Suggested Answers of BT2 Revision Package - ASKnLearn

2. Appreciation is also needed to discourage excessive investments into manufacturingà loss-made export firms will exit the industry à more resources channelled to otherindustries, for instance, service industries as quoted in extract 7à which will help toincrease employment of workers3. Appreciation can also help to “reduce the trade deficit further, alleviate the risk of aprotectionist backlash abroad” àin fig 5, trade surplus was accumulating from 2005to 2008 with the highest trade surplus recorded in mid 2008Disadvantage of appreciation:• Extract 6 evidenced that China’s exports as a percentage of GDP are 32%à stillrelatively reliant on exports earnings as a source of national income à figure 4 showedthat when yuan appreciated in June 2008, trade surplus started to fall significantly asshowed in figure 5Synthesis/conclusionAppreciation of Yuan recommended.è Important to improve equity à excessive investment into capital-intensive growth hascaused “the share of national income going to households (as wages and investmentincome) to fall, while the share of profits has risen”Fall in export revenue is likely to be compensated by the rise in domestic C and overall ADwill still increase à actual growth maintained. (Extract 4)(d) “Excessive levels of investment are not a recipe for sustained rapid growth”Comment. [6m]àInvestment inferred in extract 5 à public investment and private investment “Excessivelevels of investment” à implies economic imbalance in China à Government stimulusfocuses on promoting investment à increases I à at the expense of C falling or growing ata slower rate.à Private investment à Loosening of credit à reduce interest rates àincrease ininvestment for firms à firms channel investments to capital intensive industries àproduction of output relies more capital goods rather labour à hence limited income flows tohouseholds à households reduce lower wages à C falls è Increase in I is offset by C àAD increases at a slower extent à Real output increases at a slower rates à henceexcessive levels of investment are not a recipe for sustained growthPublic investment à “However, the pace of investment is unsustainable” à excessive levelsof investment under taken by government à unsustainable because part of the investmentunder taken by government à lead to strain on budget position for China à may lead to abudget deficit for China. Draw AD-AS diagram to link to growth rates