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Economics

JC Economics Macro Syllabus

JC Economics Macro Syllabus

Note from tutor: Macroeconomics is very context heavy, and most of the material is best taught in a global manner; all of the concepts are linked to  each other and it's not possible to learn any single topic without reference to the other topics. Lessons are heavily focused on drawing links between the different topics and on applying the different concepts across different economies: in particular Singapore, US, China, Europe, and Japan.

KEY ECONOMIC INDICATORS

  • Key Understanding Points
    • National income statistics (GDP, GNP)
    • Measures of inflation
    • Measures of unemployment
    • Balance of Payments
    • Significance of these indicators
    • Limitations of indicators
  • Key Exam Focus
    • Interpretation of statistical data
    • GDP as a measure of standard of living and limitations

Income and Employment Determination

  • Key Understanding Points
    • AD-AS Model
    • Determinants of AD
      • Consumption
      • Investment
      • Government spending
      • Net Exports
    • Determinants of AS
    • Multiplier
  • Key Exam Focus
    • Explanation of equilibrium using the circular flow of income
    • Explanation of equilibrium using the AE-Income approach to national income determination
    • Explanation of Multiplier Effect and evaluation of effectiveness in various economies, including Singapore

MACROECONOMIC AIMS

  • Key Understanding Points
    • Growth
    • Inflation
    • Unemployment
    • Balance of Payments
  • Key Exam Focus
    • Explanation of goals
    • Consequences of failure to achieve these goals
    • Relate productivity growth to long run growth

MACROECONOMIC POLICIES

  • Key Understanding Points
  • Key Exam Focus
    • Explain how policies affect goals
    • Understanding of conflicts between goals
    • Appreciation of Singapore's particular context (small and open economy)
    • Assessment of suitable policies for Singapore and other countries

INTERNATIONAL TRADE AND GLOBALISATION

  • Key Understanding Points
  • Key Exam Focus
    • Explanation of gains from trade using theory of comparative advantage
    • Singapore's pattern of trade
    • Economic arguments for and against protectionism
    • Evaluation of the costs and benefits of globalisation on macroeconomic goals

JC Economics Micro Syllabus

JC Economics Micro Syllabus

Microeconomics

Note from tutor: Microeconomics is less context heavy than macroeconomics, and the concepts build on each other in a sequential manner. As Economics is a new subject for most students, lessons are focused on building a solid foundation and clear understanding of the few key concepts, as well as applications to different markets so that students gain familiarity and confidence.

In my experience, students who start lessons with me early in the first year will do significantly better at the end of the year one.

SCARCITY, CHOICE, AND OPPORTUNITY COST

  • Key Understanding Points
    • Concept of Opportunity Cost. (This is a common source of confusion)
    • Cost and Benefit analysis
    • Introduction to marginal analysis
  • Key Exam Focus
    • Using the PPC to illustrate Scarcity, Choice, and Opportunity Cost

DEMAND AND SUPPLY

THEORY OF THE FIRM (H2 ONLY)

  • Key Understanding Points
    • Marginal analysis (Part 3)
    • Cost
      • Marginal costs (MC)
      • ATC
      • AVC
      • AFC
      • Fixed and variable
      • Short and long run
      • Internal and external economies of scale
    • Revenue
      • Marginal revenue (MR)
      • AR
    • Firm Behaviour
      • Profit maximisation condition (MC = MR)
      • Alternative theories
    • Market Structures
      • Price and non-price competition
      • Shut down and exit conditions
      • Perfect Competition
      • Monopolistic Competition
      • Oligopoly
      • Monopoly
  • Key Exam Focus
    • Key features of market structures
    • How firms compete based on analysis of market structure
    • Application of models to real markets
    • Analysis of efficiencies
      • Productive
      • Allocative
      • Dynamic

MARKET FAILURE AND GOVERNMENT INTERVENTION

Two big topics here, but they are always tested in tandem

  • Key Understanding Points
    • Meaning of market failure
    • Concept of deadweight loss
    • Efficiencies
      • Productive
      • Allocative
      • Dynamic
    • Types of market failures
      • Externalities
      • Market dominance
      • Imperfect information
      • Factor immobility
      • Public good
      • Income inequality
    • Government interventions in market failures
      • Taxes and subsidies
      • Legislation
      • Tradeable permits
      • Public education
      • Concept of government failure
  • Key Exam Focus
    • Explanation and graphical illustration of market failures, especially externalities in both production and consumption
    • Explanation of welfare loss
    • Analyse various means of government intervention

Macroeconomics Essay: Singapore's Multiplier and Financial Crisis

Macroeconomics Essay: Singapore's Multiplier and Financial Crisis

Essay, Macro: Singapore's Multiplier and Financial Crisis



A two-sector economy has a large multiplier value while a four-sector economy like the Singapore economy has a smaller multiplier value.

a. Explain the multiplier process and suggest reasons for this difference in the size of the multiplier. (12) b. Assess the possible effects of an increase in the marginal propensity to save on Singapore's recovery from the recent global financial crisis. (13)


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Singapore Skyline by Erwin Soo, via  flickr.com

Singapore Skyline by Erwin Soo, via flickr.com

def The fiscal multiplier measures the extent to which national income increases in response to an increase in autonomous expenditure. It depends on the marginal propensity to withdraw (MPW), and is calculated as the reciprocal of the MPW. As MPW increases, a larger proportion of each additional dollar spent in the economy is withdrawn from the circular flow of income, leading to a smaller increase in the national economy.

multiplier explanation For example, given an autonomous increase in government expenditure of 100M due to expansionary fiscal policy, households employed by firms which contract for the government will earn higher income of 100M. Assuming MPW is 0.5, these households will in turn half of this higher income in consumption, which further increases the factor income of those in consumer facing industries by 50M, who then go on to spend 25M, and so on and so forth until withdrawals equals injections. The increase in government spending of 100M leads to an eventual increase in national income of 200M.

In a two sector economy consisting of only households and firms, there are no taxes by the government nor are there imports due to international trade, while in a four sector open economy with the government sector, taxes and imports constitute withdrawals, which increase the MPW. For instance, the Singapore economy has a high marginal propensity to import (MPM) due to the country's openness to trade as well as its lack of natural resources. The government further imposes taxes to fund government expenditure, which leads to a marginal propensity to tax. Hence, in a four sector economy, the multiplier is lower as the MPW is higher.


b) Assess the possible effects of an increase in the marginal propensity to save on Singapore's recovery from the recent global financial crisis. (13)

def The marginal propensity to save is defined as the proportion of income saved for each additional dollar of income. A higher MPS would make fiscal policy less effective, and may also lead to an increase in the amount of loanable funds, which lowers interest rates and make more funds available for investment.

thesis An increase in the MPS would hamper Singapore's recovery from the global financial crisis, as it limits the effectiveness of fiscal policy by increasing the MPW, which causes the multiplier to be lower.

eval However, the extent of this effect may be small, as Singapore already has a high marginal propensity to save due to the country's forced savings scheme. Also, consumption as a component of GDP is small as the country is very open and exports make up a big proportion of national income.

Given that the multiplier in Singapore is already small due to high MPS and MPM, the increase in the MPS may have a limited marginal negative effect on recovery. Another factor to consider is the ability of the Singapore government to execute fiscal policy. As Singapore generally has a healthy budget and many years of budget surpluses, it has more flexibility to increase expenditure to compensate for a smaller multiplier effect.

antithesis An increase in the MPS would lead to an increase in the amount of funds available for investment. This would aid recovery from the crisis as the increase in investment would lead to a rightward shift in the AD and lead to growth in income. In the long run, higher savings rates also lead to higher economic growth as the economic capacity of the country grows due to higher investment. This is illustrated by a rightward shift in the LRAS.

eval However, Singapore's interest rates are more determined by international flows of capital, which Singapore cannot control due to her small and open economy. As such, increased savings are unlikely to move interest rates down by much.

Also, investment in Singapore is driven more by the export facing industries, and investments are made based more on expectations of external demand rather than the domestic interest rate.

conclusion Given the nature of Singapore's economy, the extent of the effect of an increase in the MPS on both consumption and investment is likely to be small, and it is likely that Singapore's recovery from the crisis would depend more on global recovery leading to a boost in the economy's exports.


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Macroeconomics Essay: Balance of payment deficit

Macroeconomics Essay: Balance of payment deficit

Essay, Macro: Balance of payment deficit

a. Illustrating with examples, explain the causes of a deficit in the balance of payments of a country. (10) b. Discuss the view that protectionism can help developed nations deal with balance of payments issues arising from the emergence of developing nations. (15)


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def The Balance of Payments (BOP) is an accounting record of all monetary transactions between a country and the rest of the world in a given time period, usually a year. A deficit refers to a situation where international receipts are less than payments.

def The BOP is made up of the current account (CA) and the capital account (KA). The current account is the sum of the balance of trade, or net export revenue less payments for imports, and the capital account reflects changes in the ownership of national assets, such as foreign direct investment (FDI) and portfolio investment.

A BOP deficit can be caused by a deficit in either the CA or KA.

CA deficit

A deficit in the CA occurs when imports are more than export revenues.

This can be due to a fall in export demand due to recessions trading partners. For instance, during the Euro debt crisis, Singaporean exports to the Eurozone declined as Europe decreased their demand for imports, leading to a worsening of the CA.

A trade deficit can also be caused by weakened competitiveness of a countries' exports. For instance, higher costs and inflation may push the price of exports up. Since export demand is usually price elastic due to high substitutability, this leads to a fall in export revenue. A strengthening of the exchange rate would also have a similar effect by making exports more expensive and imports cheaper.

KA deficit

A KA deficit occurs when there is net capital outflow.

For instance, lower interest rates may cause hot money to flow out of the economy as funds seek higher interest rates elsewhere.

FDI is also heavily influenced by the business confidence of firms. For instance, Singapore received enormous FDI in its early years due to government policy encouraging FDI. On the flip side, when businesses foresee a fall in the expected returns on their investment, they will tend to withdraw their capital, leading to a KA deficit.


b. Discuss the view that protectionism can help developed nations deal with balance of payments issues arising from the emergence of developing nations. (15)

def With the emergence of developing nations who participate in the global trade market, developed nations have seen more competition for some of their export markets from countries who have a comparative advantage over them. As globalisation leads to falling transport costs and the prominence of global trade organisations such as the World Trade Organisation, exporters in developing economies are beginning to compete more aggressively with exporters in developed nations.

This has led to a fall in demand for the exports of developed nations as importers switch to developing nation exports, as well as an increase in imports by developed nations from these developing nations. This causes the current account to worsen, and a balance of payments deficit.

thesis Hence, developed nations are inclined to deal with the BOP deficit by imposing protectionistic measures such as tariffs, quotas, subsidies, and legislation. These measures may be effective.

Image from page 57 of "Report on the emergency tariff act of May 27, 1921" (1922), via  flickr.com

Image from page 57 of "Report on the emergency tariff act of May 27, 1921" (1922), via flickr.com

tariffs Tariffs work to reduce imports by making them more expensive. As shown in the figure below, Q2 of goods are consumed in the country, with local firms providing Q1 of output and the rest Q2-Q1 imported. The imposition of an import tariff shifts the world supply vertically upwards by the amount of the tariff, which causes the level of imports to fall to Q3-Q2.

world-trade-tariff.png

quotas Quotas work in a similar way to reduce imports, by restricting the quantity of imports that can enter the country. In the figure, a quota of Q3-Q1 leads to a consumption of Q4 at a price of P1.

world-trade-quota.png

thesis However, protectionism may not be the most effective way for developed nations to deal with BOP problems, as they are short term, have negative welfare effects, and do not address the underlying issues causing the persistent BOP issues.

Protectionism is usually seen as an aggressive trading tactic by other trading partners, who are likely to retaliate with their own protectionistic measures. When carried out, this leads to a fall in exports of the country, which worsens the BOP.

Also, protectionism leads to higher prices for consumers in the country and an overall deadweight loss as consumption switches from lower cost world imports to higher cost local producers. This is illustrated in the figure here:

Developed nations should identify the root causes of a deficit in their current account.

For instance, if weak exports are due to a loss in comparative advantage, they should consider implementing supply side policies to boost productiveness and encourage the formation of new niche industries where they are more likely to be competitive. In the long run this will lead to stronger export performance and economic growth.

Expenditure reducing policies may also be required to address a high level of imports. For example, due to strong government spending and over-expansionary monetary policy in the US, the current account deficit has worsened. The US should consider reducing government expenditure as well as tighten up monetary policy in order to reduce the level of imports. However, such policies are only feasible when the country is doing well economically. During period of economic contraction, economic growth is usually placed at a higher priority that a favourable BOP.

conclusion In conclusion, while protectionistic measures may seem attractive to developed nations in the short run, they are inefficient and may prove counter productive in the long run. To manage the BOP in the long run, countries should implement supply side policies as well as calibrated expenditure reducing policies.


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Timed full paper test for Economics

Basecamp Economics offers a monthly timed full paper test (essay and case study) for H2 Econs JC1 and JC2 students.

The paper is free to take for current Basecampers and for first time non-Basecampers.

The next test is held on 29 Apr 2016, from 6.30pm to 8.30pm. There will be two papers, one for JC1, one for JC2, held concurrently.

All papers will be hand graded with examiner comments and emailed to students.

To sign up for this test, fill up this form:

Student Name *
Student Name
I can make it on 29 Apr at 6.30pm *

Microeconomics Essay: Market power and barriers to entry

Microeconomics Essay: Market power and barriers to entry

Essay, Micro: Market power and barriers to entry

a. Explain how barriers to entry influence the market power of firms. (10)

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def Barriers to entry prevent firms from entering an industry, and may be constructed artificially or arise naturally due to the nature of the industry. They can take the form of cost advantages, control over supplies, patents and trademarks, legislation, product differentiation, control over distribution, and credible threats of price wars.

def Market power refers to the ability of firms to set and maintain prices over the marginal cost without significant loss of market share.

thesis In general, high barriers to entry leads to higher market power and higher prices. In an industry with high barriers to entry, there are a low number of substitutes as competitors are unable to enter the market to offer alternatives. This leads to a more price inelastic demand for the incumbent, who is then able to charge higher prices.

example For example, Microsoft is a monopolist over Windows and Office software, which is bought by almost all businesses as there are no suitable close substitutes. Although the marginal cost of distributing software can approximate zero, Microsoft is able to charge high prices for its software.

On the other hand, in markets with low barriers to entry, such as in monopolistic competition, a large number of firms compete with each other and each firm faces a relatively small price elastic demand. This leads to lower market power and firms are restricted in their ability to raise prices.

Low entry to barrier in the hawker market. Eric Pesik, Hainanese Chicken Rice, via  flickr.com

Low entry to barrier in the hawker market. Eric Pesik, Hainanese Chicken Rice, via flickr.com

antithesis On the other hand, high barriers to entry may not necessarily lead to market power, and this is clear in the case of regulated public utilities.

example For instance, although public utilities are a natural monopoly and high fixed costs is a barrier to entry for another firm to enter, they are usually regulated by the government. In such a case, while they have an incentive to maximise profits by raising prices, the government may limit their pricing to marginal cost pricing.

In oligopolistic markets where there are only a few dominant firms, the ability of each firm to raise prices is also curtailed by the mutual interdependence between the firms. For instance, Singtel, one of the three major telco companies in Singapore, may not raise prices as they would lose many of their customers to their competitors if they choose to react by not similarly raising prices.

conclusion In conclusion, while barriers to entry are necessary to sustain market power, an analysis on whether barriers to entry are sufficient to lead to market power will depend on the exact nature of the industry and the influence of legislation, mutual interdependence, and market contestability.


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Macroeconomics Essay: Inflation

Macroeconomics Essay: Inflation

Essay, Macro: Inflation

a. Explain why low inflation is a macroeconomic objective of a government. (10) b. Discuss whether globalisation will always help to lower the inflation rate of a country. (15)


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a. def Inflation refers to a persistent increase in the general price level of goods and services in an economy over a period of time, usually measured over a year. Governments usually wish to achieve low and stable inflation, as it increases business confidence, encourages savings, and minimises costs such as menu costs.

business certainty High and unpredictable interest rates are regarded as harmful as they make it difficult for businesses to make long term plans for investments, as they are unsure over the future purchasing power of money. For example, although Vietnam's economy was growing rapidly in the 2000's, high demand pull inflation made many MNCs reluctant to invest more in the country. A low and stable inflation rate allows businesses to make confident forecasts and increase certainty in their production and sales decisions.

encourage savings Low inflation rates also encourage savings. In a country with high inflation rates, households would experience a rapid decline in the real value of savings since inflation depresses the real rate of interest. This incentivises households to spend now instead of saving for the future. In the long run, the level of investments in the country depends on the amount of savings available, and a low savings rate would lead to low investment and slower economic growht.

menu costs Finally, high interest rates imposes costs on businesses, who have to change their prices to keep up with inflation. Frequent changes of prices impose both an explicit cost of printing new menus and implicit costs that come with the extra time and effort needed to adjust prices constantly.

In conclusion, most governments have an incentive to keep inflation low to avoid the problems above. However, governments may sometimes have an incentive to keep inflation high. For instance, inflation would erode the real value of debt, which would make government debt more easy to pay off. Too low an inflation rate might also signal weak demand in the economy, and governments have to be careful in managing the economy to be aware of its other economic goals, such as economic growth.


b) Discuss whether globalisation will always help to lower the inflation rate of a country. (15)

def Globalisation is defined as a process of deeper economic integration between countries involving an expansion of trade in goods and services, transfers in financial capital between countries, and more free movement of labour.

Globalisation can lead to lower prices due to economies of scale and the ability of firms to access cheaper inputs from the global market. At the same time, it might also lead to higher prices as globalisation drives demand and leads to increased competition for resources.

thesis

goods and services The free movement of goods and services between nations and the falling costs of international transport has led to increased trade. As countries specialise in goods in which they have a comparative advantage, the prices of internationally traded goods fall. Also, with a global market, firms can reap larger economies of scale and lower their costs. Finally, the elimination of tariffs and quotas due to the forces globalisation further allows consumers to buy goods and services at lower prices.

labour Globalisation has also allowed labour to move more freely to where demand is highest. Labour supply hence shifts to the right and becomes more price elastic. This leads to a shift in the AS curve to the right.

capital Finally, globalisaton has led to a standardisation of international financial regulations, allowing freer flow of FDI. The inflow of FDI brings with it capital and technology, which increases productivity, reduces costs and expands output in the long run.

antithesis

However, globalisation might also lead to higher inflation rates.

goods and services As nations join the global economy, they will experience in demand in their export facing industries. This would lead to higher aggregate demand and drive demand-pull inflation, especially if the country is already near full capacity. For example, there have been concerns that China's manufacturing industry has been overheating, which has led to inflationary pressures in the country.

Globalisation also leads to an increase in the demand for commodities and energy, leading to higher prices, which drives up the costs of production. This leads to imported inflation in countries which are reliant on imports for raw materials and neccessities, such as Singapore.

labour The free flow of labour also leads to the phenomenon of brain drain. For instance, Spanish engineers might not be able to find suitable jobs due to the current Euro crisis, and can migrate very easily to Germany. While Germany benefits from an increase in engineer supply, the supply in Spain dries up, pushing labour costs for the remaining engineering firms. This causes the AS to shift left.

capital Finally, increase in FDI will lead to a higher demand for labour and raw materials, which leads to demand pull inflation.

conclusion Although globalisation is likely to lead to lower prices in the long run, it may also lead to increased demand and inflationary pressure. Whether globalisation would ease or worsen inflation would depend on its openness to trade, the size of its economy, the availability of capacity to soak up export demand, and government policies to manage inflation.


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Micro-economics Essay: Rising food prices and govt intervention

Micro-economics Essay: Rising food prices and govt intervention

Essay, Micro: Rising food prices and govt intervention

David Read, Prestige chief executive, told the Daily Telegraph that food prices could rise by as much as 6 per cent next year, but at the very least were likely to jump by another 3.8 per cent.

He said Britain was in a new era where food prices would continue to soar because of growing global demand and the effects of climate change on harvest and higher commodity costs.

telegraph.co.uk, 9 Dec 2013

a. Account for the sharp rise in the price of food. (10) b. Should the government intervene in the determination of food prices? (15)


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In a free economy, prices are determined by demand and supply. In particular, in equilibrium, demand and supply are equal and there is no tendency for prices to change.

According to the extract, there are a few reasons why food prices are rising: increase in global demand, climate change leading to lower supply, and increasing costs of production. The extent of the change in price can is determined by how much demand and supply have changed and the price elasticity of demand and supply.

Rising global demand has been fuelled by a growing world population, which leads to more mouths to feed on the planet. At the same time, rising affluence in many countries have led to an increase in the demand for the quantity and quality of food. This shifts the demand curve to the right.

On the supply side, climate change has made harvest more unpredictable and harder for farmers to plan production. Droughts and adverse weather conditions would lead to a fall in harvests and supply.

The costs of production for farmers have also been rising, such as the price of water, seeds, electricity, and machinery. This has also led to a fall in supply of food.

The demand for food is extremely price inelastic, as it is a widely defined essential good with no substitutes.

The supply of food is also price inelastic, as harvests are usually grown a year in advance and farmers cannot easily vary their output in the short run. As a result, food supply is usually fixed in any relevant short time frame.

These factors combine to have led to a raise in prices of food. Due to both inelastic increasing demand and inelastic falling supply, one would expect prices to rise sharply, while the effect on quantity would depend on whether demand or supply changes more:

ss_fall_inelastic,_dd_rise_inelastic_.png

b) Should the government intervene in the determination of food prices? (15)

As food is essential to human survival and the proportion of income spent on food is higher for those in lower income groups, there might be case for the government to intervene in the food market for reasons of equity. However, there is also the case for the government to not intervene, as the free market itself is an efficient mechanism of allocating resources, and government intervention may introduce harmful distortions into the market.

thesis The thesis is that the goverment ought to intervene in the food market to ensure equitable prices so that there will be a fair distribution of food. The high increase in food prices has a bigger impact on lower income households, as they spend a larger proportion of their income on food. As prices of food rise, they end up spending more on food as their demand is price inelastic, which leads them to sacrifice other forms of expenditure. When this leads to hardship and a loss of opportunites (economic, education, etc), the resulting inequality should be something the government ought to be concerned about.

The government can intervene in the food market by providing subsidies to food producers, giving food coupons to the poor, or by setting a price ceiling for essential food items.

By providing subsidies, the government encourages production of food. Supply shifts downwards by the amount of the subsidy, and the equilibrium price falls and quantity increases:

subsidy.png

A government may also impose a price ceiling, such as Malaysia's price ceiling for sugar. To be binding, this is set below the equilibrium price.

antithesis However, the case against government intervention can also be made by highlighting the possibility that the government might do more harm than good by intervention

For instance, while subsidies would benefit households and poorer households more in particular, subsidies might encourage inefficiencies in food producers and would contribute a large budgetary burden on the government. This would lead to increased taxes eventually. In the long run, food subsidies are also difficult to take away once they are in place.

A price ceiling does not rely on the market mechanism, and is likely to cause even distortions to the market. There is no guarantee that a lower price ceiling will ensure that low income households will have access to food, as there will be a perpetual shortage due to the excess demand created by the artifical low price. This implies that the government may have to set up a costly rationing system.

Since producers now receive a lower price, they will reduce their production, and some households who previously could consume the food would find that they no can no longer do so, and hence are worse off. This leads to a deadweight loss as follows:

In a free economy, the price mechanism works well in allocating resources to those who want them the most. In the equilibrium, both consumer and producer surplus are maximised. In times of shortages, it is likely to be the fastest mechanism to signal to producers to supply more.

conclusion In conclusion, the free market generally results in a efficient allocation of resources. However, there is scope for the government to intervene, especially during situations where there is a great danger that food becomes unaffordable to the poor. However the government should be mindful of the potential distortions its interventions might create, and whether a government decides to intervene or not would depend on how it can also mitigate the problems of intervention.


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Economics Essay: Macro: Circular flow of income in Singapore and the US

Economics Essay: Macro: Circular flow of income in Singapore and the US

Essay, Macro: Circular flow of income in Singapore and the US

a. Explain the difference in the relative importance of the components of the circular flow of income for a small and open economy such as Singapore versus a large and less open economy like the USA. (10)


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a. The circular flow of income in a four sector economy comprises of households, firms, the government, and external trade, and illustrates the flow of goods, services and their payments in the economy. This is shown in the diagram below:

def When households and firms save part of their incomes it constitutes a withdrawal. They may be in form of tax payments and imports also. Withdrawals reduce the flow of income.

def On the other hand, injections increase the flow of income. Injections can take the forms of investment,government spending and exports.

The equilbrium national income is attained when withdrawals equal injections. Otherwise, when injections are higher than withdrawals, national income will increase until the level of withdrawals increase to match injections, and vice versa.

The Singaporean economy can be characterised as small and open, while the US economy is large (about sixty times larger by GDP) and relatively less open to trade.

Domestic consumption in the USA is relatively more important in the circular flow than in Singapore. In Singapore, due to a higher savings rate because of compulsory savings via the CPF and Asian conservatism, and due to a higher marginal propensity to import because of Singapore's limited domestic market and high openness to trade, the marginal propensity to withdraw is much higher in Singapore than in the US.

The US also has a more domestic demand driven economy, as domestic consumption, investment and government expenditure is a big component of GDP. Singapore on the other hand is more trade reliant, and external demand forms a great part of national income in Singapore.

The marginal propensity to tax is higher in the US, as they operate many welfare oriented policies, while in Singapore, low tax rates are in place both for corporations and individuals so as to attract talent and companies to base their operations in Singapore. This means that withdrawals via taxes are more important for the US, while in Singapore savings and imports are more important as withdrawals.

conclusion The marginal propensity to withdraw in Singapore is rather low, as there is a high leakage via imports and savings. This leads to a low multiplier in Singapore. On the other hand, the US has a large domestic market, its lower leakages via savings and imports is likely to lead to a higher multiplier, implying more scope for the government to conduct fiscal policy.


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Economics Case Studies for Week of 1 Feb

Microeconomics case study

Read the article Shipping Rates So Low That Renting a Ferrari Costs More

Discussion Questions:

  1. Using a diagram, explain the fall in shipping rates.

Macroeconomics case study

Read the article Exit, pursued by bear

Discussion Questions:

  1. Explain how does "slashing interest" work in stimulating demand in the economy.
  2. Discuss the three stories in the article that explains why the US economy has taken so long to recover despite low interest rates.

Topic of interest: money

Read the article In Sweden, a Cash-Free Future Nears

Discussion Questions:

  1. What is money?
  2. Discuss the link between money supply, interest rates, and the exchange rate.

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Economics Sample Essay: Micro: Rising Oil Prices and Euro Debt Crisis

Essay, Micro: Rising Oil Prices and Euro Debt Crisis

Jack at Wikipedia  CC BY-SA 2.0

Jack at Wikipedia CC BY-SA 2.0

Discuss the likely effects of rising oil prices and the European debt crisis on tourism and its related markets in Singapore. (25)


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intro Rising oil prices and the Euro debt crisis will affect the demand and supply for provision of goods and services in tourism and related industries. In general rising oil prices will lead to higher costs of production in all industries while the debt crisis is likely lower demand for many travel related services.

airlines

In the air transportation industry, rising oil prices will lead to rising costs for airlines, as fuel is one of their biggest costs. This shifts the supply curve to the right significantly.

Demand for air transport can be analysed with regard to two kinds of consumers: leisure travellers and business travellers. The Euro debt crisis has led to a fall in national income of many european countries, which lowers their income and purchasing power.

This leads to a large fall in leisure/holiday demand from Europeans for flights to Singapore as leisure travel is a luxury good. Together with the fall in supply, this leads to a rise in price and a sharp fall in quantity of leisure travel, as shown in the graph here:

In the business air travel industry, demand tends to be price inelastic. Since business travel is a necessity, demand for it is income inelastic and only falls slightly. Due to price inelastic demand, prices rise more for business class travel compared to economy class travel for leisure, as shown here:

The overall effect of these factors will be a fall in total revenue for the airline industry. This is likely to lower profits for the industry.

local hotels

The local hotel industry is likely to be negatively affected as well. The euro debt crisis will lead to fewer visitors to Singapore, and reduce their ability and willingness to spend on hotels.

For luxury hotels, the fall on demand is likely to be large as it is a luxury good, and demand from Europeans will fall more than proportionate to their decline in comes. There will be tourists who switch from luxury hotel to budget hotels and even hostels.

Rising oil prices will raise the costs of production of all hotels, as it raises their costs prices for electricity, food etc. This shifts the supply curve to the left.

For luxury hotels, the fall in demand is likely to be more significant than the fall in supply, leading to lower prices and quantity:

For budget hotels, demand may increase as tourists switch to them from luxury hotels. This will lead to a rise in price and quantity:

medical tourism

Singapore attracts many medical tourists to Singapore due to its robust and affordable healthcare system and hospitals. The demand for medical tourism from Europeans is unlikely to be affected by the fall in incomes as medical care is deemed as a necessity. Demand is also likely to be very price inelastic as there are no substitutes for quality healthcare.

Supply side analysis suggests that rising oil prices will increase the cost of production for hospitals. At the same time, the Euro debt crisis may cause the demand for medical equipment to fall, leading to cheaper medical equipment for the hospitals' purchase. Overall, the effect on supply is not clear.

Assuming that both demand and supply does not change significantly, the medical tourism industry is unlikely to be much affected by these two factors, and the industry as a whole is likely to become more profitable in the long run.

link to macro Rising oil prices will lead to an increase in the prices of our imports, which may lead to imported inflation and a general rise of costs. Singapore's central bankers should rely on an exchange rate policy of gradual appreciation in order to contain imported inflation.

The Singapore Tourism Board should also continue to diversify Singapore's sources of tourists so that in the long run Singapore's tourism industry will not be so susceptible to demand shocks from regional economic crises.

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Economics Case Studies for week of 25 Jan

Discussion Questions:

  1. What elasticity concepts apply to the product?
  2. Analyse the firms' strategies in light of these elasticities which you identified.
  3. Are there other factors which can inform your analysis?

Macroeconomics case study

Read the article In Canada, the 8-Dollar Cauliflower Shows the Pain of Falling Oil Prices

Discussion Questions:

  1. Explain the main factor influencing the increase in higher cauliflower prices.
  2. Use a diagram to show how higher world oyster prices are leading to shortages in Canada.

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4 out of 5 PhD economists failed to answer this question correctly

The concept of opportunity cost in economics is quite basic and one would assume that professional economists would be able to answer simple questions about it. In a research paper, that is exactly what two economists from Georgia State University set out to test. Link to paper. They asked the following question to approximately 200 PhD economists/graduate students, of whom 120 has taught an introductory class in Economics.

opportunity-cost-question

Take a moment to read and answer the question.


This question is actually a simple one, and can be solved very easily if you understand the concept of opportunity cost.

If you answered $10, you'd be correct. The opportunity cost of going for the Eric Clapton concert is the value of the next best alternative: the value of going to Bob Dylan. This is simply the willingness to pay for Bob Dylan ($50) less the price of the ticket ($40).

However, you'd be surprised to know that only 21% of the professional economists surveyed answered "B: $10", and the rest of them answered the question wrongly.

The researchers suggest that in university economics there's too much focus on techniques and problems at the expense of teaching students how to think about economic problems. 

As a teacher, opportunity cost, marginal thinking, and efficiency are the three main themes of my classes. A good understanding of these three ideas will help students apply economics in their daily lives. I conduct classes on Friday, Saturday, and Sunday. Click to find out more.

Economics Class Discussion for week of 25 Jan

Discussion Questions:

  1. How often does the MAS (Singapore's Central Bank) review Singapore's monetary policy publicly?
  2. What is the likely monetary policy guidance that will be given by MAS, as suggested in the article?
  3. Explain one factor that will prompt an "off-cycle easing" by the MAS.
  4. Discuss the effects of a large easing of the exchange rate by the MAS.
epSos .de  CC BY 2.0

epSos .de CC BY 2.0

Economics Essay, Trade: Protectionism and FTAs

Essay, Trade: Protectionism and FTAs

The bilateral CSFTA signed between China and Singapore has enhanced Singapore-based companies’ access to the vast Chinese market and further boosted bilateral trade and investment relations. The CSFTA is also the first comprehensive bilateral FTA concluded by China with an Asian country, covering areas ranging from trade in goods and services, to investment and economic cooperation, among others.

Source: IE Singapore, March 2012

a. Explain why some countries continue to implement protectionistic policies. (10)

b. Discuss the extent by which appropriate policy responses would differ between China and Singapore in the run-up to the full implementation of the CSFTA. (15)


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a) def Protectionism refers to government action through its policies to restrict or restrain a country's trade, and particularly imports through measures such as tariffs, quotas, and legislative barriers.

infant industry

A frequent argument for protectionism is the so called infant industry argument. Infant industries usually start off small, and will die before they reach a certain size where they can enjoy economies of scale, adequate infrastruture, and the appropriate trained labour force.

For instance, Airbus in its beginning stages received massive support from European governments to build up its capabilities in order to compete with Boeing from the US.

Protectionists claim that infant industries need to be protected from competition for a certain amount of time, so that the industry can eventually compete in the world market effectively. Subsidies and tariffs on imports are used to ensure the infant industry can compete initially.

evalThe drawback of relying on this argument is that it can be very difficult in reality to take away protections once it is given, and is likely to breed inefficiencies in protected industries.

avoiding structural unemployment

Structural unemployment may result from a structural change in the economy which loses its comparative advantage in certain industries. For example, the car industry in the US has claimed that they require protection from cheaper and presumably more efficient Japanese firms.

In the figure below, an imposition of a tariff raises the world price and reduces imports from Q1-Q2 to Q3-Q4. Local production increases from Q1 to Q3.

eval Protectionistic measures which aim to slow down structural unemployment does not address the structural change in the economy. General Motors eventually went bankrupt in the US despite government support. It is vital for the government to focus on other policies such as retraining to deal with structural change.

correct current account deficit

Countries may also implement protectionist measures in an attempt to correct a balance of payments deficit caused by a current account deficit.

Protectionist measures such as tariffs or quotas will reduce the amount spent on imports, which will improve the current account.

eval However, the economic justification for doing so is weak, as persistent current account deficits are usually due to underlying economic fundamentals, such as an overvalued currency which encourages imports and makes exports too expensive. It would be better to address these root causes directly.

conclusion Most justifications for protectionism tend to be framed as a benefit only for a section of the economy. Overall, protectionism leads to higher prices for households and may also lead to retaliatory actions by trading partners. Hence, protectionism should be justified more on the basis of politics rather than economics.


b) Discuss the extent to which appropriate policy responses would differ between China and Singapore in the run-up to the full implementation of the CSFTA. (15)

intro The FTA is likely to lead to increased trade and economic growth by increasing export demand, as shown by national income increasing from Y1 to Y2 in the figure below.

supply side policy thesis Both countries would implement supply side policies to increase the export capacity of the country in the long run. For example, both countries would invest in the labour workforce through training and education in order to raise productivity levels.

antithesis Singapore would be likely to focus its supply side policies in its export facing high tech manufacturing industries.

On the other hand, China would be likely to focus its supply side policies on labour intensive industries in which it has a comparative advantage, such as textiles manufacturing and other low tech industries.

inequality thesis Both countries would experience an increase in inequality as the gains from trade would go the most to workers in export facing industries. To alleviate widening income inequality, both countries would find redistributive policies such as transfer payments to the lower income appropriate.

antithesis China is likely to face a bigger problem of income inequality as the disparity between the rural and city areas is high. China would focus on improving the transport and education infrastruture to ensure that more citizens can benefit from trade, while Singapore would focus more on training for low skilled workers.

fiscal policy

Increased trade between both countries would lead to increased mutual economic dependence. This is likely to be more true for Singapore, which would see more volatility in the economic cycle due to fluctuations in Chinese import demand. As such, fiscal policy would be appropriate for Singapore during periods of weak Chinese demand (for example during recessions).

Given an initial increase in government spending, households employed by firms which contract for the government will earn higher income. These households will in turn spend a proportion of this higher income in consumption, which further increases the factor income of those in consumer facing industries, who then go on to spend so on and so forth until withdrawals equals injections.

The figure below illustrates the multiplier effect, where the initial injection (vertical distance between AE1 and AE2 leads to a more than proportionate increase in income Y2-Y1).

eval As China is not as trade reliant on Singapore, it is unlikely that China will be severely impacted in the event of a Singaporean recession. Fiscal policy may also be of limited use in Singapore's case due to a high import leakages and a low multiplier.

To conclude, the FTA will be likely to deepen the economic relationship between Singapore and China, and appropriate policies will be introduced to maximise the potential benefits of the FTA. Due to differences in the size and openness of the two economies, the specific focus of these policies will differ largely.

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Economics Essay, Micro: Markets for public and private transport

Essay, Micro: Markets for public and private transport

The recent rise in global prices of fuel has affected the operational costs of public transport operators. At the same time, the economy is recovering from the global recession.

Discuss how the above events affect the markets for public and private transport. (25)

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intro

The equilibrium price and quantity in a market is only reached when demand for a good or service is equal to the supply.

market for public transport

supply The public transport market consists of the market for bus and train transportation. When the price of fuel rises, it raises transport operator's cost of production. It is likely that one the main components of transport operators' cost are fuel expenses, the other being wages. A higher cost of production will shift the supply curve left.

demand On the demand side, global recovery from the recession may lead to higher wages and household spending, including on public transport.

demand income elasticity As incomes rise, the demand for public transport rises as it is a normal good. However, as public transport is a necessity, demand for it is income inelastic, and higher incomes would only lead to a less than proportionate increase in the quantity demanded for it.

overall analysis

The above analysis suggests that the rise in demand coupled with the fall in supply will lead to an upward pressure on prices. It is likely that the extent of the fall in supply is relatively more than the rise in demand, which leads to a rise in price and fall in quantity in equilibrium. This is illustrated in the figure here:

supply fall, demand rise

In reality, transport operators are regulated by the LTA and PTC, and cannot raise prices without permission nor remove non-profitable bus services. Without the ability to raise prices sufficiently, and faced with rising costs and increasing demand, they might reduce costs in other ways, such as reducing expenditures on maintaining service standards.

market for private transport

def The market for private transport consists mainly of the demand for private cars.

demand The demand for private cars is likely to increase together with economic recovery leading to households earning higher incomes.

demand income elasticity The demand of cars is income elastic as it is deemed a luxury good by most households. When incomes rise, the demand for cars will increase by more than proportionately.

cross price elasticity However, rising prices of fuel is likely to dampen this increase in demand for cars. As cars require fuel to operate, individuals consume these two goods together. As they are complements, the rise in price of fuel would lead to a fall in the demand for cars, all things equal. It is likely that this effect would be significant for drivers who drive daily and less significant for those who use their cars only for weekends.

supply elasticity The supply of cars might be inelastic in the short run, as car manufacturers cannot react very quickly to changing demand conditions even with efficient chain management. Supply would be more elastic in the long run.

overall analysis It is hard to determine the final effect of these events on the demand for cars in the private transport market. Assuming a high rise in incomes due to the global recovery which outweighs the effect of the rise in fuel prices, demand increases slightly.

This leads to a rise in the equilibrium price and quantity of cars, as shown here:

dd increases, supply stays the same

conclusion

The above analysis suggests that transportation prices, whether public or private, will tend to rise. As public and private transport are substitutes, househoulds will switch to either one when the other becomes relatively too expensive.

As public transport is a public utility, the government should consider how it may keep the price of it affordable, especially for the lower income groups, who spend a larger proportion of their income on transportation.

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Yellow line MRT. Photo by  daarwasik

Yellow line MRT. Photo by daarwasik

Economics Essay, Macro: How the equilibrium level of national income is reached

Note: the keynesian cross diagram in this essay is more relevant for JC2 students. The new 2017 H2 paper de-emphasises this.

  • Explain how the equilibrium level of national income is reached. (8)
  • To what extent do different savings rates between countries affect changes in national income given an increase in autonomous expenditure? (17)

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def The equilibrium level of national income is the level at which there is no tendency for it to change. It is consistent with planned aggregate demand equalling planned aggregate supply.

Using the income expenditure approach, an economy (assumed to be open to trade with a government sector) where national income (Y) is equal to aggregate expenditure is said to be at equilibrium. Aggregate expenditure is made up of domestic consumption, investment, government expenditure, and net exports.

In the graph, when national income is $300m, planned aggregate expenditure exceeds planned output. This leads to a fall in unplanned inventories of $100m. When firms see this depletion in their inventories, they will expand output, hiring workers and other factor inputs. This leads to an increase in income, output and employment. National income will rise until planned AE equals planned output.

Conversely, when national income is $800m, planned aggregate expenditure is less than planned output. This leads to an increase in unplanned inventories of $200m. When firms see this increase in their inventories, they will decrease output, hiring fewer workers and other factor inputs. This leads to a fall in income, output and employment. National income will fall until planned AE equals planned output.


  • To what extent do different savings rates affect changes in national income given an increase in autonomous expenditure? (17)
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def Autonomous expenditure refers to any component of aggregate expenditure which does not change with changes in national income. For instance, government expenditures typically depend on a government's fiscal position and economic policies, while investment spending may increas due to improved business sentiments or lower interest rates.

def The savings rate in a country can be modelled as a percentage of the national income. This percentage is known as the marginal propensity to save, and defined as the proportion of each additional dollar of household income that is used for saving.

When autonomous expenditures increase, it leads to a multiplied increase in the national income. The multiplier is lower when the savings rate is lower.

thesis Different savings rates will lead to different changes in the national income given an increase in autonomous expenditure.

The marginal propensity to save in different countries is affected by 1) cultural atttitudes towards thrift and 2) government policies among other factors.

An Asian country like China, or Singapore tends to have higher rates of savings, while western countries such as the US typically have a less prudent attitude when spending.

Government policies also play a role in influencing the MPS. For instance, in Singapore, compulsory savings under the CPF scheme lead to a high saving rate, while in the countries with welfare schemes such as the US, citizens may feel less need to save since they can expect government payouts when they no longer have an income.

A higher savings rate will lead to increased withdrawals from the circular flow of income, which will dampen the multiplier effect of any increase in autonomous expenditure.

For example, given an autonomous increase in government expenditure due to expansionary fiscal policy, households employed by firms which contract for the government will earn higher income. These households will in turn spend a proportion of this higher income in consumption, which further increases the factor income of those in consumer facing industries, who then go on to spend so on and so forth until withdrawals equals injections.

In the picture below, AE_1 increases to AE_2, showing an increase in autonomous expenditure. National income increase from Y* to Y1. However, if the multiplier is lower due to a higher savings rate, the AE_1a increases to AE_2a, and the increase in national income is smaller (Y* to Y2).

anti-thesis Other factors also affect the national income given an increase in autonomous expenditure.

Apart from withdrawals from the economy via savings, imports and taxes are also important factors.

def The marginal propensity to import is defined as the change in import expenditure that occurs with a change in disposable income. The higher the MPM, the lower the multiplier.

The MPM is affected by 1) the openness to trade of an economy, and 2) the trade policies of an economy.

Singapore is a good example of a country which is highly open to trade. As the country lacks natural resources , it has to import many goods for domestic consumption. Singapore also has a very liberal trade policy, and has signed countless free trade agreements with many countries and trading blocs.

The marginal propensity to tax is determined by government policy, and a higher MPT would also lead to a lower multiplier.

Singapore has pretty low taxes relative to other countries both at the individual level and at the firm level. As the government operates on the principle that citizens should strive to pay for most of their expenses, there is minimal welfare tax burden on the state, unlike other western countries where government spending can be much higher as they have to support welfare.

eval The multiplier effect due to an increase in autonomous expenditure will lead to an increase in nominal national income. However, real national income will only increase if there is spare capacity in the economy. In an economy without spare capacity to grow, the multiplier effect on real growth will be weak and inflation will be more likely.

conclusion A higher savings rate implies a higher marginal propensity to withdraw, which will reduce the extent to which an autonomous increase in expenditure would lead to an increase in national income. However, other factors such as the tax rate and the marginal propensity to import are also important.

In the long run, a higher savings rate allows a country to investment in productive capacity, which would lead to a higher growth path of the economy.

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via https://www.flickr.com/photos/draganbrankovic/23754539739/in/explore-2016-01-02/

via https://www.flickr.com/photos/draganbrankovic/23754539739/in/explore-2016-01-02/

Economics Class Discussion for week of 3 Jan 2015

The article can be downloaded for educational purposes at this link.

Discussion Questions:

  1. What are the reasons for the depreciation?
  2. Discuss the macroeconomic impact of the depreciation?
  3. Evaluate the feasibility of the various policies that the Chinese could adopt.
  4. Discuss the likely policies that China will adopt.

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