TUTORIAL CASE STUDY Question 3: VJC Prelim 2013 Inflation in Asia
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TUTORIAL CASE STUDY Question 3:VJC Prelim 2013Inflation in Asia
RECAP: CASE STUDY SKILLS
Remember this is an Economics paper, your answers must show understanding and application of economics concepts and theories.
Definitions should be precise.
Answers should be concise.
As you read the case material, think of how the various economic concepts you have learnt can be applied!!
SAFA (SKILLS PACKAGE)
Scan – headings, tables, questions
Annotate – relate issues to key economic concepts along theway
Focus – on the questions – Qn Dissection, Mark Allocation
Answer – contextualise (use data + economic theories tosupport answer, – extract from data; not reproduce)
ANSWERS MUST INCLUDE:
Economic Analysis +Substantiation from case
QUESTIONS(a) With reference to Figure 2, explain which country is the most reliant on
Europe as a source of its economic growth.[2]
(b) Explain how rising inflation could shake a country’s macroeconomic stabilityand cause widening income inequality.
[5]
(c) (i) With reference to Figure 3, describe the trend of Vietnam’s inflationbetween 2008 and 2011.
[2]
(ii) Do you agree with the view in Extract 6 that the poor internalfundamentals are the root causes of Vietnam’s inflation?
[6]
(d) Explain the relationship between Vietnam’s exchange rate and its tradebalance.
[3]
SCAN & ANNOTATE DATA…
Refresh memory…
Relevant economics concepts/theories?Central idea of each extract?
The Asian Development Bank (ADB) says East Asia faces a number of threats,with commodity price driven inflation at the top of the list due to turmoil in theMiddle East and nuclear crisis in Japan driving up commodity prices. Higherglobal commodity prices also drove food prices up across the region. Itwarned that these higher prices could shake developing Asia's macroeconomicstability and cause widening income inequality.
EXTRACT 5
Relevant economics concepts/theories?Central idea of each extract?SCAN & ANNOTATE DATA…
INFLATION IN ASIA
ADB warned that if left unchecked, rising inflation would trigger wage spiralsand affect the region’s economic outlook. The external economic environmentcontinues to weaken with an anaemic US recovery and Asia’s reliance onEurope as an export market has also made it vulnerable to the continent’sdebt woes.
EXTRACT 5
Relevant economics concepts/theories?Central idea of each extract?
INFLATION IN ASIA
Persistent and volatile changes in commodity prices are a challenge to inflationmanagement and the main difficulty for Asia’s policymakers is to achieve acoherent policy mix that will tackle inflation and rebalance the sources ofgrowth that is more inclusive and sustainable in the long term.
Adapted from The Business Times 29 July 2011
EXTRACT 5
Relevant economics concepts/theories?Central idea of each extract?
INFLATION IN ASIAFIGURE 2: EXPORT DATA FOR SELECTED ASIAN ECONOMIES
INFLATION IN ASIA
Poor internal fundamentals are the root causes of Vietnam’s inflation, which hasaccelerated for the 12th consecutive month in August to 23% from a year earlier.Most of Asia has been grappling with rising prices, yet Vietnam's economy has beensingularly susceptible. This is the country's second bout with inflation in excess of 20%within a period of three years. According to ADB, the causes of inflation are due tohigh growth of credit expansion, rising transportation costs, declining investmentefficiency in state-owned enterprises. High demand for capital and imports of rawmaterials to fuel its growth was among the contributing factors. While Vietnam is animportant rice exporter, its imports were also high, at times equal to 90% of its grossdomestic product. Experts have pointed the finger at the nation's cumbersome productdistribution systems with many middlemen that added to costs and made control ofthe prices of products difficult. Higher inflation expectations than other countries inthe region further created an inflationary mind-set.
EXTRACT 6
Relevant economics concepts/theories?Central idea of each extract?
INFLATION IN ASIA
However, the latest monthly inflation data gave hope that price pressures hadpeaked, thanks to the government’s introduction of a package in May totighten credit and rein in the country's state-owned enterprises.
Although inflation is set to ease, the situation remains delicate, given a newminimum wage hike that will take effect in October, and Vietnam’s continuedcurrency manipulation. In the past weeks, there have been signs of a possibleshift toward relying more on price controls on essential goods.
EXTRACT 6
Relevant economics concepts/theories?Central idea of each extract?
INFLATION IN ASIA
The central bank went on to reduce its interest rate in July to 14% from 15%.In response, the International Monetary Fund said that the cut may confuseinvestors. “It is too early to go into a full-blown easing cycle given thatinflation and inflation expectations remain elevated. Policymakers seem to bedemonstrating their low tolerance for slower growth again. A strongcommitment to sustaining the effort of tight monetary policy is essential to re-establishing confidence in the dong and restoring macro-economic stability.”
Adapted from Reuters, 25 Aug 2011
EXTRACT 6
Relevant economics concepts/theories?Central idea of each extract?
INFLATION IN ASIAFIGURE 3: VIETNAM’S EXCHANGE RATE AND INFLATION RATE
INFLATION IN ASIATABLE 1: VIETNAM’S EXTERNAL TRADE (MILLION US DOLLARS)
2008 2009 2010 2011
Exports 62,685 57,096 72,237 96,906
Imports 75,468 64,703 77,339 97,356
Trade balance -12,783 -7,607 -5,147 -450
INFLATION IN ASIA
Singapore’s inflation unexpectedly accelerated to hit 5.2% last year, thesecond-highest rate in nearly 30 years, creating risks to the already haltinggrowth. The increase was a result of higher domestic spending, costs ofaccommodation, private road transport including COEs and a tighter foreignworker policy. Higher than expected domestic inflationary pressure has keptinflation elevated even when global energy and commodity prices haveeased.
EXTRACT 7
Relevant economics concepts/theories?Central idea of each extract?
INFLATION IN ASIA
Policy makers are planning to give equal priority to containing inflation andboosting growth. The central bank will keep its current stance of “modest andgradual” appreciation of the Sing dollar. However, if the current economicenvironment continues, this will pose a policy dilemma. In Singapore‘s case, itwas estimated that a 1% appreciation of the Nominal Effective Exchange Ratewill lead to a 0.8% decline in the domestic CPI level over eight quarters.
EXTRACT 7
Relevant economics concepts/theories?Central idea of each extract?
INFLATION IN ASIA
A report showed that from 2006 to 2011, the real median income rose by2.5% a year while for the 20th percentile group, real income has an annualrate of 2.2%. Economists noted that productivity growth is a key driver of realwage growth. But this has virtually grounded to a halt last year, in part due tothe slow growth experienced. This underscores the difficulty by the governmentto shift the mature economy to a productivity-driven model. The concern is thathistorically, productivity growth has always been somewhat lower than othercountries. With the government’s push of the Productivity and Innovation CreditScheme which gives financial incentives for productivity initiatives, morecompanies are gradually adopting some of the productivity measures.
Adapted from The Straits Times, 1 Feb 2012
EXTRACT 7
Relevant economics concepts/theories?Central idea of each extract?
QUESTIONS(a) With reference to Figure 2, explain which country is the most reliant on
Europe as a source of its economic growth.[2]
(b) Explain how rising inflation could shake a country’s macroeconomic stabilityand cause widening income inequality.
[5]
(c) (i) With reference to Figure 3, describe the trend of Vietnam’s inflationbetween 2008 and 2011.
[2]
(ii) Do you agree with the view in Extract 6 that the poor internalfundamentals are the root causes of Vietnam’s inflation?
[6]
(d) Explain the relationship between Vietnam’s exchange rate and its tradebalance.
[3]
Additional Qn: With reference to Figure 2, explain which country is themost reliant on Europe as a source of its economic growth. [2]
Reference from Case?Figure 2:
FIGURE 2: EXPORT DATA FOR SELECTED ASIAN ECONOMIES
Hong Kong (1) as its exports to euro-zone as a share of GDP is highest, reflecting the significance of trade with euro-zone on the economy (1).
(a) Explain how rising inflation could shake a country’s macroeconomicstability and cause widening income inequality. [5]
Dissect Question:Identify 3Cs
(a) Explain how rising inflation could shake a country’s macroeconomicstability and cause widening income inequality. [5]
SKILLS PACKAGECOMMAND WORD/SCommand Words What is required
EXPLAIN No requirements for anti-thesis and evaluation Focus only on thesis analysis; no need to consider
flip-side No judgement is required
b) Explain how rising inflation could shake a country’s macroeconomicstability and cause widening income inequality. [5]
CONCEPT/S:‘rising inflation’ ↑GPL at an INCREASING RATE‘macroeconomic stability’ refer to the macro goals‘widening income inequality’ rising income of the high-incomehouseholds and/or falling income of the low-income households
CONTEXT:‘CASE’
Paraphrase Qn:How rising prices cause:(i) –ve effects on macro goals (‘shake’)(ii) widening income gap
b) Explain how rising inflation could shake a country’s macroeconomicstability and cause widening income inequality. [5]
Aim: Explain how rising inflation could affect the other goals of economy
(i) Explain how rising inflation can affect macroeconomic stability:
Identify Relevant Material/ Evidence from CASE:
‘rising inflation would trigger wage spirals’ workers expect higher prices and demand forhigher wages If w↑ > productivity ↑ unit wage/ COP ↑ SRAS ↓ Real NI↓ unN↑ GPL↑
If govt intervenes to prevent NI↓ by increasing AD (via G↑/ T↓) GPL ↑ further andworkers may demand for further increase in wages. Wages and prices further increase,contributing to wage‐price spiral.
Draw AD‐AS diagram.
Extract 1Para 2: ‘… rising inflation would trigger wage spirals’
Economic Analysis:
a) Explain how rising inflation could shake a country’s macroeconomic stabilityand cause widening income inequality. [5]
(ii) Explain how rising inflation will cause widening income inequality:
Quote evidence from case: In Singapore, real annual income of the lowest 20% lags behind the top50% signalling widening income inequality.This could be due to ‘higher food prices’ since the poor spends a higher % of income on foodrelative to the rich the poor will be worse off than the rich.
Identify Relevant Material/ Evidence from CASE:
Extract 3Para 3: ‘A report showed that from 2006 to 2011, the real median income rose by 2.5% a year while forthe 20th percentile group, real income has an annual rate of 2.2%.’
Extract 1Para 1: ‘Higher global commodity prices also drove food prices up across the region.’
Economic Analysis:
a) Explain how rising inflation could shake a country’s macroeconomic stabilityand cause widening income inequality. [5]
c) (i) With reference to Figure 3, describe the trend of Vietnam’sinflation between 2008 and 2011. [2]
Inflation was generally slowing from 2008 to 2009 (1m) [despite anincreasing inflation rate in the first half of 2008) before starting to increasegenerally from 2009 to 2011 (1m).
FIGURE 3: VIETNAM’S EXCHANGE RATE AND INFLATION RATE
c) (ii) Do you agree with the view in Extract 6 that poor internalfundamentals are the root causes of Vietnam’s inflation? [6]
Causes of Vietnam’s inflation – Poor internal fundamentalsExtract 6:‘…easy credit, devaluation of dong making exports relatively cheaper (demand–pullfactors), inefficient use of capital in state-owned enterprises, cumbersome productdistribution systems, inflation expectation (cost-push)…’
Identify Relevant Material from CASE:
Other causes of Vietnam’s inflation – External factorsExtract 5:‘Higher commodity prices… (imported inflation)’Extract 6:‘… its imports were also high, at times equal to 90% of its gross domestic product…’
c) (ii) Do you agree with the view in Extract 6 that poor internalfundamentals are the root causes of Vietnam’s inflation? [6]
Poor internal fundamentals cause inflation in Vietnam
PLAN YOUR ANSWER
Other factors causing inflation in Vietnam
STAND (Do you agree? Justify):
c) (ii) Do you agree with the view in Extract 6 that poor internalfundamentals are the root causes of Vietnam’s inflation? [6]
Poor internal fundamentals cause inflation in Vietname.g. ‘easy credit’ (Ext 6) ↑C + ↑I ↑AD firms bid up resource prices as they compete for them in order to meet rising demand
(as economy approaches full capacity) ↑GPL (demand pull inflation)
e.g. cumbersome product distribution systems + low efficiency in state own entreprises +rising transportation cost (Ext 6) ↑ unit COP ↓SRAS ↑GPL (cost push inflation)
PLAN YOUR ANSWER
c) (ii) Do you agree with the view in Extract 6 that poor internalfundamentals are the root causes of Vietnam’s inflation? [6]
PLAN YOUR ANSWER
Other factors causing inflation in VietnamRising commodity/ food prices (Ext 5) imported inflation since Vietnam is heavilydependent on imports (Ext 6: ‘… imports at 90% of GDP…’)
This type of inflation originates externally from importing raw materials and finished goods from other countries. When other countries face inflation, the prices of their goods increase.
Increase in price of inputs ↑ unit COP ↓SRAS ↑GPL
c) (ii) Do you agree with the view in Extract 6 that poor internalfundamentals are the root causes of Vietnam’s inflation? [6]
PLAN YOUR ANSWER
STAND (Do you agree? Justify):Agree with the view that internal factors are the culpritsince “most of Asia has been grappling with rising prices, yet Vietnam's economy hasbeen singularly susceptible” (Extract 6).Singapore which is more dependent on imports than Vietnam has inflation of only5.2% (Extract 7), 2nd highest in last 30 years compared to that of Vietnam’s is about20% within 3 years.
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