2024 A-Level H2 Economics CSQ2 Questions & Answers

(a) With reference to Figure 2:

i) Explain how the appreciation of the Chinese yuan against the US [2] dollar is represented in a particular time period. [2]

Chinese yuan [CNY ] has been appreciating against US$ from around mid-2020 to early 2021 [1m]. This is represented by how US$1 buys lesser and lesser CNY than before [1m].

ii) Using demand and supply analysis, explain one possible reason why the Chinese yuan has appreciated against the US dollar on the foreign [2] exchange market.

‘Booming exports’ will result in a rise in demand of CNY in the forex market [1m] as foreigners would need more CNY to pay for the exports. As a result, at the initial exchange rate, there will be a shortage of CNY as quantity demanded exceeds quantity supplied, exerting upward pressure on the exchange rate, causing the CNY to appreciate [1m].

(b) Explain how the change in the exchange rate from March to September 2018 shown in Figure 2 might have affected China’s balance of payments. [4]

CNY has generally appreciated against US$ from March to September 2018 [1m]. An appreciation of CNY will cause the price of her exports in terms of USD to increase, causing foreigners to decrease their demand for China’s exports, reducing export revenue (in CNY) [1m]. At the same time, the price of imports in terms of CNY falls and if demand for imports is price elastic, quantity demanded for imports will increase more than proportionately, leading to an increase in import expenditure [1m]. With export revenue falling and import expenditure rising, the balance of trade worsens. In fact, as long as Marshall-Lerner condition holds whereby | PEDx+PEDm | > 1, the appreciation of the CNY will worsen the trade balance and hence worsen the balance of payments, ceteris paribus [1m].

(c) Explain how increased exports of health supplies and equipment from China might have affected national income and the general price level [4] in China.

Increased exports of health supplies and equipment could cause an increase in the net exports component of the AD, leading to a rise in AD. This will lead to producers experiencing an unplanned fall in inventories, leading them to increase output and hire more factors of production, which increases national income. This further triggers the multiplier process as the initial increase in national income induces an increase in domestic consumption, leading to further increases in AD and national income. Ultimately, national income increases more than proportionately to the increase in exports. [2m]

As firms are increasing output, there will be an increase in demand for factors of production, which may now be in severe shortage as the economy expands towards the full employment level of output. This causes factor prices to increase, leading to higher unit cost of production, which in turn leads to more output to be produced at higher price levels (as shown in the upward sloping AS curve). As firms may also be forced to use resources that are less and less suitable for their production, productivity falls, which also causes the unit cost of production to increase, which pushes up prices across the economy, leading to higher GPL. [2m].


(d) Discuss the extent to which countries such as Vietnam, Malaysia and [8] Taiwan are ‘the real winners in the US-China trade dispute’. [8]

The CCCS needs to carefully weigh the potential benefits and costs of such a merger in terms of economic efficiency, consumer welfare and equity.

R1: How Vietnam, Malaysia and Taiwan benefit greatly from the US-China trade dispute

As Chinese goods becomes more expensive to US consumers due to US tariffs, US will import more from China’s competitors like Vietnam, Taiwan and Malaysia instead. This will increase their and improve their trade balance, increase their net exports component of AD, leading to a rise in the AD and Real GDP, boosting actual economic growth and employment via the multiplier process as explained in part c). For e.g. Vietnam’s exports to US and its trade balance grew more than 2 times since 2018 (table 3), after the US-China trade dispute.

Furthermore, foreign direct investment (FDI) into these countries also increases as MNCs and Chinese manufacturers relocate from China (Ext 6). This will increase the I components of AD, adding to the actual economic growth and employment boost as explained above. Furthermore, the increase in I will lead to an increase in capital stock, thus increasing productive capacity indicated by the rightward shift of the AS curve from AS1 to AS2, boosting potential economic growth as indicated by an increase in the full employment output from Yf1 to Yf2. Hence the countries can enjoy sustained economic growth, a fall in demand-deficient unemployment and an improved trade balance.

(Sustained Economic Growth Diagram showing increases in both AD and AS)

R2: May Hurt Their Economies

However the economic growth may result in greater pollution and depletion of natural resources. In addition, the rise in exports and its related activities also create more congestion, especially as infrastructure at the ports cannot keep up with the pace of economic activities [Ext 6]. These negative externalities, which are third party effects, harm the health and quality of life of the residents. Furthermore, though economic growth may be boosted in the short term, the deterioration of the environment and health of labour force may reduce productive capacity in the future and hence the economic growth may not be sustainable.

There could also be possible structural unemployment as farmers are displaced due to acquisition of agricultural land for factories [Ext 6]. These farmers cannot be employed despite job vacancies in the booming industrial sector due to the mismatch of skills between what they possess and what is required by the industrial sectors.

Evaluative Conclusion

These countries will certainly stand to gain from the trade dispute especially in the short-term as they produce goods that are close substitutes of Chinese goods.

However, whether these countries are the real winners in the long term will depend largely on effectiveness of government policies (such as skills retraining schemes and infrastructure development) to mitigate the threats as above-mentioned. The more proactive the governments and more effective the policies, the more likely they will emerge as real winners. Finally, it would also depend on how US responds to its rising trade deficit with these countries, for example whether US will in turn impose tariffs on them.

(e) Discuss whether the UK or China will benefit more from joining the CPTPP. [10]

R1: How UK Benefits

With the difference in factor endowment due to ‘the member countries diverse economic characteristics’ [Ext 7], UK will be able to engage in inter-industry trade and reap the full benefits of international specialisation and trade that is based on comparative advantage. As her comparative advantage appears to lie in knowledge-intensive areas like services and digital trade [Ext 7], it will thus specialise and export in these areas as it incurs a relatively lower opportunity cost. It will then import labour–intensive goods which countries like Vietnam and Malaysia have a comparative advantage in.

This will increase its exports, thus boosting actual economic growth and employment as explained previously. Consumers will also benefit from “lower prices and more variety”. As seen in the tariff removal diagram below, prices will fall from Pw+t to Pw and quantity consumed will increase from Q3 to Q4. Hence, increasing consumer surplus from APw+tB to APwC.

(Diagram on Tariff Removal)

Furthermore, UK has just withdrawn from the EU. The benefits that UK reap from CPTPP whose member countries are seen as “driving force of global economic growth” [Ext 7] may outweigh the lost benefits from reduced trade with EU. This is also especially important with the rise in “anti-globalisation threats”. [Ext 7].

R2: How China Benefits

China has been experiencing “prolonged economic slowdown” amidst trade disputes with the US. With CPTPP membership, China is able to re-route its labour-intensive manufactures from the US to a huge tariff-free market. This will similarly boost economic growth and employment as explained above. As China becomes more integrated with CPTPP economies, more FDI inflows may be experienced [Ext 7] as part of “supply chain networks” to develop components more cheaply in China, taking advantage of its comparative advantage in manufacturing. This will further boost actual and potential economic growth in China. Such integration will be especially important for China with the rise in “anti-globalisation threats” [Ext 7], which often involve the targeting of China due to its highly competitive economy.

Evaluative Conclusion

On balance, the UK stands to benefit more from joining the CPTPP. Following Brexit, the UK is in critical need of securing expansive, tariff-free markets to compensate for lost EU market access. Furthermore, as a developed economy specializing in services and digital trade, the UK offers immense economic complementarity to the bloc. As the sole European nation, its non-overlapping comparative advantages perfectly enrich the bloc’s “diverse economic characteristics,” making it highly likely to attract significant mutual trade and investment.

Conversely, China’s potential gains are constrained. As noted in part d), CPTPP countries like Malaysia and Vietnam are close manufacturing competitors to China. As a result, the benefits of CPTPP accession for China will be heavily diluted by intense regional competition, making the treaty far more transformational for the UK.

💡 Chief Tutor’s A-Level (H2) Breakdown: This is actually a very challenging question, which requires very strong conceptual understanding of trade and globalisation. Students will do better by focussing on critical analysis than regurgitating standard explanations incessantly. Do note our references to answers from earlier questions to avoid wasting time repeating explanations.

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