(2022) A Level H1 Econs CSQ 2 Suggested Answers

(2022) A Level H1 Econs Paper 1 CSQ Q2

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2022 A Level H1 CSQ Q2

a. In both Botswana and Zimbabwe, budget balance as a % of GDP is negative / shows a deficit. A country’s budget position is given by government revenues minus government expenditure.

This would lead us to conclude that projected government spending is greater than government revenue in both countries.

b.

  1. I would expect a positive relationship between adult literacy rate and real GDP per capita.

  2. Higher adult literacy rate suggests a higher level of education. Higher levels of education increases the skills of the labour force → increase productive capacity → shifts LRAS to the right → higher potential economic growth.

  3. Higher real GDP will contribute to a higher real GDP per capita should population remain largely unchanged

  4. Figure 3 largely supports the expected relationship as countries with higher literacy rates do show a higher estimated real GDP per capita

  5. There is however an outlier - Zimbabwe which does not appear to support this relationship since real GDP per capita is low despite a relatively high literacy rate compared to other countries in the figure.

  6. There could be other factors contributing to the low GDP per capita for Zimbabwe

c. It is stated in extract 1 that diamonds have a PED value of between 0 to 1 - which means that demand for diamonds are considered to be price inelastic.

The global price for diamonds increased from Dec 2019 to Jan 2020 then fell from Jan 2020 to March 2020.

Given that demand for diamonds are price inelastic - an increase in price from Dec 2019 to Jan 2020 will result in a less than proportionate fall in quantity demanded → total revenue from sale of diamonds will thus increase.

Given that diamonds contribute 80% to export earnings, (X-M) will increase → AD will increase → real GDP will increase (via k) in Botswana for this period.

Given that demand for diamonds are price inelastic - a decrease in price from Jan 2020 to March 2020 will result in a less than proportionate increase in quantity demanded → total revenue from sale of diamonds will thus decrease.

Given that diamonds contribute 80% to export earnings, (X-M) will decrease → AD will decrease → real GDP will decrease (via k) in Botswana for this period.

d. GDP growth

Provides an understanding of incomes and thus purchasing power → helps us assess material standard of living (but not much on non-material SOL - thus not so useful)

GINI Coefficient

Provides an understanding on levels of income inequality in the country → thus helps us better assess if GDP per capita would likely be an accurate reflection on incomes and thus purchasing power (not so useful in assessing non-material SOL)

Human development index

  1. An index which aggregates information in three areas

    1. Life expectancy at birth

    2. Mean and expected years of schooling

    3. GNI per capita (PPP international dollars)

  2. This would be most useful as it allows us to make an assessment of both material & non-material SOL

  3. Life expectancy can give us an insight on non-material SOL since life expectancy is positively correlated with access, quality of healthcare as well as diet & sanitary conditions.

  4. Mean and expected years of schooling can give us an idea on education attainment which contributes both to material & non-material SOL as education can help individuals attain better paying jobs and thus increase in purchasing power & improves non-material SOL due to better satisfaction

  5. GNI per capita (PPP international dollars) would also allow us to compare incomes with other countries after having adjusted for cost of living.

Reliability of this information

  1. Data collection may be incomplete due to difficulties in collecting data in rural areas

  2. In developing countries, existence of informal sectors & underground economy will likely mean that the GNI per capita data doesn’t fully capture the actual income earned

ei. How a stronger S$ could counteract inflationary pressures

  1. Stronger exchange rate generally helps with addressing the impacts of inflation

  2. Stronger S$ → imported goods becomes cheaper → reduce imported inflation

  3. Stronger S$ → imported inputs become cheaper → SRAS shift right → reduce cost push inflation

  4. Stronger S$ → fall in demand for SG exports as they become more expensive → fall in (X-M) → fall in AD → Fall in GPL → reduce demand pull inflation

eii. Why governments should be concerned

  1. Expectations of deflation —> reduces consumers willingness to buy goods & services as they would rather wait to buy a later time —> Consumption will fall —> AD falls —> real national income falls via multiplier —> lower economic growth & higher unemployment

  2. Economy with persistent deflation may breed investors pessimism as investors may view the economy as stagnant or ailing —> fall in investments

    1. Fall in AD —> fall in real national income —> lower economic growth & higher unemployment

    2. Fall in AS —> lower potential growth, higher prices

    3. Worsening capital account —> worsening BOP

  3. The problem with deflation, is also about what can cause deflation

    1. Deflation, when due to a fall in aggregate demand, as illustrated in figure 1 below, while bringing down prices, also causes a fall in real national income —> decreasing economic growth and increasing unemployment (as illustrated)

Why governments should not be concerned

  1. There is no ‘persistent’ cause of deflation - the pandemic is likely a transient factor & associated impacts would likely come to pass

  2. Governments have already embarked on significant fiscal stimulus package measures which are likely to be excessive and create inflation.

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