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S6 Economics paper 3: full accounts and competitiveness
S6 Economics paper 3: full accounts and competitiveness
Ten items cover a full current account, reserve financing, the real rate, the income terms of trade, cross rates and inflation gaps.
Direct answers Items 01 to 03 build a full current account, the reserve change and the real rate, 04 to 06 the income terms of trade, the Marshall-Lerner threshold and export value, 07 to 09 import value, cross rates and inflation gaps, and 10 the counting of capital inflow as current account income.
01 Paper details (check answers afterwards)
| Item | Detail |
|---|---|
| Questions | 10 |
| Suggested time | 25 |
| Difficulty mix | Foundation 3 · Intermediate 3 · Challenge 3 · Error redo 1 |
| Chapter | Chapter: S6 Economics Balance of Payments and Exchange Rate |
| Level | S6 |
02 Questions (10 items)
- FoundationGoods exports 320 billion, goods imports 345 billion, service exports 78 billion, service imports 69 billion, income inflow 105 billion, income outflow 98 billion and net current transfers 4 billion. Find the current account balance.
- FoundationUsing the previous figures, net inflow to the capital and financial account excluding reserves is 2 billion dollars. Find the change in reserve assets.
- FoundationThe nominal rate is 7.80 Hong Kong dollars per US dollar, the local consumer price index is 130 and the US index is 125. Find the real exchange rate.
- IntermediateThe export price index is 96, the import price index 80 and the export volume index 110, each with 100 in the base year. Find the terms of trade and the income terms of trade.
- IntermediateIn one case the absolute export demand elasticity is 0.7 and the import elasticity 0.4; in another they are 0.5 and 0.4. Judge the effect of a depreciation in each case.
- IntermediateAfter a depreciation export volume rises 12 per cent while the foreign currency export price falls 5 per cent. Find the percentage change in export value.
- ChallengeImport volume falls 8 per cent while the foreign currency import price rises 3 per cent. Find the percentage change in import value.
- ChallengeOne US dollar buys 7.80 Hong Kong dollars and one euro buys 1.10 US dollars. Find the value of one euro in Hong Kong dollars.
- ChallengeLocal inflation is 4 per cent, US inflation is 2 per cent and the nominal rate is unchanged. Find the change in the real exchange rate and its effect on competitiveness.
- Error redoA common slip: with a current account balance of minus 5 billion, a student adds net capital inflow of 20 billion to get a 15 billion surplus. What is wrong?
03 Answers and one-line notes
| # | Answer | One-line note |
|---|---|---|
| 1 | A current account deficit of 5 billion dollars (minus 25 plus 9 plus 7 plus 4). | Work out each of the four components first, then add them. |
| 2 | Reserve assets fall by 3 billion dollars (5 minus 2). | Capital inflow offsets part of the deficit and reserves cover the balance. |
| 3 | The real rate is 7.50 Hong Kong dollars per US dollar (7.80 times 125 over 130). | Faster local inflation pulls the real rate below the nominal rate. |
| 4 | The terms of trade index is 120 and the income terms of trade index is 132 (120 times 110 over 100). | The income terms of trade include export volume and so measure import purchasing power. |
| 5 | The first sums to 1.1, just above one, so the balance improves; the second sums to 0.9, so the balance worsens. | The Marshall-Lerner condition turns on the sum of the two absolute elasticities. |
| 6 | Export value rises by 6.4 per cent (1.12 times 0.95, minus one). | The change in value is the product of the quantity and price changes. |
| 7 | Import value falls by 5.24 per cent (0.92 times 1.03, minus one). | Value falls when the drop in quantity exceeds the rise in price. |
| 8 | 8.58 Hong Kong dollars (7.80 times 1.10). | A cross rate multiplies the two legs of the conversion. |
| 9 | The real rate falls 1.92 per cent (1.02 over 1.04, minus one), so local goods become relatively dearer and competitiveness weakens. | Faster local inflation amounts to a real appreciation. |
| 10 | The current account deficit stays at 5 billion; capital flows belong to another account and cannot be added to it. | The accounts are separate, so capital inflow finances the deficit but is not current account income. |
04 What to do after marking
- After marking, redo only the wrong items and write down which step went wrong (formula, unit, or misread number).
- Repeat the same item two days later; move to the next paper only when both attempts are correct.
- Parents only need the answer and note columns; there is no need to explain every item.
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