ANGLO-CHINESE JUNIOR COLLEGE

2016 JC2 PRELIMINARY EXAMINATIONS

ECONOMICS 9808
Higher 3 13 September 2016
3 Hours 15 Minutes
Additional materials: Writing paper

READ THESE INSTRUCTIONS FIRST

Write your index number and name 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/tape.

Section A
Answer all questions.

Section B
Answer two questions.

Begin each question on a fresh sheet of paper.

The number of marks is given in brackets [ ] at the end of each question or part question.

At the end of the examination, fasten all your work securely together in order.

Please check that your question paper is complete.

This document consists of 9 printed pages, including the cover sheet.
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Section A

Answer all questions in this section.

Question 1 The Era of Digital Globalisation

Extract 1: Digital globalisation and developing countries

Globalization is entering a new era, defined not only by cross-border flows of goods and
capital, but also, and increasingly, by flows of data and information. This shift would seem to
favour the advanced economies, whose industries are at the frontier in employing digital
technologies in their products and operations. Will developing countries be left behind?

For decades, vying for the world’s low-cost manufacturing business seemed to be the most
promising way for low-income countries to climb the development ladder. Global trade in
goods rose from 13.8% of world GDP in 1985 ($2 trillion) to 26.6% of GDP ($16 trillion) in
2007. Propelled by demand and outsourcing from advanced economies, emerging markets
won a growing share of the soaring trade in goods; by 2014, they accounted for more than
half of global trade flows.

Since the Great Recession, however, growth in global merchandise trade has stalled, mainly
owing to anaemic demand in the world’s major economies and plummeting commodity prices.
But deeper structural changes are also playing a role. Many companies are simplifying and
shortening their supply chains. For a range of goods, automation means that production
location and outsourcing decisions no longer depend primarily on labour costs. Quality of
talent, infrastructure, energy costs, and speed to market are assuming greater weight in such
decisions. In the near future, 3D printing could further reduce the need to ship goods across
long distances.

If trade in global goods has indeed peaked relative to global GDP, it will be harder for poor
countries in Africa, Latin America, and Asia to develop by becoming the world’s next
workshops. But globalization itself is not in retreat. While global goods trade has stalled and
cross-border financial flows have fallen sharply since 2007, flows of digital information have
surged: Cross-border bandwidth use has grown 45-fold over the past decade, circulating
ideas, intellectual content, and innovation around the world.

New research from the McKinsey Global Institute (MGI) finds that cross-border flows of goods,
services, finance, people, and data during this period increased world GDP by roughly 10% –
roughly an additional $7.8 trillion in 2014 alone. Data flows accounted for an estimated $2.8
trillion of this gain, exerting a larger impact than global goods trade – a remarkable finding,
given that the world’s trade networks developed over centuries while cross-border data flows
were nascent just 15 years ago.

Digitization disrupts everything: the nature of goods changing hands; the universe of potential
suppliers and customers; the method of delivery, and the capital and scale required to operate
globally. It expands opportunities for more types of firms, individuals, and countries to
participate in the global economy. It also gives countries and companies everywhere an
opportunity to redefine their comparative and competitive advantage. For example, while the
United States may have been at a disadvantage in a world where low labour costs were

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paramount in global manufacturing value chains, digital globalization plays directly to its
strengths in technology and innovation.

On its face, this shift to digital globalization would seem to work against developing countries
that have large pools of low-cost labour but inadequate infrastructure and education systems.
Yet digital flows offer developing countries new ways of engaging with the global economy.
The near-zero marginal costs of digital communications and transactions create new
possibilities for conducting cross-border business on a massive scale. Alibaba, Amazon,
eBay, Flipkart, and Rakuten are turning millions of small enterprises around the world into
“micro-multinational” exporters. Companies based in developing countries can overcome local
market constraints and connect with customers, suppliers, financing, and talent worldwide.
Twelve percent of global goods trade is already conducted in ecommerce channels.

Moreover, a country need not develop its own Silicon Valley to benefit. Countries on the
periphery of the network of global data flows can benefit more than countries in the centre.
Digital connections promote productivity growth; indeed, they can help developing economies
move to the productivity frontier by exposing their business sectors to ideas, research,
technologies, and best management and operational practices, and by building new channels
to serve large global markets.

But the Internet cannot deliver such improvements in efficiency and transparency unless
countries build the digital infrastructure needed to connect the world’s huge offline population.
The number of Internet users worldwide now exceeds 3.2 billion, but at the end of 2015, 57%
of the world’s population, or four billion people, remained offline, and many who are online use
only basic cell phones. In many developing countries, connectivity is too slow, unreliable, or
expensive to allow entrepreneurs and individuals to take full advantage of the new global
business and educational opportunities.

Education systems will also need to keep up with demand for language fluency and digital
skills. While 40% of the world’s population are connected to the Internet, 20% are still unable
to read and write. According to another recent MGI study, there are also large gender gaps in
access to digital technologies around the world, and this lack of access impedes women’s
economic and social empowerment. Lagging countries that fail to promote gender equality,
invest in education, and adopt broader governance and regulatory reforms risk falling even
further behind in reaping the significant benefits of globalization.

Twenty-first-century globalization, driven by digitization and rapid changes in competitive

advantage, can disrupt local industries, companies, and communities and cause job loss, even
as it spurs greater productivity, boosts overall employment, and generates economy-wide
gains. Governments must consider these trade-offs carefully, and develop ways to support
those who are harmed by global flows, giving them paths to new roles and livelihoods. To
date, few governments have done so. Ironically, the political backlash against globalization is
gaining momentum in many places even as digitization increases the opportunities and
economic benefits that globalization has to offer.

Adapted from Project Syndicate, 25 March 2016

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Figure 1: Global flows of goods, services and finance from 1980 to 2014

Figure 2: Actual and projected changes in used global cross-border bandwidth (terabits
per second) from 2005 to 2021(forecast)

Extract 2: Digital economy, information and consumer protection

“Many people want the government to protect the consumer, while a much more urgent
problem is to protect the consumer from the government,” Milton Friedman said. And it is truer
than ever today, since the digital economy and its rules don’t seem to run at the same speed.
As a result, many governments around the world – and especially in Europe – are having a
hard time justifying to the 21st century consumer the need for endless authorization
procedures, stifling regulatory demands of federal agencies, obscure laws on product liability,
taxi’s monopolistic driving licenses, notarial records, et cetera.

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The justification for all such regulation usually concerns consumer ignorance. Crucial
information about products and services within the market may indeed be ignored or
misunderstood by the economic actors participating in it. And since trust among consumers
and producers is essential for the economy to flourish, an assurance of quality and safety
provided by the government is often viewed as a tool for economic growth and development.
Regulation, in this regard, is deemed to be potentially helpful in identifying good suppliers and
safe products, as well as in preventing frauds and rip-offs.

Until very recently, even the most stubborn free-marketers accepted the case for government
intervention to mitigate market failures generated by the fact that producers would not be able
or willing to provide information about given products and services.

In the past, various counterarguments have challenged the need for government regulation to
ensure consumer protection. However, the greatest challenge to it has undoubtedly been
triggered by the digital revolution that has been taking place in recent years. The internet has
proven capable of connecting people on a common platform, where they can share opinions,
desires and experiences. The common knowledge thus created is inevitably more precise and
complete than anything certified by a government agency.

The internet has greatly expanded the market for goods and services, while reducing barriers
to entry and many limits to innovation. It has thus solved problems that regulation has failed to
solve for decades. Think of the impact of car sharing on pollution. Specifically regarding
the protection of consumers, the internet contains a quantity of information on any good or
service that was inconceivable before its advent. Asymmetric information – often denounced
as one of the main reasons underpinning the need for market regulation, has mainly become
a bad memory. Today’s consumers not only have access to powerful tools for analysis and
comparison of goods and services, but transaction costs normally associated with them have
also been drastically reduced.

Adapted from “Innovation Is Replacing Regulation” by Giacomo Lev Mannheimer

Extract 3: Digitization, profitability and market power

Many US industries, including some of the most innovative, are dominated by a handful of
large companies, some of which enjoy very large market shares and generate returns that
greatly exceed historical averages. And some companies are stockpiling cash or acquiring
competitors rather than using their returns to build productive capacity.

Nonetheless, it would be a mistake to conclude that weakening competition is driving these

unusual economic trends. They are taking place in a context of swiftly changing sectoral
dynamics and rapid digitization.

Corporate profits may be near all-time highs, but their variance among firms and industries
has also increased significantly. The most profitable firms in the US are no longer in heavy
industry; they are in sectors that capitalize on research and development, brands, software,
and algorithms. Companies in sectors like pharmaceuticals, media, finance, information
technology, and business services have the highest profit margins. Even excluding finance,
these sectors’ share of US corporate profits has increased significantly, from 25% in 1999 to
35% in 2013.

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Corporate profitability is increasingly driven by digital capabilities. In the most digitally

advanced sectors of the economy, margins have grown 2-3 times faster than average. And
even within these sectors, there are enormous spreads between the top-performing
companies and the rest of the pack. The “winner-take-most” dynamic of the digital economy
is not only producing record profits for leading firms; it may be accelerating the pace of
innovation and broadening the areas in which companies can enter and quickly establish
market power.

Indeed, in a growing number of digital markets where a few giant firms hold commanding
shares, there is little evidence that market power is leading to higher prices. On the contrary,
consumers have gained an array of free services and conveniences.

More relevant concerns about market concentration may turn out to be privacy and data
ownership, not pricing power. Indeed, some have begun to ask whether the collection and
control of large amounts of data by a few huge firms with commanding market shares can be
an anticompetitive force, creating insurmountable entry barriers for would-be innovators.

At the same time, however, some of the largest digital platforms, by their very nature, may
promote competition, as they improve transparency in markets and enable millions of small
enterprises to reach customers and suppliers around the world. A recent study found that
digital platforms can help small businesses increase their export rates dramatically.

Adapted from Project Syndicate, 27 May 2016

Figure 3: Internet penetration rates across the world as of 30 June 2016

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Questions:

(a) With reference to Figures 1 and 2, explain the trends in global flows in goods, services,
finance and data. [6]

(b) Assess the view that the shift to digital globalisation will benefit advanced economies
more than developing countries. [8]

(c) Extract 3 mentions that ‘corporate profitability is increasingly driven by digital

capabilities.’

To what extent can game theory explain a firm’s decision to invest in developing its
digital capabilities? [6]

(d) In light of digital globalisation, discuss whether there remains a need for government
regulation to deal with the problems of imperfect and asymmetric information, as well
as market dominance in a country. [10]

[Total: 30]

References:

Extract 1: https://www.project-syndicate.org/commentary/digital-globalization-opportunities-
developing-countries-by-laura-tyson-and-susan-lund-2016-03
Figures 1 and 2: Report on Digital Globalisation by McKinsey Global Institute, March 2016
Extract 2: http://www.valuewalk.com/2016/06/innovation-vs-regulation/
Extract 3: https://www.project-syndicate.org/commentary/profits-competition-digital-economy-by-laura-
tyson-and-james-manyika-2016-05
Figure 3: Internet World Stats

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Section B

Answer two questions from this section.

2. Statistical analysis can only demonstrate correlations within economics. This does not
prove causation. To what extent does this and a lack of experimentation mean that
economics is not a true science? [35]

3. Nash equilibrium is an example of the solution of an economic model developed by

John Nash to deduce the actions taken by different agents in a non-cooperative
situation.

Evaluate the view that economic models, such as game theory, are ultimately
redundant in today’s volatile and uncertain economic environment. [35]

4. Discuss whether strategies adopted by firms to gain a competitive advantage is likely

to lead to a more profitable outcome and a more efficient and equitable allocation of
resources. [35]

5. ‘Apart from local sources of pollutants, Singapore has had in more recent times to deal
with the transboundary haze pollution from Indonesia. The sources of air pollution can
be grouped into three categories. These are stationary sources such as power stations,
oil refineries and industrial development; mobile sources such as motor vehicles,
shipping and air travel; and others such as open burning of waste materials and trans-
boundary air pollution.’

Source: http://filter-the-fumes.blogspot.sg/2011/01/causes-of-air-pollution-in-singapore.html

Since the publication of this blog in 2011, air pollution reached a record high in
Singapore in June 2013.

Discuss which policies are likely to be the most successful in reducing air pollution in
Singapore. [35]

6. Assess the extent to which trade theories justify the need for regional trading
agreements amongst different countries. [35]

7. Consider whether foreign direct investment and multinational enterprises are an

absolute necessity for a developing country to grow its economy. [35]

END OF PAPER

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2EC
Name Form Class EC Class Name of Tutor Index No

ANGLO-CHINESE JUNIOR COLLEGE

2016 JC2 PRELIMINARY EXAMINATIONS

ECONOMICS 9808
Higher 3 13 September 2016

Additional materials: Writing paper

Cover Sheet
INSTRUCTIONS
Arrange your answers in order.
Fasten your answers to this cover sheet using the string provided.
Write your index number and name on all the work you hand in.
Complete the information in the boxes on this cover sheet.

Essay Marks
(Write down question number attempted)

Question No. 1 / 30

Question No. / 35

Question No. / 35

Total / 100

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