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Macro – Economics


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A Level Macro Goals Essay
May 12, 2017
Actual Growth takes place when is an increase in the country’s real GDP. Gross Domestic Product (GDP) refers to the value of all final goods and services produced within a given country during a given period of time. Potential Growth refers to an increase in the productive capacity of an economy. Stability can be understood as a situation where an economy has a fairly constant output growth and low & stable inflation. When there is LT EG and stability, there is an increase in household’s real incomes and hence their purchasing power. This increases their ability to purchase and enjoy more goods and services, leading to an increase in the material standard of living (SOL) of the country.   Secondly, as a result of LT Economic Growth and stability, there will be an increase in the economy’s real GDP and household incomes. The government can then collect more tax revenue. The tax revenue collected can be used to finance expenditure on infrastructure, education and healthcare services enjoyed by the citizens. This is especially beneficial to developing countries. Furthermore, economic growth can help bring about greater income equality. As there is an increase in tax revenue collected by the government, it will be easier for the government to redistribute the additional tax revenue from the higher income group to the lower income group without the need to raise tax rates. In addition, since lower-income households tend to spend a larger proportion of their income on essential services like healthcare and education, as compared to the higher-income groups, the increased expenditure on education and healthcare services mentioned above is likely to benefit the lower-income groups more, helping to narrow income inequality gap.   Stability can be in the form of low and stable inflation. When inflation is low and stable, it creates a more certain environment in which both businesses and households can plan and operate more efficiently. For example, firms can predict future revenue, costs and thus profits with greater certainty, encouraging them to undertake more investment. Part of these investment undertaken could be in the form of acquiring new capital goods like machineries and equipment, which may serve to increase the economy’s productive capacity in the long run. Furthermore, foreign investors may also be attracted to invest in the country due to relatively lower costs of production as compared to other countries with higher inflation rates. As foreign investors set up production plants and subsidiaries in the domestic country, they will employ domestic labour, hence increasing job opportunities and reducing unemployment in the domestic economy. Overall, stability in an economy will lead to higher investment, output and jobs.   Lastly, stable prices allow a country to enjoy export competitiveness. When the domestic inflation rate is relatively lower than that of trading partners, exports of that country will become cheaper in the foreign market (more price competitive). Assuming the price elasticity of demand for exports is more than 1 (PEDx > 1), the fall in the price of exports will lead to a more than proportionate increase in the quantity demanded for exports. Overall export revenue increases. At the same time, imports will become relatively more expensive in the domestic market, i.e less price competitive when compared to the cheaper domestically produced goods. As consumers are inclined to switch to buying the relatively cheaper domestically produced goods, the demand for imports will decrease, and hence total expenditure on imports will decrease. The value of net exports (X-M) will hence increase, improving the current account and the Balance of Payment of the country. Again, stability allows the government to achieve the aim of maintaining a healthy position of their balance of payments.   It is important that an economy looks towards long term economic growth and stability in particular, price stability. With economic growth, households’ standard of living will experience an improvement. At the same time, a low and stable inflation rate will help to maintain the real value of money. This is one reason why the Monetary Authority of Singapore (MAS) aims to promote sustained non-inflationary economic growth in Singapore.
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HCI Prelims 2013
May 12, 2017
Cyclical Unemployment Cyclical unemployment is caused by a lack of demand in the downswing of the business cycle. During the downswing (recession or depression), aggregate demand decreases and firms find they cannot sell all their current output and so there is an unplanned accumulation of inventories. Firms will then adjust to the deficiency of demand by cutting back on production and hire fewer workers, leading to an increase in cyclical unemployment. Therefore, cyclical unemployment is sometimes referred to as demand-deficient unemployment. In the recent Global Financial Crisis (US sub-prime mortgage crisis) in 2008/09, the economy went into sharp contractions as a result of these external shocks. These shocks badly affected our export trade with the rest of the world, tourism and international banking as well as financial services sectors. In short, components of AD were negatively affected. Furthermore, exports from Singapore are dominated by high-end manufactured goods and services which tend to have a high income elasticity of demand, falling global income thus had pronounced adverse effect on the global demand for Singapore's exports. As AD falls, firms will recognise the fall in the demand for their goods and services. This will cause them to cut back on production and thus reduce their employment of factors of production like labour. In so doing, it gives rise and worsens cyclical unemployment in Singapore.   Structural Unemployment Structural unemployment arises from a change in the economic structure of an economy. For example, when an economy changes from an industrial/manufacturing type to a service-orientated one, workers are made redundant in the declining sector, but may not have the necessary skills/knowledge to meet the job requirement in the emerging sectors, or are unwilling to move from one region to another in order to take up jobs in which they have suitable skillsets for. These are cases of occupational and geographical immobility of labour respectively. In the case of Singapore, there is a decline in her competitiveness in the manufacturing industries. This is due to competition from low-cost emerging countries that have entered the world market. For example, China's low-cost manufacturing sector and India's IT software industry have permanently reduced the demand for Singapore's manufacturing and IT exports. Singapore’s domestic firms in these industries either cut back on production or shut down completely, resulting in the retrenchment of workers. While there are job vacancies available in the sunrise industries of the economy, like the tertiary sectors, these retrenched workers are unable to fill these vacancies due to the lack of necessary skills. This is a case of skills mismatch and occupational immobility, leading to structural unemployment in Singapore. Structural unemployment is common in Singapore as the country moves from one industry to another due to her changing comparative advantage. As the country moves from the secondary to the tertiary sector, labour finds itself with a mismatch between their skills and the requirements of the jobs in the sunrise industries.   Frictional Unemployment Frictional unemployment arises because of imperfect information in the labour market as it takes time for job-seekers to be matched with suitable jobs. It is also known as search unemployment. On one hand, job-seekers have imperfect information on the jobs available in the job market, along with the job prospects, job requirement, salaries, benefits, to name a few. On the other hand, firms also have imperfect information on the job-seekers available and their qualities, skillsets, working attitude etc. Since both the firms and job-seekers are trying to find what they deem to be the best match available, time will be taken for job-seekers to be matched with suitable firms. During this period of time, some job-seekers will be frictionally unemployed. Furthermore, the unending flow of people into (e.g new graduates) and out of the labour force (retirees, women leaving labour force to take care of their children etc), and the process of job creation and job destruction create the need for people to search for jobs and for firms to find suitable employees. This type of unemployment is common in all countries inclusive of Singapore. In Singapore, for example, it is common to see new graduates taking about 3-6 months to find themselves suitable jobs. During this period, they are frictionally unemployed.
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MI Prelims H2 2013
May 12, 2017
Introduction One of the macroeconomic aims of the Singapore government is to maintain price stability (low inflation levels) so as to create a conducive environment for investment, maintain export competitiveness to sustain non – inflationary economic growth. There are two main types of inflation – demand-pull and cost-push. An increase in the inflation levels will lead to problems for both the domestic and the external sector.   Thesis: Increase in inflation levels may cause more problems for the domestic sector An increase in inflation levels will lead to greater uncertainty in the economy and firms will face difficulty predicting future costs, revenue and profits. This will reduce business confidence and the expected rate of returns from investment will fall. Firms will thus reduce their investment expenditure. Part of these investment expenditure could have been channeled into useful investment projects like Research and Development (R&D) to search for cheaper and more efficient methods of production, which will serve to increase the productive capacity in the economy. However, since firms are deterred from taking up investment projects in view of the higher inflation levels, potential economic growth is hindered. Furthermore, if the increase in inflation levels is due to cost-push inflation, where there is persistent increases in cost of production, it may lead to an increase in unemployment in the country. This is because with higher costs of production, existing firms may be encouraged to relocate part of their operation and production processes to other countries with lower cost of production. These firms will bring out with them job opportunities, which will then lead to increase in unemployment in the country. On the overall, the high inflation rates will negatively affect the economic growth and employment levels in the economy. This illustrates how increase in inflation levels can cause severe problems for the domestic sector, adversely affecting the macroeconomic aims of the economy.   Anti-Thesis: Increase in inflation levels may cause more problems for the external sector 1) Worsening of current account An increase in the inflation levels is likely to worsen the current account of the Balance of Payment. When the domestic inflation rate is relatively higher than that of trading partners, exports from the domestic country will become more expensive in the foreign market (less price competitive). The price demand elasticity of Singapore’s exports is expected to be more than 1 (PEDx > 1), given the wide availability of substitutes in the global market, the increase in the price of exports will lead to a more than proportionate fall in the quantity demanded of exports. Overall export revenue falls. At the same time, imports will become relatively cheaper in the domestic market, i.e more price competitive when compared to the more expensive domestically produced goods. As consumers are inclined to switch to buying the relatively cheaper imports, demand for imports increases and total expenditure on imports increases. The value of net exports (X-M) will hence fall, worsening the current account and the Balance of Payment of the country.   2) Exchange Rate The fall in the quantity demanded for the country’s exports will lead to a fall in foreigners’ demand for the country’s currency (e.g DDSGD falls). At the same time, the rise in the demand for imports will increase the supply of the country’s currency in the foreign exchange market (e.g SSSGD increases). As a result, there will be a depreciation in the country’s currency. For countries that are heavily dependent on imports (e.g Singapore), a depreciation in the currency may eventually lead to / worsen cost-push inflation as imported factor inputs become relatively more expensive.   3) Worsening of Capital and Financial account Cost-push inflation means higher production cost. Foreign investors may hence be less willing to invest in the domestic country, leading to a fall in inflow of new Foreign Direct Investments (FDIs) into the country. At the same time, existing foreign firms may also choose to relocate their production to other countries with lower cost of production, leading to an increase in outflow of FDIs. Furthermore, an increase in inflation levels will also lead to capital flight as people prefer to put their money in countries where the monetary situation is more stable, resulting in short–term capital outflow. This will worsen the Capital and Financial Account (CFA) and hence the Balance of Payment of the country.   Evaluation (Making a Judgement) Singapore is endowed with little natural resources of her own and with a small domestic market. Thus she is very highly dependent on imported factor inputs (e.g raw materials) for her domestic production processes. At the same time, she is also highly reliant on foreign markets as key destinations for her exports of finished products. In addition, Singapore is also very reliant on capital flows and FDIs. Since Singapore is such an open economy with high dependency on trade and FDIs, an increase in inflation levels is expected to cause more problems for her external sector than her domestic sector. However, problems from the external sector will have spillover effects on the domestic sector as well. E.g. an increase in inflation levels will reduce the price competitiveness of Singapore’s exports, leading to a fall in the quantity demanded for exports. Since Singapore is an export–reliant country, a fall in the quantity demanded for exports will severely affect her AD. The fall in AD will lead to a fall in real national output by multiplied times, through the multiplier effect. This would trigger a fall in domestic production, employment and economic growth. In general, an inflation rate of 2 – 3% on average would not cause much of a problem for the domestic or external sectors of the economy. In fact, mild demand–pull inflation may be favourable to economic growth since the excess demand and the prospects of higher returns may serve to stimulate investment and production in the economy. Nonetheless, inflation is of great concern to Singapore and therefore the government has to be vigilant in keeping inflation rates in check.  
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Balance of Payment Essay
May 12, 2017
The balance of payments is a record of receipts and payments arising from all economic transactions between a country and the rest of the world over a period of time (usually a year). The BOP comprises of 2 main accounts, the Current Account and the Capital and Financial Account. The Current Account records the country’s trade in goods and services with the rest of the world, as well as income flows and transfers of money and assets across borders. The Current Account includes the (i) Goods balance, (ii) Services balance, (iii) Income balance and the (iv) Net current transfers.   Explain how an appreciation in the domestic currency can cause a Current Account deficit. An appreciation of the exchange rate will lead to an increase in the external value of the domestic currency with respect to foreign currencies. The appreciation will lead to an increase in the price of exports in terms of foreign currency in the foreign markets. This will lead to a decrease in the quantity demanded for exports. The extent by which Qdx falls by depends on the price elasticity of demand for exports. At the same time, an appreciation will lead to a decrease in the price of imports in terms of domestic currency. This will lead to an increase in the quantity demanded for imports. The extent by which Qdm increases by depends on the price elasticity of demand for imports. On the overall, if the Marshall-Lerner condition holds i.e the absolute sum of price elasticities of demand for Exports and Imports is more than 1 (|PEDx + PEDm| > 1), an appreciation will lead to a fall in the value of net exports (X-M), thus worsening the BOT and this may eventually lead to a BOP deficit.   Explain how higher Economic Growth relative to other countries can lead to Current Account deficit. A relatively higher economic growth rate in a country, like Singapore, relative to other countries can lead to a Current Account deficit. A relatively higher economic growth rate means that the level of real GDP is rising faster than that of other countries. The increase in real national income leads to a rise in the purchasing power of households, leading to an increase in demand for goods and services in general, which includes imports. The increase in demand for imports will lead to an increase in the total import expenditure. Assuming that the total revenue from exports remains unchanged, there will be a fall in the net export revenue, hence the current account and BOT will worsen and may eventually lead to a current account deficit. The extent of this depends on the marginal propensity to import (MPM). If MPM is high, rise in income will lead to significant rise in imports, hence worsening the current account to a large extent. On the other hand, if MPM is low, an increase in income may not increase import expenditure substantially, and will thus have little effect on the Current Account. For example, Singapore has a high dependence on imports, which take up about 150% of GDP. A large proportion of consumption goods, including necessities, in Singapore are imported. In addition, many raw materials and intermediate goods used in production are also imported. This means that the marginal propensity to import is fairly high. Hence a rise in income relative to other countries would lead to a large increase in imports, resulting in a possible current account deficit.   Explain how higher domestic inflation relative to other countries can cause a Current Account deficit. When the domestic inflation rate is relatively higher than that of trading partners, exports of that country will become more expensive in the foreign market (i.e less price competitive). Assuming the price demand elasticity of exports is more than 1 (|PEDx| > 1), given the wide availability of substitutes in the global market, the increase in the price of exports will lead to a more than proportionate fall in the quantity demanded for exports. Overall export revenue falls. At the same time, imports will become more price competitive when compared to the domestically produced substitutes in the domestic market. As consumers are inclined to switch to buying the relatively cheaper imports, demand for imports will increase, hence total expenditure on imports will increase. The net exports revenue (X-M) will hence fall, worsening the current account and the Balance of Payment of the country.  This eventually leads to a BOP deficit on the current account.   Explain how changes in immigration policies and corporate tax rates on foreign firms can lead to Current Account deficit. Current account deficit can occur when the government relaxes its immigration policies and allows the entry of a larger number of foreign workers into its country. These foreign workers will remit part of their wages back to their home countries. Thus, when there is a rise in the number of foreign workers, there will be an increase in the amount of remittances flowing out of the country. Likewise, when the government reduces the corporate tax rates imposed on foreign firms, it will attract more foreign investors to set up production plants and subsidiaries in this country. These firms will send part of their profits back to their home countries. Thus, when there is an increase in the number of foreign firms, there will be an increase in the amount of profits flowing out of the country. This will worsen the current account and eventually leading to a current account deficit.   In conclusion, there are several factors that can lead to a deficit on the current account. This includes the inflation rate of the domestic country relative to that of its trading partners. Relative economic growth is another important factor to consider.
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A Level Economics Exam 2017 – Macroeconomics
Jan 22, 2018
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A Level Economics Exam 2016 – Macroeconomics
Jul 14, 2017
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