Download Economics X Creativity Multimedia Case 10: Intimate Relationship

Economics X Creativity
Multimedia Case 10: Intimate Relationship
Case Study prepared by:
Prof. Michael FUNG
Dr. Fred KU
Dr. David CHOW
Mr. Sam KONG
Mr. Edwin MOK
Miss Cindy LAU
Mr. Patrick CHEUNG
Video produced by: CUHK Business School (2012)
* Should you have any comment, please email Prof. Fung ([email protected])
P. 1
Introduction
The story took place a long, long time ago…Little
Heung was a eunuch who managed Hong Kong
Town. He was highly favoured by the queen
mother. Hong Kong Town had been cooperating
with China, supplementing and mutually
benefitting each other. However, Hong Kong
Town and her economy had received blows after
blows of epidemic diseases and external shocks.
Little Heung almost committed suicide before the queen mother stopped him in time. To ease the
economic hardship of Hong Kong Town, the queen mother introduced the “Closer Economic
Partnership Arrangement” to strengthen the cooperation on trading and investment with China.
Further, she initiated the “Individual Visit Scheme” that allowed more visitors from the
mainland. How effective were these policies in reviving the economy of Hong Kong Town? How
would the small town’s citizens be affected by a closer economic relationship with China?
Key Question
What is the impact of the interdependence with the
mainland on Hong Kong economy?
Key Concepts
1. Four key industries
2. Individual Visit Scheme (IVS) and Closer
Economic Partnership Arrangement (CEPA)
3. Comparative advantage and current account
4. Linked exchange rate
Learning Outcomes
Understand the importance of economic interdependence between the mainland and Hong Kong.
Terminology
The terms used throughout this worksheet are in accordance with the Census and Statistics
Department, HKSAR. You may refer to the Department website for the precise definition of the
terms.
P. 2
True / False Questions
1.
A tourist’s spending in a Hong Kong restaurant is an example of Hong Kong’s exports.
2.
If a country has absolute advantages in producing any goods, it is impossible for her to
benefit from trading with other countries.
3.
The revaluation of Renminbi (RMB) may lead to an imported inflation in Hong Kong.
4.
Closer Economic Partnership Arrangement (CEPA) benefits only Hong Kong but not
the mainland.
5.
Under the linked exchange rate system, Hong Kong dollar is linked to RMB.
6.
Trade barriers create more job opportunities, and hence everyone in the domestic
country can be benefitted.
7.
The principle of comparative advantage is one of the supporting reasons for
globalization.
8.
Individual Visit Scheme (IVS) benefits not only tourism-related industries but also
other industries.
9.
Generally speaking, comparative advantage results in greater specialization.
10.
A depreciation of domestic currency can lead to an increase in both exports and
imports.
MC Questions
1. Hong Kong has a/an _______ in _______ over the mainland as the opportunity cost of
providing these goods/services is lower.
A) absolute advantage; providing professional services
B) absolute advantage; producing food
C) comparative advantage; providing professional services
D) comparative advantage; producing food
2. The U.S. has a/an _______ in _______ over China as the amount of resources used for
providing these goods/services is lower.
A) comparative advantage; producing high-tech products
B) absolute advantage; producing high-tech products
C) comparative advantage; providing professional services
D) comparative advantage; producing food
P. 3
3. Which of the following item is NOT a contribution of foreign direct investment to a local
economy?
A) An increase in labour productivity
B) An increase in physical capital
C) A transfer of technology
D) A reduction of employment
4. Which of the following event is NOT an example of Hong Kong’s exports?
A) A local resident purchased a ring and gave it to his wife in the mainland.
B) An auditor in a local firm performed accounting services to a commercial bank in
the mainland.
C) A local port provided logistics services to a company in the mainland.
D) A hotel in Hong Kong offered accommodation service to a tourist.
5. Which of the following industries are the Four Key Industries in Hong Kong?
A) Financial services, construction, tourism, producer and professional services
B) Agriculture and fishing, trading and logistics, tourism, producer and professional
services
C) Financial services, trading and logistics, tourism, producer and professional
services
D) Financial services, trading and logistics, tourism, manufacturing
6. If European countries are in recession, the ______ into European countries will decrease.
It will lead to a decrease in the _____ from China. As a result, Hong Kong’s _____ will
decrease.
A) imports ; imports ; re-exports
B) imports ; exports ; re-exports
C) imports ; re-exports ; imports
D) exports ; exports ; exports
7. Which of the following item is NOT a function of the World Trade Organization (WTO)?
A) Settling disputes
B) Building trade capacity for developing countries
C) Facilitating trade negotiations
D) Peacekeeping
8. Which of the following items are the advantages of the Hong Kong International Airport
over nearby airports in the mainland?
(i)
Reliability of service
(ii)
Number of international destinations
(iii) Low charges
A) (i) and (ii) only.
B) (i) and (iii) only.
C) (ii) and (iii) only.
D) All of the above.
P. 4
9. Under the linked exchange rate system, when the Federal Reserve increases money
supply, the Hong Kong economy is likely to experience
A) a decrease in interest rate.
B) a depreciation of domestic currency over RMB.
C) an increase in general price level.
D) All of the above.
10. Which of the following statements about Individual Visit Scheme (IVS) is NOT correct?
A) IVS lowers the unemployment rate in Hong Kong.
B) IVS leads to an increase in rents in tourist spots.
C) IVS leads to a decrease in the volume of Hong Kong’s exports.
D) IVS leads to an increase in the general price level.
Discussion Questions
1. In 2003, the outbreak of Severe Acute Respiratory Syndrome (SARS) in Hong Kong
resulted in a sharp decrease in the number of incoming tourists. To stimulate the economy,
the Hong Kong government launched the Individual Visit Scheme (IVS) with the mainland.
Prior to the scheme, mainland residents were allowed to visit Hong Kong and Macau only
on business visas or group tours. Under IVS, they are able to visit Hong Kong and Macau on
individual visas. Since then, the number of mainland visitors increased sharply.
Table 1：Visitors to Hong Kong by Country/Territory of Residence (in thousands)
Country/Territory of residence
Year 2006
Year 2010
The mainland
13,591
22,684
Total
25,251
36,030
Source：Census and Statistics Department, HKSAR1
(a) What is the percentage of mainland visitors to the total number of visitors to Hong
Kong in 2010?
(b) What is the average annual growth rate of mainland visitors to Hong Kong from 2006
to 2010? Was it higher than the growth of total visitors to Hong Kong?
(c) According to the figures from the National Bureau of Statistics of China2, the average
annual wage of employed persons in Urban Units rose from 20,856 RMB in 2006 to
36,539 in 2010. Using the above figures, can we conclude that tourism is a normal
good?
Table 2：Percentage Share of Tourism in GDP and Employment
Year 2005
Year 2010
Value added from Tourism (HK$ million)
$44,500
$74,600
% share in GDP
3.3%
4.4%
Number of employment in Tourism
164,800
218,100
% share in total employment
4.9%
6.2%
Unemployment rate
5.6%
4.3%
Source：Census and Statistics Department, HKSAR3
P. 5
(d) Using the data above, state the effects of the growth of tourism on Hong Kong’s
economy.
(e) Manufacturing, food and beverage services, accommodation services, professional
and business services and retail trades are important industries in Hong Kong. Which
of these three are especially benefitted by the growth of the tourism industry? And in
what aspect of tourism they can get benefit from?
2.
From 1997 to 2005, the exchange rate of RMB was fixed at 8.27 Yuan per USD. In 2005, the
People’s Bank of China announced that RMB would be gradually revaluated. Since then, the
exchange rate of RMB rose gradually from 8.27 Yuan per US dollar in 2005 to 6.36 Yuan per
US dollar in 2012.
Figure 1：Chinese Yuan per US dollar from 2002 to 2012
Modified from Yahoo4
(a) What is the effect of the revaluation of RMB on Hong Kong’s inbound tourism?
(b) If RMB devaluates against USD, what will be the effect on inbound tourism to Hong
Kong?
(c) According to a survey from Nielsen5, in 2010, the average spending per trip per
person for mainland tourists was HK$12,000. Some mainland tourists chose to
purchase certain health care products in Hong Kong at a higher price instead of
purchasing the same products in the mainland. Why?
(d) Medicine, personal care products, cosmetics and skin care products are among the
favourites of mainland visitors. However, an article from Wen Wei Po6 mentioned that
some pharmacies in Hong Kong sold fake products to tourists. How would this
practice affect Hong Kong’s tourism?
P. 6
3.
In 2003, the mainland and Hong Kong signed the Closer Economic Partnership Arrangement
(CEPA). It allows qualified products, companies and professions to access to the mainland
market.
Table 3：Value added of professional services and other producer services (HK$ million)
2005
2010
Professional services
46,800
76,300
Other producer services
104,000
140,900
Professional services and other producer services
150,800
217,200
Percentage share in GDP
11.1%
12.8%
Source：Census and Statistics Department, HKSAR7
(a) Compute the average annual growth rate of value added of the “professional services
and other producer services” from 2005 to 2010. Does this industry achieve a faster
growth than the GDP?
(b) Which component of Hong Kong’s GDP was most benefited from CEPA? Using the
short-run AD-AS model, illustrate the effect of CEPA on the price level and real
output of Hong Kong.
(c) Generally speaking, Hong Kong imports agricultural products from and exports
professional services to the mainland. Why does Hong Kong import agricultural
products from the mainland instead of producing them domestically?
4.
With her geographical advantage and well-established facilities, Hong Kong serves as the
logistic hub of the Pearl River Delta Region. Many products from the mainland are reexported to overseas markets through the Hong Kong International Airport and the port of
Hong Kong.
Table 4：Value added of Trading and logistics (HK$ Million)
Trading
Logistics
Trading and logistics
Percentage share in GDP
2005
2010
70,300
82,400
318,100
352,100
388,400
434,500
28.6%
25.5%
Source：Census and Statistics Department, HKSAR7
(a) Compute the average annual growth rate of value added of the “trading and logistics
industry” from 2005 to 2010. Was the growth rate of trading and logistics industry
higher than the growth rate of GDP?
(b) One of the reasons for the slowdown of Hong Kong’s logistics industry was the
economic downturn in Europe, which caused a fall in demand for the products made
in China. Use the short-run AD-AS model to illustrate the effects of this on the levels
of price and output of Hong Kong.
(c) Another reason for the slowdown of Hong Kong’s logistics industry was the keen
P. 7
competition from nearby mainland cities. In the past few years, airports in the Pearl
River Delta Region underwent a series of enhancement and development to raise their
competiveness. What are the advantages of the Hong Kong International Airport over
its counterparts in the Pearl River Delta Region?
Challenging Question
5. Aggregate demand can be broken down into four components: consumption, investment,
government purchases and net exports (exports minus imports).
(a) What are the effects of the growth in the number of visitors on the aggregate demand?
(b) With the help of the short-run AD-AS diagram, indicate the effects of the growth in
tourism on both real output and price level.
Figure 2：Prices and rentals of non-residential properties from 2002-2012
Source：Census and Statistics Department, HKSAR8
Figure 3：Composite consumer price index, (Index 1999=100)
Source：Census and Statistics Department, HKSAR9
P. 8
(c) The growth of inbound tourism may lead to the increase in rents of retailing shops. In
2011, the rental index increased significantly when compared to 2003 value (Figure
1(b)). However, the general price level just increased by about 15% for the same
period (Figure 2). What is the implication on the change in real rental rates? Was it
possible that there is a shift in the short-run aggregate supply curve? If so, explain the
overall effects of the growth of tourism on price level and output level.
P. 9
Reference
1. Hong Kong in Figures (2011 Edition)
2. http://www.stats.gov.cn/tjsj/ndsj/2011/indexch.htm
3. http://www.statistics.gov.hk/pub/B71202FA2012XXXXB0100.pdf
4. http://hk.finance.yahoo.com/echarts?s=USDCNY%3DX#symbol=;range=20011119,2012
0810;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=of
f;source=undefined;
5. http://hk.nielsen.com/news/20110221.shtml
6. http://paper.wenweipo.com/2011/07/16/HK1107160018.htm
7. http://www.statistics.gov.hk/pub/B71202FA2012XXXXB0100.pdf
http://www.statistics.gov.hk/pub/B6XX00012012QQ15C0100.pdf
http://www.censtatd.gov.hk/hkstat/sub/sp270_tc.jsp?subjectID=72&tableID=052&ID=0
&productType=8
P. 10
Suggested Answers
True / False Questions:
1.T
2.F
3.T
4.F
5.F
6.F
7.T
8.T
9.T
10.F
MC Questions:
1.C
2.B
3.D
5.C
6.B
7.D
8.A
9.D
10.C
4.A
Discussion Questions:
1.
(a) 22,684/36,030 = 62.96%
(b) Apply the formula of compound growth rate, the average annual growth rate of
mainland visitors is ∜(22,684⁄13,591) – 1 = 13.67%. Comparing to the growth
rate of total visitors to Hong Kong, ∜(36,030⁄25,251) – 1 = 9.29%, the growth
rate of mainland visitors is higher than that of total visitors.
(c) Though academic research supports the notion that tourism is a normal good, we
cannot conclude by the mere information given in the question. There are other
factors in play. First, we should consider real income instead of nominal income
of the mainlanders. Second, there was a change in the IVS policy which included
more cities. Finally, the revaluation of RMB may also contribute to the surge of
mainland tourists to Hong Kong.
(d) The dramatic increase in valued added from tourism leads to an increase in its
contribution to the GDP, from 3.3% in 2005 to 4.4% in 2010. Following the surge
of incoming tourists, the number of employed workers in tourism increased by
more than 30%, and tourism’s share of total employment rose by 1.3 percentage
points. The increase in job opportunities lowered the unemployment rate as well.
(e) The food and beverage sector benefits from tourists’ dining expenditure;
accommodation sector benefits from tourists’ demand on hotel, and retail industry
benefits from tourists’ consumption.
2.
(a) When there is a revaluation of RMB against USD, under the linked exchange rate,
a unit of RMB can exchange for more HKD. Thus, the price of Hong Kong’s
products in terms of RMB decreases. It will increase the purchasing power of
RMB in Hong Kong and attract more mainland visitors to shop in Hong Kong.
Thus, Hong Kong’s inbound tourism will benefit from the revaluation of RMB.
(b) The devaluation of RMB against USD will decrease the purchasing power of
RMB in Hong Kong due to the linked exchange rate system adopted in Hong
Kong, thus fewer Hong Kong goods can be purchased using the same amount of
RMB. The growth of mainland tourists is expected to be slower and the
devaluation may even lead to a contraction of Hong Kong’s inbound tourism.
(c) Tourists are willing to purchase the same goods at higher prices in Hong Kong
because Hong Kong has a reputation of selling authentic and high-quality
products. Therefore, the difference of value between products in Hong Kong and
in the mainland is due to the better quality assurance.
(d) Quality assurance is the main reason for mainland visitors to purchase products in
Hong Kong. Thus, fake products will significantly lower their incentive to shop
P. 11
and visit Hong Kong.
3.
(a) Using the formula of compound growth rate, the average annual growth rate of
value added was 5√ (217200⁄150800) – 1 = 7.57%. As the percentage share of
professional services and other producer services in GDP has increased from
11.1% to 12.8%, we can conclude that the growth rate of this industry was higher
than the growth rate of GDP.
(b) Under CEPA, more qualified professional services can be provided for companies
in the mainland, and these services are counted as exports. Thus, among the four
GDP expenditure components, net exports would increase most due to CEPA.
With a higher net exports, there will be an increase in aggregate demand, and
both price level and real output of Hong Kong will increase.
Price level
SRAS
P2
P1
AD2
AD1
Y1
Y2
Output
(c) It is because Hong Kong has a comparative advantage in providing professional
services. Land is a key input in agriculture. As land resources in Hong Kong are
very limited, commercial centres or business buildings may have to be forgone to
produce agricultural products. The value-added forgone will be much higher than
the value-added gain from producing agricultural products. On the other hand, the
mainland has abundant land resources and a lower opportunity cost of producing
agricultural products. Therefore, it is mutually beneficial for Hong Kong to
import agricultural products from the mainland.
4.
(a) Apply the formula of compound growth rate, the average annual growth rate of
value added was 5√(434,500⁄388,400) – 1 = 2.27%. As the percentage share of
trading and logistics industry in GDP decreased from 28.6% to 25.5%, the growth
rate in this industry was lower than that of GDP.
P. 12
(b) The decrease in exports from China will lead to a drop in demand for Hong Kong
logistics service from Chinese firms. The decrease in net exports will shift the
aggregate demand curve to the left, so both price level and real output of Hong
Kong will decrease.
Price level
SRAS
P1
P2
AD1
AD2
Y2
Y1
Output
(c) Quality of airport services is important for Chinese enterprises in their shipping
decisions. The Hong Kong International Airport’s other edges include more
international destinations, well-managed facilities, reliable services and good
reputation.
5.
(a) More visitors to Hong Kong means stronger demand for goods and services, and
their expenditure is counted as exports of Hong Kong. In addition, if Hong Kong
residents earn more from tourism, they will spend more, further shifting the AD
curve to the right (the multiplier effect). In other words, an increase in
consumption and net exports will lead to an increase in aggregate demand.
(b) Increase in net exports leads to a rightward shift of aggregate demand curve. Both
real output and price level will increase.
P. 13
Price level
SRAS
P2
P1
AD2
AD1
Y1
Y2
Output
(c) The increase in rental rate of retail shop was higher than the increase in the
general price level, and hence the real rental rate has increased. It led to an
increase in production costs, shifting the short-run aggregate supply curve to the
left. Speaking of overall effects of tourism, the price level would increase more
than that in part (b), but the real output would increase less than that in part (b).
Price level
SRAS2
SRAS1
P3
P2
P1
AD2
AD1
Y2
Y1
Y3
Output
P. 14