General answering skills

Disclaimer: These notes are based on my opinion on how the questions should be tackled. Do take it with a pinch of salt, and practice to see how they are applied. 1. Definitions a. Use standard definitions b. State the types present i. Unemployment Demand-deficient Structured Frictional Seasonal ii. Standard of Living Material Non-material iii. Inflation Cost-push Demand-pull iv. Externalities Positive Negative Consumption Production 2. When the term large change is used, it usually involves elasticity 3. When asked to explain the relationship between two concepts, show how each concept affects the other a. How A affects B, and then how B affects A 4. When asked for effectiveness a. Does it do its intended job b. For macroeconomics, consider its impact on the 4 aims c. For microeconomics, consider its impact on efficient and equality d. For higher level analysis, include a brief paragraph on the other aims i. E.g. When analysing a macroeconomic policy, look at its impact on equality ii. E.g. When analysing a microeconomic policy, look at its impact on the 4 aims 5. When asked for desirability a. Does it impact other policies/ other areas/ other aims? b. Is it sustainable? 6. Try to have a pre-content explanation a. Define new concepts as stated in the preamble, using the preamble to help i. Like R&D b. When asked about elasticity, briefly state how demand and supply determines price and quantity i. What is demand and supply

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7.

8. 9.

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ii. What are their determinants iii. How prices are determined c. When asked about a measurement, like inflation or unemployment or growth i. How is it measured (not the types) CPI GDP ii. What are the types Headline vs core inflation Cost-push vs demand-pull Structural vs demand deficient Actual vs potential iii. What does it mean Higher living costs Productive inefficiency Overheating economy Preamble content should also be used in part a, as part of applications marks if possible. a. Like how it causes market failure b. Like what are the factors affecting the issue i. Demand and supply ii. Macroeconomic goals When introducing a new term in the middle of the essay, you need to explain or define it. Diagrams a. Show deadweight loss b. Show cause of divergence List of diagrams axis a. Price against Quantity i. Demand and supply b. General price level against Real national income i. AD/AS c. Interest rate against Volume of investment i. MEC d. Planned expenditure against National income i. AE/Y e. Price, revenue, cost against Output i. Market structure When drawing a diagram for elasticity, draw both elastic and inelastic cases to show the difference When showing separate effects use separate diagrams a. Use only a single diagram to show multiple effects when youre looking for the result i. Like final price and quantity When asked to suggest policies, supply-side should usually be one of them a. Solves almost everything b. Can use in evaluation for LR benefits For most appropriate questions, look at the conditions of

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15. 16. 17. 18.

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20. 21.

a. If recession b. Near full employment c. Open economy d. Closed economy In evaluation, dont introduce new policies If the question is not focused on national income indicators, no need to explain choice of GDP or GNP When talking about burden on producers or consumers, examine their changes in producer or consumer surplus When describing/ evaluating a change, you need to include these characteristics a. Direction b. Magnitude c. Relative importance i. Relative to other countries ii. Historical trends d. Duration e. Ways of measurement i. GDP or GNP ii. Income, output or expenditure iii. PPP or CPI Avoid absolute words like a. Will b. Always c. Never When asked about impact on society a. Society is usually microeconomics, so look at producers and consumers When analysing the effectiveness of a policy a. It is effective for certain causes of the problem i. E.g. High inflation from import prices can be tackled by exchange rate b. It is not effective for other causes of the problem i. E.g. High inflation from wage costs cannot be tackled by exchange rate c. Does it reach the target audience i. E.g. Rich farmers benefit more from price floor d. Is it set correctly i. E.g. Difficulty in determining MEB/ MEC ii. E.g. Difficulty is setting price floor/ celling

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CSQ skills
Disclaimer: These notes are based on my opinion on how the questions should be tackled. Do take it with a pinch of salt, and practice to see how they are applied. 1. Total time: 1h 7.5 min a. 1mark = 2 min b. 7 min for reading questions and extract 2. Marks a. 1-5 marks i. Point marking b. 6-8 marks i. LORMS (Level of Response Marking) c. 8-9 marks i. LORMS + 1 Evaluation d. 10-12 marks i. LORMS + 2 Evaluations 3. For 10 marks CSQ a. Identify problem i. Causes ii. Impacts b. Suggest possible solutions i. Introduce policy ii. Change/ remove policy c. Evaluation 4. No repeating of answers 5. Link usually present between part (i) & (ii) & 6. Answer should consist of economic concept supported by extracts of CSQ a. Inference should be obvious, but no need to directly quote b. Inferences can be reused, not usually should not due to potential overlap 7. Link the end of paragraph to question 8. Look out for s (relationships, differences, causes, reasons, consequences) to signal more than one answer 9. Look at the extract title to gain a gist of the content of the extract, and what content should be in the answer 10. Reference to extract, by using From extract __ direct quote, to make it easier for examiner a. Try not to rephrase, as the meaning might be lost 11. To show trend, it is usually good to show percentage change 12. Trend refinement a. Sharp rise/ drop b. Fluctuations 13. Keywords for relationship a. Direct/indirect b. Proportional/Inversely Done by Nickolas Teo Jia Ming

14.

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c. Positive/Negative When accounting for trend and relationships, you need to account for the general trend, and the refinement as well a. Short term impacts can be used, as the yearly data is a sum of all the years events When asked to compare changes a. Look for similarities and differences i. Direction of change (increase/decrease) ii. Extent of change From negative value to positive? o E.g. deflation to inflation Larger increases for 1? b. If comparing more than 2 things i. State the general trend among all the statistics ii. State who has the biggest and smallest change iii. State who is the largest and who is the smallest Use keywords that answer the question a. Rises relatively to If you use the word sharp or great rise in your trend, usually account using elasticity If the question indicates that the good is inelastic, you need to quote figures to show that you understand it too. When asked to use economic analysis, there are several concepts that could possible apply a. Demand and supply i. Determinants ii. Elasticity b. Theory of firms i. Market power Diagrams only needed when asked, or if its helpful to illustrate a concept Only label the diagram when youre sure of the labels a. Externalities usually dont have labels Looks for both supply and demand factors that affect the price and quantity of the good Watch out for data that is in reverse chronological order Highlight key parts of the data. For example: a. % of GDP b. Index of c. US/1995 = 100 When quoting an index, there is no units a. The price of ___ b. Rose/ fell from a price index of ___ in ___ c. To a price index of ___ in ___ When interpreting data, try to look for deeper trends like a. Asian economies b. LDC vs DC c. Small open economy d. Opening up borders to trade Always define terms used in the question Done by Nickolas Teo Jia Ming

28. If they say identify, just state, and explain if have time. 29. For to what extent, give both sides, using terms like a. Largely b. To a small extent 30. When asked to evaluate/ analyze the causes of an event, you need to show why the event may occur, and why it may not. (Show both sides) 31. When asked if the data is useful or effective a. Look at numbers, graphs, charts and tables first b. Then look at the extract c. Give both sides i. Why it support the assertion ii. Why is does not Missing data/ other indicators Certain portions of data disagree 32. When asked to use or explain a concept, give a situation and its causes and explain from there. Link to question if needed a. When ___ improves, it is due to ____. Hence 33. When the question talks about the future, consider a. YED as income increases b. Long run effects of policies 34. For impact on economy, classify into a. Internal effect i. Unemployment ii. Inflation iii. Economic growth b. External effects i. BOP 35. Can classify trends, for unemployment, inflation etc., into categories a. High b. Moderate c. Low 36. For large mark questions a. Do not neglect the data when looking for supporting extracts b. Use raw data instead of processed data 37. For 10 marks question a. Define economic concept i. Use economic terms/ jargon b. Explain the concept and its effects c. Answer the question using the concept (2 paragraphs) d. Evaluation 38. When reading articles, take note of the context the words/jargons are used in. For example: a. Sunk costs i. The price of the machinery ii. The costs of transporting the goods iii. The price of building the factory Done by Nickolas Teo Jia Ming

b. Trade deficit/ surplus i. For which country 39. For anti-thesis questions, state either the a. Limitations b. Side-effects 40. If the question is difficult, try to use as much of the extract as possible 41. For evaluation a. Use words like i. I believe that ii. I feel that iii. In my personal opinion b. Make a stand/ judgement and support it with extract and concept c. Look at different cases i. Time frame ii. DC or LDC iii. Other indicators d. Propose solutions

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Unit 1 answering skills (Scarcity, choice and opportunity costs)

Disclaimer: These notes are based on my opinion on how the questions should be tackled. Do take it with a pinch of salt, and practice to see how they are applied. 1. Scarcity a. It is the presence of limited resources because of unlimited wants b. All resources have alternative uses, and a choice has to be made 2. Opportunity cost a. It is the highest valued alternative that has to be forgone to produce or consume a particular good or service 3. Choices for the market to make a. What to produce i. Allocative efficiency b. How to produce i. Productive efficiency c. For whom to produce for i. Equity 4. Allocative efficiency a. When the allocation of resources is optimal to fulfil as many wants as possible b. The best use of resources to maximise societys welfare 5. Productive efficiency a. When the good or service is produced at the lowest possible cost b. Factors of production used efficiently 6. Pareto optimality a. Societys welfare has been maximised such that no one can be made better off without someone else made worse off b. Realistically impossible c. Use Pareto improvement for when i. You move from a point inside the PPC to a point closer to the boundary ii. When the policy results in a welfare gain 7. Production possibility curve a. Show all the combination of two goods a country can produce b. Assumption i. The country only produces two goods ii. The boundary of the PPC is a result of all resources being fully and efficiently utilised c. Uses i. To show improvement in productive capacity Shift boundary of PPC outwards ii. To show recovery/ improvement in efficiency Movement from a point inside the PPC to a point closer to the boundary

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iii. To illustrate the concept of opportunity cost and choice Convex curve due to increasing opportunity cost o The additional, alternative resources used is not as suitable for the production of the good Concave curve due to decreasing opportunity cost o Due to specialisation iv. To show the trade-off between producer and consumer goods More producer goods = bigger shift outwards in PPC over time More consumer goods = greater current quality of life

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Unit 2 answering skills (Resource allocation in competitive markets)

Disclaimer: These notes are based on my opinion on how the questions should be tackled. Do take it with a pinch of salt, and practice to see how they are applied. 1. Possible Demand and Supply questions a. Find the changes in price and quantity b. Find the changes in total revenue and expenditure c. Assess the impact on consumer and producer surplus d. Determinants of elasticity, demand and supply e. Impact of policies i. Effectiveness ii. Who benefits more from subsidy, burden of tax 2. Demand curve downward sloping due to the law of diminishing marginal utility a. Less utility is gained from consuming an additional unit of a good or service 3. Explaining changes in demand and supply a. Demand changes due to i. Population ii. Taste and preferences iii. Price of related goods iv. Changes in income v. Changes in population statistics vi. Expectation vii. Seasonal changes b. Supply changes due to i. Number of producers ii. Spare capacity iii. Time iv. Prices of related goods v. Expectations c. Explain by linking determinants to effect i. When population rises, more of ___ (final product) is demanded, hence the demand for ___ (feedstock) rises as it is essential for the production of ___ (final product) ii. When taste and preferences change, people desire ___ as it is fashionable/ better suited to their needs. Hence the demand for ___ increases 4. Elasticity a. Price elasticity of demand i. Degree of responsiveness of quantity demanded of a good to a change in its price ii. Useful only when supply curve shifts iii. Determinants Nature of good

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o Necessity is inelastic o Luxury is elastic Proportion of income spent on it o Small proportion is inelastic o Large proportion is elastic b. Price elasticity of supply i. Degree of responsiveness of quantity supplied of a good to a change in its price ii. Useful only when demand curve shifts iii. Determinants Factor mobility o More mobile factors can easily leave or enter the industry Supply price elastic Existence of spare capacity o Spare capacity allows output to be easily increased in times of need Supply price elastic Ability to stockpile goods o Can stockpile Easily respond to changes in demand Supply price elastic c. Income elasticity of demand i. Degree of responsiveness of demand of a good to a change in consumers income level ii. Determines extent of shift when incomes changes iii. Determined by nature of good Normal necessity Normal luxury Inferior d. Cross elasticity of demand i. Degree of responsiveness of demand of a good to a change in the price of a related good ii. Determines extent of shift when price of a related good changes 5. When asked to explain the impact of elasticity, show the effect in both cases of elastic and inelastic a. Draw both on the diagram 6. When asked to compare the elasticity a. Give definitions and examples b. Explain differences in sign c. Explain meaning of magnitude d. Explain differences in uses 7. Price fluctuation has two parts a. Frequency i. Nature of supply Primary industry is unpredictable Manufactured is more reliable

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ii. Nature of Demand Recovery and recession of cyclic demand b. Extent i. Price and income elasticity ii. Cross elasticity depends on context 8. Impact of fluctuations c. Unstable income i. Affect standard of living d. Affects investment prospects e. Affects consumer choices 9. When asked to use demand and supply to explain changes in price and quantity f. First think about the final demand and supply i. Look at extract or preamble g. Then identify what demand and supply changes will explain the change h. Finally check if the extract or preamble states which effect has a larger extent

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Unit 3 answering skills (Market failure and government intervention)

Disclaimer: These notes are based on my opinion on how the questions should be tackled. Do take it with a pinch of salt, and practice to see how they are applied. 1. Dont draw both externality of production and consumption in the same diagram 2. Definitions a. Externalities i. Side effects, from the production or consumption of a good, that affects the welfare of a third-party, who neither pays nor receives compensation for that effect b. Imperfect information i. Consumers and sellers have limited information or understanding of the good they are buying or selling c. Factor immobility i. Geographical ii. Occupational d. Market failure i. When societys welfare is not maximised due to the over or under-allocation of resources into the production or consumption of a good or service ii. Two types Complete No provision of public good Partial Under or over allocation of resources 3. Need to clearly state who are the third-parties and exactly what is the spill-over effect 4. When explaining why public or merit good causes market failure, you need to include why the government should intervene to provide this good, or increase the production of the good 5. When showing the welfare loss, need to say why it is a loss a. At the output/ consumption below the socially optimum level (Qs), the benefit of an additional good produced/ consumed is greater than its cost b. Hence, a welfare loss is incurred when the producers produce less than Qs, as the maximum welfare is not achieved due to underproduction/ underconsumption 6. Positive externality of consumption a. Define i. When the consumption of a good benefits the welfare of a third-party, who does not pay compensation for the effect b. Example i. As people get vaccinated, they are unlikely to pass on the disease to other nearby people, which improves the general health level of society as less people overall fall sick c. Draw diagram

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i. Show divergence between MPB and MSB by MEB ii. Show socially optimal output iii. Show market equilibrium iv. Show welfare loss d. Explanation i. There is a divergence between the MPB and MSB, due to the positive MEB caused by the general improvement of societys health ii. Thus, assuming there are no externalities of production, while the free market produces at Q1, it is less than the socially optimum level of Q2. iii. This under-allocation of resources for the production gives rise to a welfare loss of area abc iv. Hence, market failure occurs as societys welfare is not maximised 7. Negative externality of production a. Define i. When the production of a good harms the welfare of a third-party, who does not receive compensation for the effect b. Example i. Polluting dirt particles from heavy steel factories that harms the surrounding populations, as they suffer from lung irritation and have a higher risk of lung cancer c. Draw diagram i. Show divergence between MPC and MSC by MEC ii. Show socially optimal output iii. Show market equilibrium iv. Show welfare loss d. Explanation i. There is a divergence between the MPC and MSC, due to the negative MEC caused by pollution ii. Thus, assuming there are no externalities of consumption, while the free market produces at Q1, it is greater than the socially optimum level of Q2. iii. This over-allocation of resources for the production gives rise to a welfare loss of area abc iv. Hence, market failure occurs as societys welfare is not maximised 8. Imperfect information/ asymmetric information a. Moral hazard b. Adverse selection c. Market power i. Firms know more than consumers and can exploit them d. Externalities i. People are unaware of the side effects on third parties e. Merit/ demerit goods i. Government knows more about the effects, and tries to influence consumption f. Solutions i. Consumer protection Done by Nickolas Teo Jia Ming

 Anti-trust laws Bans against misleading advertising ii. Education campaigns Health risk on cigarette packs 9. Factor immobility a. Occupational labour immobility i. Underutilisation of labour due to mismatch of skills No productive efficiency ii. Solutions Retraining Curbing trade unions Reducing minimum wage b. Geographical labour immobility i. Workers unwilling to travel to work Too far to travel Hesitant to relocate family ii. Solutions Improve transport infrastructure Buses more frequent and faster Trains more reliable and cheaper Subsidise firms shuttle services

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Unit 4 answering skills (Firms and how they operate)

Disclaimer: These notes are based on my opinion on how the questions should be tackled. Do take it with a pinch of salt, and practice to see how they are applied. 1. Market power is the ability for firms to reduce output to raise prices and earn more profit a. Keyword is ability, as they might not do so due to other firm objectives 2. Categories to compare market structures a. Number of firms b. Type of product i. Substitutability c. Information available i. Imperfect ii. Perfect d. Barriers to entry i. Natural ii. Artificial e. Price discrimination f. Non-price competition i. Advertisements ii. Differentiated products Physical Image g. Price determination i. Monopoly demand curve ii. Kinked demand curve iii. PC demand curve h. Profits i. Super normal ii. Normal iii. Sub normal i. Equity i. Supernormal profits Redistribution of income Transfer of welfare ii. Price discrimination j. Research and innovation k. Variety i. Homogenous ii. Differentiated l. Efficiency i. Allocative ii. Productive m. Economies of Scale 3. Small firms vs large firms argument Done by Nickolas Teo Jia Ming

a. Supply reasons i. Availability of economies of scale State type Lower production costs as firm size approaches the MES o Cost savings can be passed on to consumers through a lower price o Quantity of product also increases, allowing more wants to be fulfilled MES occurs early at low output results in survival of small firms b. Demand reasons c. Impact on society i. Price discriminate Charge different prices in different markets for the same drug, based on the ability to pay of consumers in each market o Increase allocative efficiency o Transfers consumer surplus to producer Inequitable ii. Restrict output to raise price More Supernormal profit that enables R&D and innovation o Increased productive efficiency o New products causing product differentiation Boosts variety Allocatively inefficient as P > MC o Value of good to consumer is greater than value of good to producer, hence there is still welfare to be gained from increased output o Welfare loss Consumer exploitation o Transfer of welfare from consumer to producer o Less variety if firm does not differentiate its products iii. Less competition, due to higher barriers to entry from predatory pricing X-inefficiency Higher chance of collusion with other firms to increase profits 4. When asked about pricing decisions, also state that the factors decides output as well 5. When talking about profit-maximising output at MC=MR a. Need to say why at other points is not maximum profits i. MC > MR More profit to be gained when output is reduced ii. MR > MC More profit to be gained when output is increased 6. When drawing market structure graphs, state the assumption that the market is unregulated and firms are profit maximising

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7. If talking about big firms being able to have cost saving from reaping economies of scale, need to assume that it is passed on to consumers in the form of lower prices if talking about benefits 8. When talking about price discrimination a. Define b. Identify type of discrimination c. Test to see if it fulfil the conditions for price discrimination i. Market power ii. Different groups of consumers iii. Able to segregate markets iv. Able to limit seepage v. Same good 9. To tackle the harms of a monopoly a. Nationalisation b. Privatisation with regulation i. Marginal cost pricing Socially optimal Loss incurred o Need government subsidy or two part tariff ii. Average cost pricing

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Unit 5 answering skills (How the Macroeconomy works)

Disclaimer: These notes are based on my opinion on how the questions should be tackled. Do take it with a pinch of salt, and practice to see how they are applied. 1. The AE/Y curve shows: a. Multiplier effect i. Step up diagram b. Inflationary and deflationary gap i. Relative to the full employment equilibrium c. Injections and withdrawals i. Shifts in AE d. Components of AE (C + G + I + X-M) e. Explain the equilibrium model of NY i. When below equilibrium, AE > Y (Output) Expenditure increases to ii. When above equilibrium, Y > AE 2. The AD/AS curve shows: a. Full employment i. Perfectly inelastic portion of AS b. High, sustained economic growth i. Actual growth Movement of AE ii. Potential growth Movement of AS c. Components of AD (C + G + I + X-M) 3. A change in autonomous consumption (a) and injections (I,G X-M) shifts the AE/AD function, while a change in MRT, MPM, MPS pivots the AE function. a. Increase in MRT, MPM or MPS makes AE more elastic 4. Aggregate supply is affected by a. Technological improvements b. Investments in capital and labour c. Quantity and quality of factors of production 5. Stagflation a. It is when the economy faces both increase unemployment and rising inflation b. Caused by a decrease in aggregate supply i. AS shifts upwards, as it is only in the SR ii. Caused by an increase in the price of the factors of production Wage raise Capital becomes scares due to low saving rates 6. Investments a. Has multiple effects i. SR AD increase GPL and GDP increases Done by Nickolas Teo Jia Ming

 ii. LR iii. BOP

Unemployment falls while inflation rises, and actual growth occurs AS increase Real national income rises while GPL falls Actual growth and lower inflation Capital and financial account improves in SR Current account worsens in LR o Due to outflow of profits o Counted under income transfers

7. Terms of trade a. Definition i. It is the ration of the prices of exports to the prices of imports ii. It represents the ability to buy imports with exports b. Explanation i. When TOT improves, it is due to Price of exports increasing Price of imports decreasing Both Which in turn is dependent on the D&S of the X and M, and their elasticity. ii. Hence the country can obtain more imports from a given amount of exports 8. Interest rate a. It is the money earned from saving money in banks, and affects the opportunity cost of consumption as well as the level of borrowing by firms and consumers 9. How something affects the circular flow of income a. Define circular flow of income i. It is the expenditure by consumers on goods and services produced by firms in the product market ii. The firms then spend their money on the factor of productions, which are land, labour, capital, and entrepreneurship, in the factor market, through rent, wages, interest and profits iii. There are injections into the circular flow by banks, government and foreigners, in the form of investment, government expenditure and export respectively. These will expand the circular flow of income iv. There are also withdraws caused by households saving part of their incomes in banks, or paying government taxes or on imports from foreigners. These withdrawals shrink the circular flow of income. b. Explain how the something affects the injection, withdrawals or consumer spending 10. Impact of lower circular flow of income on SOL a. Less real national income, as firms lower wages and some people become unemployed due to reduction in output i. Less material SOL as citizens can afford less goods and services to fulfil their wants

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ii. Less non-material SOL for the unemployed as they are upset at being retrenched, and will be a burden on family and friends until they can find employment b. However, if the economy was near full employment i. The fall in general price level could be greater than the fall in nominal income, leading to a rise in real income, increasing the material SOL instead, as people can consume more goods and services than before c. Also, if the cause was government spending on areas that do not affect consumes greatly, like defence i. The incomes of citizens are not strongly affected, hence little change in material SOL d. Also, non-material SOL could increase, as the lower output would mean that workers have shorter working hours, and can spend more time with their family e. There are also other factors that impact the SOL other than national income, such as i. Greater levels of innovations that increase the quality of goods and services, as the bleaker economic outlook spurs firms to be more competitive to retain their market share ii. Government policies that can counter the effects of the lower national income f. Evaluation i. Circular flow of income only useful in measuring material SOL Need other indicators like Gini coefficient, pollution index 11. Explain the multiplier effect whenever any component of AE/AD changes 12. Multiplier assumptions: a. MPC is the same and constant for all households in an economy b. The economy is in a state of less than full employment, having room for growth c. A MPC values of 0.5 is assumed when answering questions 13. Long Multiplier explanation (Use step-up diagram): a. Initially the equilibrium NY is at NY 1 b. When there is a $100m *Change in AE*, planned spending/output exceeds planned output/spending. c. This shifts the AE function from AE 1 to AE 2 , as seen in figure 1. d. Resulting in a depletion/build-up of firms inventory e. Assuming that there are unemployed/employed resources available in the economy, firms counter this change by increasing/decreasing their output by $100m, causing NY to increase/decrease by $100m too, as seen from the movement from point a to c in figure 1. f. Assuming MPC is 0.5, half of the additional/subtracted $100m to households will/will not be spent on domestic goods and services, while the remaining $50m is/is not withdrawn through savings, taxes and imports. g. The additional/reduced spending will create extra/less income for the suppliers of the additional/subtracted domestic goods and services bought. h. This process continues with each round, resulting in a long chain of additional/reduced income, withdrawals and consumption.

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This process stops when the total change in withdrawals equals to the initial change in AE j. The equilibrium NY is now at NY 2 , $200m more/less than NY 1 k. Therefore the increase/decrease in AE aids/retards growth through the multiplier effect as it increases/decreases NY by a larger then proportionate amount. l. Hence influencing the policy decisions of the government 14. For a short multiplier paragraph a. When the income of ___ increases, their expenditure will increase by a factor of the marginal propensity to consume b. This becomes the income for another party, who in turn spends more, to generate more income for others c. Thus, it creates a cycle, which results in the increase in real national income being greater than the increase in ___

i.

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Unit 6 answering skills (National Income statistics)

Disclaimer: These notes are based on my opinion on how the questions should be tackled. Do take it with a pinch of salt, and practice to see how they are applied. 1. Measure of economic performance a. 4 aims i. Economic growth ii. Unemployment iii. Inflation iv. BOP b. Non-economic indicators i. Quality of life ii. HDI c. Relativity i. Countries ii. Time 2. Indication by GDP a. When GDP increases i. Higher output, income and expenditure Lower unemployment and higher economic growth ii. If relatively higher than other countries, the country is performing better b. Components i. If consumption is high, but investment is low The country may have little potential growth o Lead to demand push inflation Lower future actual growth o Lack capital goods needed to sustain growth c. Limitations i. Does not take into account Components of output o Defence expenditure Income distribution o Material living standard not accurately reflected Non-material living standards Population size Inflation 3. Indication by BOP a. It is the external performance of the country b. When BOP surplus i. Financial and capital account surplus Inward flow of I o Greater future actual growth due to capital accumulation o Increases potential growth ii. Current account surplus Done by Nickolas Teo Jia Ming

 Boosts GDP due to (X-M) iii. Other benefits Build-up of foreign reserves and wealth o Economically strong and stable c. When BOP deficit i. Current account deficit Imports bring in foreign technology o Boosts future actual growth o Increases potential growth ii. Financial and capital account deficit If due to investment in other countries o More profits in future d. For Singapore i. Constant surplus Need to compare across years to determine progress

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Unit 7 answering skills (Economic growth)

Disclaimer: These notes are based on my opinion on how the questions should be tackled. Do take it with a pinch of salt, and practice to see how they are applied. 1. Economic growth is the rate of change of the countrys GDP 2. When stating the impact on actual economic growth a. First state that NY increase or decreases b. Hence there is actual growth or negative growth 3. When stating the impact on potential economic growth a. First state that NY f increase or decreases b. Hence there is potential growth or negative potential growth 4. Pros and cons of growth a. Pros i. More income Greater SOL ii. Less unemployment Greater allocative efficiency iii. Allows for income redistribution measures iv. Promotes business confidence More investment Potential growth b. Cons i. Threat of inflation ii. Might cause structural unemployment iii. Damage of environment iv. Widening income gap v. Less non-material SOL

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Unit 8 answering skills (Unemployment)

Disclaimer: These notes are based on my opinion on how the questions should be tackled. Do take it with a pinch of salt, and practice to see how they are applied. 1. When evaluating the policy against unemployment a. Consider the effectiveness of the policy against various types of unemployment 2. If GDP increases but unemployment increases as well, it is due to a. Time lag in businesses adapting to recovery b. How unemployment is calculated 3. Ideal unemployment rate a. Non-Accelerating Inflation Rate of Unemployment i. Below this level of unemployment, inflation sets in

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Unit 9 answering skills (Inflation)

Disclaimer: These notes are based on my opinion on how the questions should be tackled. Do take it with a pinch of salt, and practice to see how they are applied. 1. Types of inflation a. Cost-push b. Demand-pull c. Core inflation d. Headline inflation 2. Inflation is the rate of change of CPI a. Thus dont use inflation rate 3. When talking about the impact on inflation a. State that the GLP increases or decreases first b. Then state the inflation is being managed or worsening 4. For demand-pull inflation a. State the assumption that the economy is near or at full employment 5. Singapores top 3 sources of inflation a. Housing and transport i. Top contributor as seen from big gap between core and headline inflation 2% difference b. Wages c. Imports

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Unit 10 answering skills (International economics)

Disclaimer: These notes are based on my opinion on how the questions should be tackled. Do take it with a pinch of salt, and practice to see how they are applied. 1. Consequence of small economy a. Small domestic market i. Firms need to export to have sufficient demand to reap EOS b. Lacks many resources i. Country need to import resources for production and consumption 2. To explain protectionistic measures a. State change in price and quantity imported and domestically produced b. For consumer and producer surplus, show i. Old surplus ii. New surplus iii. Change in surplus c. Show the Dead Weight Loss d. Show the tax revenue or quota e. If quota, show i. What happens if the licences are sold Tax revenue for government ii. What happens if it is given to domestic importers Adds to producer surplus iii. What happens if it is given to foreign importers Welfare loss f. Net effect on society g. Evaluation i. Compare with other methods like subsidies, tariffs or quota ii. Decide on efficiency based on elasticity 3. Reasons for imports a. Difference factor endowments i. Comparative disadvantage ii. Higher opportunity cost of producing domestically iii. Cheaper to import b. To gain technical knowledge c. Focus is on another sector i. Unable to produce imported goods as efficient as other countries ii. Still need that good iii. Thus import from other countries 4. Causes of comparative advantage a. Differences in factor endowments i. Assumes that factors are immobile b. Leads to specialisation in the industry which the factor endowments are suited for i. Singapore specialises in high-tech manufacturing, due to our skilled labour and abundance of capital Done by Nickolas Teo Jia Ming

c. Thus opportunity costs fall, leading to comparative advantage d. Factors that affect comparative advantage i. Regulation ii. Labour productivity iii. Labour wages e. How the factors they affect the comparative advantage i. ___ affects the cost of production, hence there is higher/lower opportunity, leading to a lower/higher comparative advantage 5. Explaining comparative advantage a. Definition i. It is the country with the lower opportunity cost relative to another country b. Assumptions made i. The countries only produce two goods ii. The cost of production of each of the two types of goods is the same iii. The good produced is homogenous c. Calculation i. Let the first good be units produced, and the second good be units d. Answer structure i. Which country has the lower opportunity cost ii. Support with figures if possible iii. State the assumptions iv. State which country specialises in what due to lower opportunity cost 6. Effects of comparative advantage a. Affects the supply of goods for trade i. Trade and interdependence develops b. Total output of the world increases when countries specialise i. Consumption possibility increases 7. Explaining patterns of trade a. Determinants of the supply of domestically-produced goods i. Comparative advantage Due to different factor endowments affecting opportunity cost ii. Government policies b. Determinants of the demand for imported goods i. Taste and preferences Variety ii. Income iii. Technological transfer c. Illustrate with examples i. Assumptions Only countries are present Only two goods are produced Constant returns to production iii. Opportunity cost of second good = ii. Opportunity cost of first good =

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No transport or transaction costs Same amount of units of resources

8. Impacts of trade a. Benefits i. Consumption possibility increases ii. Product variety increases iii. Engine of growth Causes country to shift from labour intensive to capital intensive industries o Investments allows purchasing of capital, like machines and better quality raw materials Promotes economic growth o Changes the area of comparative advantage, due to Specialisation Better trained workforce Capital goods from investment iv. Allows firms to reap EOS Lowers prices and increases productivity v. Transfer of technology b. Harm i. Vulnerability to global instability GDP of export dependent countries falls during a global recession ii. Structural unemployment Labour cannot keep up with shift to capital intensive industries iii. Domestic firms cannot compete Other countries have comparative advantage iv. Susceptible to dumping 9. Impacts of FDI a. Benefits i. Increases AD Multiplier effect Country imports more Helps the country that invested, assuming that their goods are exported to the FDI receiving country ii. Lower unemployment Skilled workers benefit more as they are more supply price inelastic iii. Transfer of knowledge and technology iv. Improve productive capacity of economy Lowers the general price level when near full employment v. Improves export as more goods are produced b. Harm i. Outflow of foreign firms profits BOP and exchange rate decrease ii. Overdependence on FDI

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10. When arguing the flow of hot money, you need to consider both exchange rate and interest rate a. If you want to only consider one, use ceteris paribus. 11. When looking at globalisation a. Consider two effects i. Increased trade ii. Increased factor mobility Labour Capital b. Consider the push and pull factors for factor mobility i. Pull Tax holidays Policies to attract skilled labour ii. Push Increased competition for foreigners leads to brain drain Outsourcing to countries with lower wages

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Unit 11 answering skills (International payments)

Disclaimer: These notes are based on my opinion on how the questions should be tackled. Do take it with a pinch of salt, and practice to see how they are applied. 1. Trade usually involves comparative advantage, so need to explain it 2. When talking about exports, always includes imports, even if its just to say assuming that it remains constant. And vice versa 3. How Free Trade Agreements affect the country a. Bilateral. Multilateral and regional FTAs i. Removes protectionistic barriers to trade ii. Could have trade creation or diversion depending on after-FTA prices b. Benefit i. Increases net exports Aggregate demand increases Economic growth Balance of payments improves c. Harms i. Increased vulnerability Global shocks will impact economy, as trade suffers Reliant on export industry, so big trouble during recession ii. Transfer to technology Allow other countries to gain knowledge of innovative products and methods Weakens comparative advantage as they become more efficient 4. Impact of BOP on exchange rate a. State BOP surplus or deficit b. State payment or receipts more c. State demand or supply for currency increase or decrease i. Draw graph ii. Y axis: Price of *own currency* in *another currency* d. Presence of upward or downward pressure e. Impact depends on exchange rate system i. Freely floating or managed Result in appreciation or depreciation ii. Fixed Impact on international reserves 5. For questions regarding MAS gradual appreciation of Singapore currency a. Singapore does not fulfill MLC i. Singapores PED for import is less than 1, as inputs imported are essential for firms ii. Singapores PED for exports is less than 1, as we export high-end goods like refined oil and chemicals, that have an inelastic demand as it is used in many activities b. The constant gradual appreciation keeps Singapore in the short run, thus the long run is not considered Done by Nickolas Teo Jia Ming

c. Singapores currency is undervalued, hence we have a large foreign reserve for gradual appreciation 6. To argue about Singapore fulfilling MLC a. First state that usually MLC is fulfilled, and state its effects b. Then say that Singapore is a unique case

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Unit 12 answering skills (Macroeconomic policies)

Disclaimer: These notes are based on my opinion on how the questions should be tackled. Do take it with a pinch of salt, and practice to see how they are applied. 1. Stagflation a. When there is an increase in the CPI (not inflation rate) and an increase in the unemployment level (number of people unemployed) 2. Usage of policies a. FP targets internal problems i. Economic Growth ii. Inflation iii. Unemployment b. Exchange rate policy target external problems i. BOP c. Supply side policy targets all problems in the long run 3. When asked to evaluate the policies used a. State the cause of the need for the policies i. Market failure ii. 4 government aims b. State what policies can be used c. Elaborate on how the policy tackles the problems d. Drawbacks on policy e. Evaluation on which policy is better 4. Exchange rate affecting BOP a. When the currency depreciates b. Price of exports decreases, price of imports increase c. In the short run, the sum of the demand price elasticity of exports and imports is less than 1, thus the MLC is not fulfilled d. This causes the net exports to fall, worsening the BOT and hence BOP e. But in the long run, the sum of the demand price elasticity of exports and imports is greater than 1, thus the MLC is fulfilled f. This causes the next exports to rise, improving the BOT and hence BOP 5. Impact of budget balance a. Deficit i. Government expenditure is greater than revenue from taxes Spend on infrastructure, training, subsidies etc. ii. Expansionary fiscal policy Aggregate demand increases o General price level may increase Export prices increase Export less competitive Extent depends on elasticity More elastic More loss in quantity traded o National income increase Done by Nickolas Teo Jia Ming

 More import demand through marginal propensity to import Worsens BOP o Output (and employment) increase More excess goods to export Less imports needed See impact of supply curve on world trade graph If spent on supply policies o Higher future GDP Greater material SOL iii. Borrow to finance spending Higher tax rate for future generations Less real national income Less material SOL iv. Use reserves Short-run measure v. Crowding out effect as government borrow from banks Higher interest rates as demand increase Less investment and consumptions Less real national income Less material SOL

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Econs evaluation skills

Disclaimer: These notes are based on my opinion on how the questions should be tackled. Do take it with a pinch of salt, and practice to see how they are applied. Make sure that your evaluation answers the question! Possible categories 1. 2. 3. 4. 5. Necessary evil LR/SR effects Impact on DC/ LDC Make suggestions / judgments Government failure a. Difficulty in measuring MEB/MEC b. Difficulty in determining adequate price floor/ celling c. Inefficient (allocative and productive) in government provision without profit incentive Multi-pronged approach a. Say that the problem is complex, hence need many prongs b. Need to state exactly what are the prongs i. E.g. LR and SR method Test assumptions a. Do firms really transfer cost savings to consumers Empathy a. Cost benefit analysis of people affected Problems with measurement a. Inaccurate b. Does not take into account time lag Relevance to the country a. Small or big economy b. Open or less open economy c. Does it correspond to the aims of the economy d. Will the drawbacks be more or less severe due to the nature of the country Sustainability of policy a. Debt from borrowing b. Depletion of foreign reserves c. Political ramifications For microeconomics a. Equality vs equity

6.

7. 8. 9.

10.

11.

12.

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Real life examples for Economics

Scarcity, choice and Opportunity cost:
Oil o Scarcity Earth is thought to hold 2 trillion barrels of oil initially Half has already been consumed Choice Oil has many alternative uses Products from a typical barrel of US oil 46% for gasoline 26% for diesel and other fuel 11% other products 9% jet fuel 4% heavy fuel oil 3% asphalt 1% lubricant In India, crude oil supplies about 40% of their energy needs 3% for asphalt 10% for jet fuel 18% as petrochemical feedstock (for chemicals, plastics etc.) 23% for heating oil and diesel fuel

Market system:
China, once a command economy, is now more like a free market economy o In 2010, China had about 10 million small businesses o However, key resources industries are still dominated by public firms. 159 Large state-owned enterprises (SOE) (Unlike Singapores Government Linked organisations (GLO)) Utilities, heavy industries, energy resources o Advantage In 1960, 60% of Chinese were employed in agriculture. By 2000, less than 30% were employed in Agriculture Move to higher-income, more stable jobs in the secondary and tertiary industry Better standard of living Now it is the worlds fastest growing major economy Average growth rate of 10% over the past 30 years Nominal GDP rose, from 67.9 billion Yuan in 1952 to 18232.1 billion in 2005 Poverty rate fell from 53% in 1981 to 2.5% in 2005 o Disadvantages Large gap between rural and urban areas Low equity Pollution Done by Nickolas Teo Jia Ming

 Air pollution measured by PM2.5 was over 500 (called beyond index) in November 2010, February, October, December 2011 E-waste on 2.3 million tonnes in 2011, second largest in the world. A 2007 World Bank report states that outdoor air pollution causes 350,000 to 400,000 premature deaths a year. Another 300,000 from indoor air pollution

Elasticity:
Price elasticity of demand o Fast food is demand price inelastic From a research article, 10% increase in price of fast food caused a 5.7% lower frequency of weekly fast food consumption o Food elasticity can be measured by proportion of income spent on it Indias household food budget is 56% of income, the UK is 15%, the US is 12% o UK price elasticity of demand in 1992 Fresh meat = 1.4 Spirits = 1.3 Cereals = 1.0 Durable goods = 0.9 Beer = 0.5 Tobacco = 0.5 Bread = 0.0 o According to a meta-analysis of 86 studies in 2001, tobacco products in Australia have a mean price elasticity of -0.48 o In US, from a meta-analysis in 1996, in the short-run (below 1 year), gasoline has an average demand price elasticity of -0.26. Long run is -0.58. Price elasticity of supply o Oil Between 2002 to 2006, 0.05 for the world, 0.09 for OPEC Between 2006 to 2010, 0.02 for the world, -0.03 for OPEC Between 2007 to 2008, 0.01 for the world, 0.04 for OPEC o From wiki 1.61 in the short run for Gasoline 7.0 in the long run for tobacco 1.6-3.7 in the long run for housing Income elasticity of demand o From wiki Automobiles (2001) = 2.98 Books = 1.44 Restaurant meals = 1.40 Tobacco = 0.64 Margarine = - 0.20 Public transportation (2008) = - 0.36 A persons own life (value of life) = 0.5 to 0.6

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Cross elasticity of demand o From wiki, data from 2008 Margarine price change against butter demand = +0.81 Pork price change against beef = +0.28 Food price change against Entertainment = -0.72

Market failure:
Examples of externality o Negative Air pollution Affects farmers (affects crop quality), public health (more likely to fall sick), and old buildings (acid rain degrade buildings) Air pollution causes necrotic lesions in crops, reducing their growth Urban outdoor air pollution causes about 1.3 million deaths worldwide yearly Famous buildings like Taj Mahal, Notre Dame, the Colosseum, which are made out of limestone and calcareous stones are hard hit by acid rains, and need constant renovation Overfishing Leads to Tragedy of the commons Depletion of a shared resource by individuals, acting independently and rationally according to each one's selfinterest, despite their understanding that depleting the common resource is contrary to their long-term best interests. Aka market failure Excessive antibiotics Leads to resistance in bacteria. o Positive Network effect (can link to EOS) When an individual buys a product that is part of a network (e.g. WhatsApp), he increases the usefulness of the product to others who also have it (They can text more people for free). Thus, each new user increases the value of the same product owned by others. Knowledge spill over (assuming its public domain and not under patent) Renewable energy Benefits world as it reduces net environmental pollution

Government regulation:
Market power o Key Performance Indicator

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SingTel was fined for poor service when there was a disruption of the EPL broadcast Need to consult with government organisations when raising prices of necessities like bus and train fares

Market structure:
Monopoly o Utilities PUB Government owned Singapore Power Government-linked company Oligopoly o Telecommunication SingTel Starhub M1 o Transport SMRT SBS

Taxes:
Carbon Emissions-Based Vehicle Scheme (CEVS) to tax vehicles for their pollution emitted o Tax on consumption of vehicles Tax revenues accounted for 91.2% of the governments operating revenue in 2010 o Income tax contributed 45% o GST contributed 19%

Inequality:
Gini coefficient from 0.425 in 1980 to 0.481 in 2000 GST offset package in 2007, a form of transfer payment, to help lower income households with the increased GST CPF contributions for elderly workers are lower o Greater employability as firms have to pay less contribution to CPF o Greater take-home pay, as less of the income is transferred to CPF account

Fiscal policies:
Resilience package in 2010 o $20.5 billion

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Supply side policies:

Capital o SPRING Singapore Funding for SME, 70% by SPRING, 30% by banks o Economic Development Board Attracts FDI o IE Singapore Encourage overseas expansion o Transport network 8 MRT lines in Singapore by 2020 Labour o Workforce Development Agency Handles employment policies and laws Aims to alleviate structural unemployment Workfare Income Supplement scheme Workfare Training Support scheme o Tripartite system National Trades Union Congress Ministry of Manpower Singapore National Employers Federation o Flexible wage system Consists of Basic wage Monthly variable Annual variable Combat sticky down wages Increase elasticity of AS Less inflation when AD increases Land o Release of government land For building 14,200 homes Increase supply to lower prices to fight inflation o Additional stamp duty for people buying houses 10% for foreigners or corporations buying residential property 3% for PRs buying their second home and above 3% for Singaporeans buying their third home and above Increases the housing prices to lower the demand for houses

Globalisation:
Outsourcing o Singapore outsources the interpretation of X rays to Indias radiologists, in a process called teleradiology, cutting down healthcare costs in Singapore Trade Done by Nickolas Teo Jia Ming

o Labour o Singapores labour is ranked among the Top 5 in Asia Free Trade Agreements o 18 regional or bilateral FTAs, with 24 trading partners (countries) o Regionals like the ASEAN Free Trade Area o Bilateral like China-Singapore Free Trade Agreement (CSFTA)

Singapore is ranked to have the most open economy for international trade and investment The value of trade in Singapore is 3 times the GDP

Case studies:
Global Financial Crisis (2007 - now) o Caused by the bursting of the US housing bubble (subprime mortgage crisis) Caused by expectation of housing prices to rise Median sale price in 2007 was USD$250,000 Average sale price in 2007 was USD$310,000 And high bank expectation led to easy loaning Financed risky (subprime) loans, with mortgages as security o Price not rising as expected People lose money Cannot repay loans Banks lose money Credit crunch as banks tighten lending policy (no rise in interest rates) Less loans made Less investment and consumption Multiplier effect o When America sneezes, the world catches a cold American spend less Export of countries all fall Multiplier effect o Idea of Too big to fail o Impact on Singapore 9900 investors affected by Lehman Brothers collapse 3900 investors got back $107 million, after a misleading sale (Agents did not clearly specify the risks) probe Non-oil domestic exports declined 7.9 per cent in 2008 FDI inflows declined by 32 per cent in 2008, after reaching a historic peak of S$48 billion in 2007. Singapores domestic economy contracted by 0.5% in the third quarter (Q3) of 2008 year-on-year Euro Debt Crisis (2009 now) o Started in Greece Unsustainable public sector wage and pension commitments drove debt increase Housing bubble caused banks to accumulate private debt Bailout from government transferred private debt to sovereign debt o Policies to tackle crisis 750 billion euro given to the newly created European Financial Stability Facility (EFSF) on 9 May 2010 Goal is to address the crisis by providing financial assistance to Eurozone states in financial difficulty

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Raised funds through bonds Irish bailout of 85 billion euros Portuguese bailout of 78 billion euros European Fiscal Compact signed on 2 March 2012 Not yet in effect, in effect when: o The first day of the month following its ratification by the twelfth Eurozone member o 1 January 2013 All ratified member states must enact laws that places their national budgets in balance or surplus o Raise taxes, cut spending European Central Bank Lower interest rates o Interest rate lowered to 0.75% in July 2012, going below 1% for the first time o Was at 2.0% in February 2009 Providing private banks in weaker countries with cheap loans of more than one trillion euros Euro Plus Pact adopted in March 2012 Aims to foster competitiveness o Deregulating industries o Improving infrastructure and education o Abolishing wage indexation Where wages rise to maintain purchasing power of income in times of inflation Aims to foster employment o Lowering taxes on labour Aims to contribute to the sustainability of public finances o Cut government spending on pensions, health care, social benefits etc. Aims to reinforcing financial stability As of 15 November 2011, Estonia, Greece, Ireland, Malta and Spain are the top 5 reformers. o Impact on Singapore If euro crisis worsens, Singapore will be among the worst-impacted in Asia Export to Eurozone is 12% of our GDP Second only to Hong Kong in private sector holdings of Eurozone debt and equities o Aka we bought Eurozone bonds US Twin Deficits o US runs both a fiscal and current account deficit Government expenditure more than revenue Deficit of USD$1.3 trillion in 2010 Imports more than it exports Deficit of USD$40 billion in 2010 Done by Nickolas Teo Jia Ming

China-US Trade Spat

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Singapore Stats:
Population: 5.2 million, 3.3 million Singapore citizens Inflation rate (%) Balance of Payments (S$ billion) Current account (S$ billion) Capital and Financial account (S$ billion) Unemployment (%) Economic Growth (%) GDP @ 2005 prices (S$ billion) 2008 6.6 19 2009 0.6 16 2010 2.8 57 2011 5.2 21

37 -22

44 -33

76 -17

72 -50

2 4.9 251

2.1 14.8 249

3 -1 286

2.2 1.7 300

Latest stats: o Inflation Core : 2.7% Headline: 4.7%

Core inflation for Singapore for the past 10 years is around 1.8%

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