2001-CE ECON

PAPER 1

HONG KONG EXAMINATIONS AUTHORITY HONG KONG CERTIFICATE OF EDUCATION EXAMINATION 2001

ECONOMICS PAPER 1
8.30 am 10.00 am (1 hours) This paper must be answered in English

1. 2.

This paper consists of two sections, A and B. Section A contains eight questions. Attempt ALL questions. The whole section carries 38 marks for content and 2 marks for effective communication. Section B contains three questions. Attempt any TWO questions. Each question carries 23 marks for content and 2 marks for effective communication.

3.

Hong Kong Examinations Authority All Rights Reserved 2001

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Section A

(40 marks)

Attempt ALL questions. 1. Give THREE reasons why division of labour can increase labour productivity. (3 marks) Suppose the postage charge of a country is fixed. When e-commerce and e-mail becomes popular, the revenue of the countrys Post Office from the postage charge falls sharply. (a) Indicate in a diagram the decrease in the postage charge revenue of the Post Office. In order to compensate for the decrease in revenue, the Post Office increases its postage charge. Indicate in the diagram in (a) the change in revenue of the Post Office due to the increase in postage charge. (5 marks) 3. The table below shows the production of a firm. Labour (Units) 10 11 12 13 14 Machinery (Units) 5 5 5 5 5 Total Product (Units) 100 150 250 400 530

2.

(b)

Explain which law in economics can be illustrated by the above data. (7 marks) 4. Cans of Coca-Cola are sold at different prices in different shops. Give TWO reasons why there is such a price difference. (4 marks) Explain why banknotes would be more generally-accepted as a medium of exchange than diamonds. (4 marks)

5.

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6.

Explain whether each of the following should be included in the calculation of Hong Kongs gross domestic product (GDP). (a) the salary of a Hong Kong citizen employed by a foreign airline (b) the rent paid by a foreign airline for using the premises owned by a Hong Kong company (4 marks)

7.

Suppose the Hong Kong government introduces a general sales tax. (a) Explain whether a sales tax is a direct tax or an indirect tax. (2 marks)

(b) Explain what would be the effect of the introduction of a general sales tax on Hong Kongs income distribution. (3 marks) 8. Refer to Hong Kongs balance of payments account. (a) (i) Two components of the current account are factor income and current transfers. Name the other TWO components. (2 marks) (2 marks)

(ii) Give an example of the component factor income.

(b) Besides the current account, name the other account in the balance of payments account. (2 marks)

END OF SECTION A

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Section B

(50 marks)

Attempt any TWO questions. 9. (a) Suppose the output of garments and computers per unit of resources of the two economies, Hong Kong and the USA, are as follows : Garments (Units) Hong Kong USA 4 4 OR OR Computers (Units) 2 5

(i) Calculate the opportunity cost of producing one unit of garments for EACH economy. Explain which economy would export garments. (4 marks) (ii) Suppose the exporting economy has to pay a transportation cost of 0.5 units of computers to export 1 unit of garments. Find the possible range of terms of trade (for 1 unit of garments) that is mutually beneficial for both economies. (3 marks) (b) Suppose the importing economy reduces the effective quota on the quantity of garments imported. With the aid of a diagram, explain under what condition the total expenditure of this economy on imported garments would decrease. (9 marks) (c) Mr Chan is the owner of a garment factory and pays his workers at piece rate. State ONE advantage and ONE disadvantage to Mr Chan of using this payment method over the time rate method. (2 marks) (d) If an import tax is introduced on all imports to Hong Kong, it would affect Hong Kongs general price level but would not necessarily lead to inflation in Hong Kong. Explain why this statement is correct. (5 marks)

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10. (a) What is the basic economic role of commercial banks ? (b) The balance sheet of a banking system is as follows : Assets ($m) Reserves Loans (i) 250 750 Liabilities ($m) Deposits 1 000

(2 marks)

Given that the legal reserve ratio is 20%, calculate the actual reserve ratio and the amount of excess reserve of the banking system. (4 marks) A depositor withdraws $40 m from the banking system and invests the money overseas. If all banks lend out their remaining excess reserves, what is the maximum possible amount of total deposits in the banking system ? Explain your answer. (4 marks)

(ii)

(c) Bank A raises capital by issuing shares to the public. The quantity and subscription price of these shares are fixed and not all people who apply for these shares are successful in their application. (i) Explain the economic phenomenon described above with the aid of a diagram. Also indicate in the diagram the amount of capital raised. (7 marks) State TWO advantages to Bank A of issuing shares over debentures for raising capital. (2 marks)

(ii)

(d) Pauls order of preference of using his money is shown below : First preference : purchase of gold coins Second preference : savings in banks Third preference : investment in stocks Suppose an interest tax is imposed on bank deposits. Explain whether Pauls opportunity cost of purchasing gold coins would change. (4 marks)

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11. (a) Refer to the following production chain in Hong Kong :

Imported materials

$2m Cement Factory $0.5m $20m As Property Development Co. Ltd. $90m Consumers

Local materials

(i)

Calculate the contribution of the above production chain to Hong Kongs GDP using the value-added approach. (3 marks)

(ii) Hong Kongs property market has been depressed since 1998. Explain how a sharp fall in property prices and in the number of property transactions would affect Hong Kongs GDP. (5 marks) (b) Suppose the government significantly reduces the stamp duty on the sale of property. Explain how this would affect (i) investment (ii) employment opportunities in the construction industry. (4 marks)

(c) Explain TWO advantages of a public limited company over a private limited company. (4 marks) (d) There is an excess supply of private housing at the price set by private housing developers. The government declares that the supply of housing under the Home Ownership Scheme will be reduced. Suppose the price of private housing remains unchanged. With the aid of a diagram, explain how this new government housing policy would affect the sales revenue of private housing developers. (7 marks)

END OF PAPER
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NUMERICAL ANSWERS

2001 Economics 1 9. (a) (i) HK : 1G = 0.5C USA : 1G = 1.25C (ii) 1C < 1G < 1.25C 10. (b) (i) actual reserve ratio = 0.25 excess reserve = $50 mn (ii) $1 050 mn 11. (a) (i) $88 mn