2017 Case Study Question 1

a) Diet Westernisation which refers to an increase in the consumption of meat products will lead to obesity. This will produce external costs such as a fall in the productivity of the labour force which is detrimental to the wider community. Extract 1 (Paragraph 1) states that the problem of obesity has resulted in a fall in the productivity of the labour force.


b) A necessity is a good with an income elasticity of demand between zero and one. The higher the degree of luxury of a good, the higher the income elasticity of demand, and vice versa. According to Table 1, poultry has the lowest degree of luxury as it has the lowest income elasticity of demand of 0.02 and hence it is more of a necessity compared to the other two types of meat.


c) According to Table 2, the PED for chilled beef from Australia in Japan is 0.92 which is less than one which means that the demand is price inelastic. Therefore, a rise in the price will lead to a smaller proportionate decrease in the quantity demanded resulting in an increase in total spending which is the product of the price and the quantity. In contrast, the PED for chilled beef from the rest of the world in Japan is 1.18 which is greater than one which means that the demand is price elastic. Therefore, a rise in the price will lead to a larger proportionate decrease in the quantity demanded resulting in a decrease in total spending.


d)

XED for chilled beef from the US w.r.t. a change in the price of chilled beef from Australia = 0.74

XED for chilled beef from the ROW w.r.t. a change in the price of chilled beef from Australia = 1.34

As the XED is positive, the goods are substitutes. In the case of chilled beef from the ROW and chilled beef from Australia, the higher XED indicates a high degree of substitutability.


e)

The Japanese government can increase tariffs on imports of food particularly meat products. The prices of meat products will rise which will lead to an increase in the production and a decrease in the consumption resulting in a small shortage and hence a decrease in imports. Extract 1 (Paragraph 2) states that Japan imports the majority of beef consumed which indicates that decreasing imports of meat products can lead to a substantial decrease in imports of food.

Limitations:

  1. retaliation from the US which is engaging in protectionism (Extract 2 Paragraph 2)
  2. higher prices for Japanese consumers

The Japanese government can increase the production of food particularly meat products by decreasing the cost of production. Extract 1 (Paragraph 2) states that Japan imports the bulk of the cattle feed used for its domestic beef production which indicates that this can be done through decreasing the tariff on the import of cattle feed. A decrease in the tariff on the import of cattle feed will lead to a fall in the price which will lead to a fall in the cost of production of cattle. When this happens, the supply of cattle will increase which will lead to a fall in the price resulting in a fall in the cost of production of beef and hence an increase in the production.

Limitations:

  1. fall in tax revenue [link it to the highest Public Debt-to-GDP ratio (about 250%) in the world]

Extract 1 (Paragraph 1) states that obesity leads to health problems such as heart disease and diabetes. Therefore, the Japanese government can decrease the consumption of meat products through conducting healthy living campaigns to increase the awareness of the detrimental effects of over-consumption of meat.

Limitations:

  1. not legally binding
  2. addictive nature

Extract 1 (Paragraph 2) states that one of the reasons for diet Westernisation in Japan is the increase in the number of supermarkets. Therefore, the Japanese government can incentivise supermarkets to carry more fish and vegetable products and fewer meat products through giving them a tax rebate. This will make it harder for Japanese consumers to buy meat products and hence will induce them to decrease consumption.

Limitations:

  1. supermarkets may place a higher premium on the right product mix to appeal to consumers.

Evaluation: The JAEPA and the TPP make it impossible for the Japanese government to increase tariffs on imports of beef from Australia and the US. Extract 2 (Paragraph 2) states that Japan’s imports of beef from Australia and the US accounted for about 90 per cent of its imports of beef in 2014. However, Extract 2 (Paragraph 5) states that tariffs on imports of Australian beef into Japan were reduced significantly under the JAEPA which means that the Japanese government will not be able to increase the tariffs. Furthermore, Extract 3 (Paragraph 3) states tariffs on almost all US farm products will be removed under the TPP. Therefore, the Japanese government should increase the production or the decrease consumption of meat to increase self-sufficiency in food.


f)

Signing FTAs will lead to an increase in exports and FDI which will lead to an improvement in the BOP. Refer to Chapter 13, Section 5. Furthermore, an increase in exports and FDI will lead to an increase in aggregate demand which will induce firms to increase production resulting in an increase in national output. When firms increase production, they will employment more factor inputs from households and therefore will pay them more factor income. When this happens, national income will rise. Due to the increase in national output, the demand for labour in the economy will increase which will lead to a decrease in unemployment. Extract 3 (Paragraph 4) states that the 12 TPP countries have a collective population of about 800 million which indicates that the increase in exports is likely to be large. Extract 3 (Paragraph 1) states that the TPP will create new economic growth among countries involved. Extract 3 (Paragraph 5) states that the TPP will increase US farm incomes and employment which will lead to a fall in unemployment.

Signing FTAs will lead to a decrease in the cost of production in the economy due to the removal or the reduction in tariffs on imports of intermediate goods and hence increase in aggregate supply resulting in higher economic growth, lower unemployment and lower inflation. Lower inflation which will increase export competitiveness is important in a global environment where competition is growing which is stated in Extract 3 (Paragraph 5).

Cheaper imports from the FTA member countries in Singapore will induce households and firms to switch from domestic goods to imports resulting in a decrease in the demand for domestic goods. When this happens, aggregate demand will fall which will lead to lower economic growth and higher unemployment. For example, the USSFTA has led to an increase in Singapore’s imports from the US.

Furthermore, foreign firms are footloose and hence if market conditions in other economies become more favourable in the future, they may pull their operations out of Singapore. For example, many foreign firms such as Hitachi, Sanyo and Seagate have relocated their manufacturing plants in Singapore to China where the cost of production is lower. If this happens, unemployment in Singapore may rise substantially.

More rapid decline in the low-value industries in a DE if the FTA is signed with a LDE which will lead to an increase in structural unemployment. Extract 3 (Paragraph 1) states that some Americans fear that the TPP will cause the US to lose jobs to developing countries. Extract 3 (Paragraph 2) states that the TPP involves LDEs which include Malaysia and Vietnam and hence it may lead to an increase in structural unemployment in DEs such as the US and Japan.

In LDEs, some infant industries that produce high value-added goods such as photonics and nanotechnology may not be able to survive if the FTA partners are developed economies where many high value-added goods are produced in mature industries. If this happens, the number of goods of comparative advantage and hence the range of goods produced will decrease in the long run which will decrease the rate and increase the volatility of economic growth. Extract 3 (Paragraph 2) states that the TPP involves DEs which include the US and Japan and hence it may lead to a decrease in the rate and an increase in the volatility of economic growth in LDEs such as Malaysia and Vietnam.


Evaluation:

The benefits of FTAs are likely to outweigh the costs. Due to limited overlap between imports and domestic goods, the increase in imports is likely to have a limited effect on the demand for domestic goods and hence is likely to lead to a small decrease in aggregate demand. Therefore, the effect of the increase in exports on AD is likely to be greater than the effect of the increase in imports on AD which will lead to higher economic growth and lower unemployment. Nevertheless, the government should take measures to reduce the costs of FTAs in order to maximize the next benefits. For example, the government of a developed economy can engage in education and training to reduce structural unemployment and income inequity.


A more elaborate answer to 2017 Case Study Question 1 will be provided in the economics tuition class.

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