A Level H1 Economics 2019 Question 1 Answer Key

(a) Growth of travel and tourism is higher than growth of total world output.

Growth of travel and tourism and growth of total world output moves in tandem.

The gap between growth of travel and tourism and growth of total world output is narrowing.

Both the growth of travel and tourism and growth of total world output fell.

The growth of travel and tourism fell at a faster rate than the growth of total world output.

(b) A normative statement is a statement that is based on value judgment (opinion) and cannot be proven by reference to evidence. The given statement is not considered to be a normative statement as they are evidence stated in the Extract to show that the government action has been ineffective. This is seen from the fact that the tourist numbers “by 2016 were 60% below their peak 2008 level.” Hence, since the effectiveness of the government action can be proven by facts, the given statement is not a normative statement.

(c) The effect of a rise in advertising expenditure by the STB and the initiatives to improve productivity of the hotel industry can be analysed based on their combined effects on demand and supply in the tourism market.

A rise in advertising expenditure by the STB can attract more visitors to Singapore. The STB advertising campaign helps to change foreign visitors’ preference for an overseas holiday in Singapore. They are more well informed of what Singapore can offer to the foreign visitors. Hence, demand for tourism is likely to rise in Singapore, ceteris paribus. This can be illustrated by a rightward shift of the demand curve (as shown in Figure 1) and causes the market equilibrium price and equilibrium quantity to rise.

Improving productivity of the hotel industry will reduce unit cost of production which raises profitability in the hotel industry, ceteris paribus. The ability and willingness of producers to provide hotel accommodation rises. Hence, market supply in the tourism industry rises and shifts right for all level of prices causing the equilibrium price to rise and equilibrium quantity to fall, ceteris paribus. This is shown in Figure 1.

The combined effect of a rise in advertising expenditure by the STB and the initiatives to improve productivity of the hotel industry will cause the market equilibrium quantity to rise but the impact on equilibrium price is uncertain, which depends on the extent of shift of supply and demand in the tourism market. Suppose that the market demand rises by a larger extent than the rise in market supply. As shown in Figure 1, the market equilibrium price and quantity rise. However, if the market demand and supply rise by the same extent, the market equilibrium price remains the same, while the market equilibrium quantity rises.

Figure 1: Simultaneous rise in demand and supply Nevertheless, it is likely that the market demand rises by a larger extent than the market supply in the tourism market as the initiatives to improve productivity only applies to the hotel industry. The impact of such initiatives on the tourism market may not be very significant.

(d) A rise in tourist expenditure will trigger the multiplier process comprising several rounds of increase in income induced spending on local goods and services, creating a multiplier effect on real GDP. A multiplier effect of 2.8 means that the country’s real GDP will rise by 2.8 times of the increased in tourist spending.

For example, when there is a rise in tourist spending of £100 in UK, the first group of retailers and their workers will experience an increase in income of £100. They will spend part of their increased income on local consumption (e.g. £65) and withdraw the remaining income (e.g. £35) in savings, taxes and imports. This increased in spending on local goods will lead to further increase in income of the next group of retailers. This is known as the multiplier process. The process will go on causing the country’s income to rise by £100+£65+…. which is more than the original rise in tourist spending.

The size of the multiplier effect is determined by how much people withdraw from their additional income. This is also known as the marginal propensity to withdraw (mpw). The more people withdraw from their additional income, e.g. £50 instead of £35, the lesser will be income created for the next group of retailers, causing the multiplier effect on national income (£100 + £50 +…) to be smaller. The size of multiplier is often not reliable due to the difficulty of getting accurate data on how much people spend or withdraw out of their additional income. In addition, the willingness to spend or withdraw from their additional income may vary across different people in an economy and thus an average value of mpw for all people is used for the computation making the estimate of the multiplier less reliable.      

(e) Price elasticity of demand (PED) measures the degree of responsiveness of quantity demanded to a change in the price of the good, ceteris paribus.

A weaker pound sterling (£) will reduce the prices of UK hotel accommodation paid by foreign visitors in their currencies. However, prices of UK hotel accommodation in £ remain the same. For example, the external value of £ falls by 10% vis-à-vis S$, price of UK hotel falls by 10% in S$ but remains £. Hence, the UK hotel owners will face with a rise in reservations for their hotel accommodations, as UK hotel accommodations are cheaper to the foreign visitors from Singapore. Since total revenue is calculated by the product of price and quantity (i.e. TR = P X Q), as P of UK hotel in £ remains unchanged, the TR of UK hotel owners will rise as quantity (Q) rises. The extent pf the rise in TR depends on the extent of the rise in Q when P (in foreign currency) of hotel accommodation falls. Hence, the impact on TR will depends on the value of PED.

Assume that UK hotel accommodation can be classified as Tier 1 (high end, luxury) and Tier 2 (Mid-range). Demand for Tier 1 hotel accommodation is price inelastic due to a lack of close substitutes while demand for Tier 2 hotel accommodation is price elastic due to due to the availability of close substitutes as Airbnb and Bed and Breakfast. Thus, for Tier 2 hotel accommodation, quantity demanded for such hotel accommodation by the foreigners is expected to rise by more than proportionately. Since Total revenue = Price X Quantity, the greater the value of PED, the greater the extent of the rise in quantity demanded,  the larger the increase in Tier 2 hotel owners’ total revenue. However, the use of PED to determine the impact on UK hotel owners’ revenue has several limitations. Estimates of PED is not always accurate or reliable as they are difficult to collect and producers need to ensure that such data are constantly updated in order to maintain their accuracy. Moreover, in reality, the ceteris paribus condition might not hold as there could be changes in demand caused by other non-price factors such as a change in consumers’ tastes and preferences that could affect the revenue of these hotel owners.

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