all parts of the network have risen faster than inflation. Alongside above-inflation fare increases, South West Trains has instructed its guards to show no mercy when issuing penalty fares to ticketless passengers, even if they have a good excuse. Firms have also been given the autonomy to raise unregulated ticket prices (typically, those bought just before travel) as much as they want. It even leaves open the possibility of removing price caps on regulated fares, such as season tickets. Source: Adapted from the Economist, 26 July 2007

Extract 3: The benefits of rail travel Widely accepted as the least polluting means of mass transportation, rail travel can justifiably lay claim to some pretty impressive green credentials at the outset. It has, for instance, been estimated that if the UK internal flights were to be made by train instead, by 2015 between 118,000 362,000 tonnes of carbon and 18,000 58,000 tonnes of nitrogen oxides emissions could be avoided. Even over relatively shorter distances than are commonly flown on domestic routes, a full train is at least twice as energy efficient as a full car driving down the carbon cost per passenger mile and making a very clear case for rail as an eco-friendly travel option. Source: http://www.ecotravelling.co.uk/TheBenefitsOfRailTravel.html

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5 Questions (a) (i) Describe the trend in car traffic volume in UK from 1950 to 2008. [2]

(ii)

Comment whether the data show that rail passenger numbers will double [4] over the next 20 years.

(b)

(i)

Explain and illustrate the profitability of the Britains national railway network.

[6]

(ii)

Evaluate the effectiveness of the proposal made by the Department for [8] Transport to shift the burden from taxpayers to ticket-holders.

(c)

In light of the data provided, if you were an economic advisor to the UK [10] government, discuss whether the UK government should remove rail subsidies.

[Total: 30]

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6 Question 2 Dealing with the Global Recession Extract 4: Building Britains future In response to the steep and synchronised global downturn, the UK Budget 2009 announced a package of measures that will support the adjustment towards renewed economic growth and improve the UKs competitiveness. A 750 million Strategic Investment Fund is set up to support advanced industrial projects of strategic importance. Additionally, a package of reforms to the taxation of foreign profits, including the introduction of an exemption for foreign dividends, supported by a limited restriction to the interest deduction rules has been introduced. The current corporate tax rate remains unchanged at 21%. The UK Budget 2009 also announced further Government action to support employment, by setting aside an additional 1.7 billion to help savers and families with children, to support pensioners, and to help people manage their finances. It also aims to implement guaranteed job trainings or work placements for all 18-24 year olds who have been unemployed for 12 months, to ensure no young people are left behind due to long-term unemployment. As part of this, the Government will allocate funding to provide 100,000 new jobs in socially useful activity and a further 50,000 jobs in areas of dense unemployment across the country. The guarantee will also offer new training courses, and Community Work placements. For this Budget, the Government is delivering fiscal support worth 4% of GDP in 20092010, and the operation of the automatic stabilisers. The Bank of England has cut Bank Rate to half a per cent and announced a 75 billion programme of asset purchases. With substantial macroeconomic stimulus already in place, this Budget focuses on further targeted support for those most affected by the downturn, and on ensuring a sustained and sustainable recovery, including support for employment and investment. In the UK, government borrowing is forecast to peak at 12.4% of GDP in 2009-2010, before falling as the economy recovers and the Government takes further action to ensure sustainability. The Budget also sets some tax and spending measures to reduce borrowing by 26.5 billion by 2013-14. Source: Adapted from the UK Budget 2009

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7 Extract 5: Protectionism during recession The year 2008 has been defined by the worsening global economic climate, with the UK GDP contracting by 1.5 per cent in the last quarter of 2008 and with unemployment hitting 1.97 million, the focus for the government is definitely on tackling the recession. It's not just Britain that has to deal with a downturn; the rest of the world is struggling with the global recession and as this happens there could be a temptation to focus attention inwards rather than worrying about the constraints of a free market leading to protectionism. Supporters of protectionism believe that it will save local jobs and help aid declining industries, while those opposed believe it will cause what Professor Iain Begg from the European Institute at the London School of Economics and Political Science calls "a major spiral" where ultimately nobody wins from it. A strong advocate of free trade, Professor Begg also believes that a sufficient condition for getting rid of protectionist measures is that all countries act together in trying to deal with the causes of the recession and impose the appropriate macroeconomic policies. "Protectionism will only impede economic recovery and breed retaliation amongst trading countries," he says. Source: Adapted from www.politics.co.uk, 1 March 2009 Extract 6: Singapores Monetary Policy The Monetary Authority of Singapore (MAS) tightened the monetary policy stance in October 2007, by allowing a slightly steeper appreciation of the S$ nominal effective exchange rate (S$NEER) policy band. This was followed by an upward movement of the band to the prevailing level of the S$NEER in April 2008. Both external and domestic price pressures had strengthened as a result of rapid increases in global commodity prices and a build-up in domestic cost pressures. In October 2008, MAS shifted to a zero per cent appreciation of the S$NEER policy band, eliminating the crawl which had been in place since April 2004. The decision reflected the moderation of inflation from its peak in mid-2008, and also the higher risk of a further deterioration in the external outlook after September 2008, following the escalation of turbulence in global financial markets. Singapores monetary policy has also been complemented by its fiscal policy. In the latest Budget 2009, a $20.5 billion Resilience Package was unveiled. This expansionary Budget, which featured the Jobs Credit Scheme, aimed to save jobs, enhance the cash flow and competitiveness of firms, support families, and strengthen the economys long-term capabilities through the Skills Programme for Upgrading and Resilience (SPUR). At the same time, there was a reduction of corporate income tax rate from 18% to 17%. The coherent and complementary nature of these macroeconomic policies, together with the numerous Free Trade Agreements signed over the past few years, will not only provide a buffer against the present downturn, but also help to achieve economic stability and the main macroeconomic objective of sustained growth for Singapore. Source: Adapted from MAS Annual Report 2008/09
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Table 1: The Singapore Economy: Selected Economic Indicators 2005-2009 2005 GDP, at current market price (S$ bn) GDP, at 2000 market prices (% change) Inflation (% change) Unemployment rate (%) Productivity Growth (% change) Current account balance (% of GDP) Capital and Financial Account Balance (S$ bn) 201.3 7.3 0.5 3.1 2.8 23.8 29.7 2006 221.1 8.4 1.0 2.7 1.6 26.4 35.1 2007 251.6 7.8 2.1 2.1 0.8 25.2 33.9 2008 257.4 1.1 6.5 2.2 7.8 15.2 16.2 2009* 240.9 8.8 0.1 3.6 8.7 15.5 35.8

*forecast as at 2Q 2009 Source: various

Table 2: The UK Economy: Selected Economic Indicators 2005-2009 2005 2006 2007 2008 2009* 1,413.79 -4.1 0.8 7.4 2.4 2.0 na

GDP at current market price 1,252.51 1,321.86 1,400.53 1,442.92 ( bn) GDP at 2000 market prices 2.1 2.8 3.0 0.7 (% change) Inflation (% change) 2.1 2.8 2.0 3.9 Unemployment rate (%) 4.8 5.4 5.4 5.6 Productivity Growth 0.8 2.4 2.3 0.5 (% change) Current Account Balance 2.6 3.4 2.9 1.7 (% of GDP) Capital and Financial 687.3 571.9 995.7 655.2 Account Balance (bn)

*forecast as at 2Q 2009 Source: various

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Questions

(a)

Summarise and account for the changes in the S$NEER since October 2007.

[5]

(b) (i)

With the aid of a diagram, explain how tariffs on imports can save local jobs in the UK economy. Discuss the view that ultimately nobody wins from protectionism.

[3]

(ii)

[6]

(c)

Consider whether the data would lead you to expect a further deterioration in the balance of payments of Singapore in 2009.

[4]

(d) Discuss and compare the choice of growth policies adopted by Singapore and the UK in response to the current global downturn.

[12]

[Total: 30]

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10 BLANK PAGE

Copyright Acknowledgements: Question 1 Extract 1 Question 1 Extract 2 Question 1 Extract 3 Question 1 Figure 1 Question 1 Figure 2 Question 2 Extract 4 Question 2 Extract 5 Question 2 Extract 6 Based on: The Economist, 4 June 2009 Based on: The Economist, 26 July 2007 Based on: http://www.ecotravelling.co.uk/TheBenefitsOfRailTravel.html The Economist, 4 June 2009 www.dft.gov.uk/pgr/statistics UK Budget 2009 www.politics.co.uk MAS Annual Report 2008/09

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