QUESTIONS Flashcards
(11 cards)
ADAS
n the short run, increase in government spending on green technology causes aggregate demand (AD) to increase as G is a component of AD. This is represented by a rightward shift from AD1 to AD2 in the diagram below.
The rise in AD causes a shortage of goods and services and stock depletion. Firms will step up production and there would be increase in real national output. The rise in production triggers the multiplier process whereby the increase in AD causes a multiplied increase in real national output from Y1 to Y2. This is known as actual economic growth.
With the low unemployment rate as given in Table 1, the UK economy is operating near full employment where there are limited factors of production in the short run. As firms increase production, there will be supply ‘bottlenecks’ due to limited factors of production available and firms will be required to use more inefficient factors of production, resulting in rise in unit cost of production. This rise in cost of production translates to increase in general price level of final goods and services from P1 to P2.
In the long run, increased government spending on green technology improves the quality/ quantity of resources through discovering more sources of energy and increase the productive capacity of the economy. This increase the long run aggregate supply and the LRAS curve shift rightwards from LRAS1 to LRAS2 as shown in the diagram, this indicates an increase in productive capacity of the UK economy. UK will experience both actual and potential economic growth.
Explain one possible relationship between GDP and general price level in Singapore.
GDP increase à rise in confidence of households due to job and income stability and investors due to greater expected returns à rise in C and I à rise in AD . Assuming nearing full employment, shortage/unanticipated decrease in stock levels will result in an increase in price levels and production. If the economy is at full employment, as firms try to increase production they would run into ‘supply bottlenecks’ due to the limited FOP. Firms would be forced to use more inefficient FOP, resulting in increase in unit cost of production, which will be passed on to consumers in the form of higher prices.
OR
GPL increasing from a situation of economic stagnancy (deflation) may lead to an improvement of economic outlook as prices are rising slightly indicating greater expected returns for investors –> increase in I–> rise in AD à rise in production of output by firms à rise in GDP
Explain why governments seek to achieve inclusive economic growth.
Inclusive growth is defined as economic growth that is broad-based, meaning the growth is driven by multiple sectors and not just certain sectors and where the benefits of growth (e.g. increase in income) is equitably distributed. Lastly, inclusive growth would create good job opportunities (i.e. allow for progression, skills development and growth in income).
Governments seek to achieve inclusive growth because of the positive consequences it would bring. This includes ensuring that when the economy grows, productive employment opportunities are also given to the lower skilled/ poorer income groups rise in Y of the low income group à better access to education and healthcare services à productivity increases à quality of labour rises à productive capacity rises à LRAS rises à potential growth.
OR
In addition, inclusive growth ensures that trust and social cohesion (Extract 3) is maintained which may attract investments as there is less uncertainty and higher profitability. Investment expenditure rise, AD rise as AD=C+I+G+(X-M). This leads to depletion of stocks and firms will increase production, leading to actual economic growth. Improvement in social cohesion would also lead to an improvement in non-material SOL or well-being as citizens would feel a greater sense of belonging to the country and a sense of safety.
assess the consequences of increasing investment in high-tech industries, on Singapore’s unemployment.
[R1] Increasing investment can reduce demand deficient unemployment.
Firstly, with increasing investments in high-tech industries, this would mean that investment expenditure (I) would increase, thereby increasing AD, ceteris paribus. With AD increasing, assuming that Singapore is nearing full employment, there is a shortage at the current price level, leading to stock depletion. Firms would step up production, thereby increasing the derived demand for workers, thereby reducing demand-deficient unemployment.
[R2] Increasing investment can increase structural unemployment.
However, increasing investments in high-end industries may likewise cause better adoption of technology (Extract 3), displacing workers. Due to technology development, machines and capital equipment are now relatively more efficient than labour. As firms are profit motivated, they will substitute labour with machines to reduce their cost of production. This reduces the demand for labour in traditional manufacturing sectors/ lower-skilled labour. In addition, These workers who are unemployed may not possess the skills required to transit to sunrise (high tech) industries such as aerospace engineering/robotics sectors. Therefore, there is a skills mismatch and a rise in structural unemployment.
EV (Situation + Weigh)
The overall impact on unemployment rate depends on the characteristics of Singapore. Considering that Singapore has relatively small segment of low-end manufacturing activities, and the skills level of the workforce is relatively higher than the rest of the world, the issue of structural may not be a significant concern. Moreover, Singapore government has also implemented different training schemes for the affected workers and this will further reduce the rate of structural unemployment. As such, the rise in high tech investment is likely to lead to an overall fall in Singapore’s unemployment rate.8
OR
EV (Situation + Weigh)
Considering that Singapore is facing an ageing population and the skills required to join the high tech sunrise industries are complex, the rise in high tech investment may result in an overall negative impact on unemployment rate. Even though there are retraining schemes, older workers may not find it worthwhile to attend these training as it takes a long time to master the complex skills to move into the high tech industry. With limited years before retirement, older low skilled workers may not attend these training schemes and therefore, remain unemployed. Furthermore, if the investment is tech/capital intensive, the amount of new jobs created may be small as the production activities are mainly automated. Hence, the overall impact would be a negative outcome and Singapore may experience higher unemployment rate.
[EV]
Many students only pointed out the government intervention to support their judgement. However, this is insufficient. Students are expected to provide contextual evidence, using Singapore’s characteristics, to support their judgement. Better candidates consider the challenges of ageing population that may limit the willingness to attend training or the nature of Singapore labour force (high educated) that may make the transition easier.
With the aid of an AD/AS diagram, explain how the “Professional Conversion Programmes” (Extract 5) will impact Singapore’s actual and potential growth.
The Professional Conversion programme can cause a rise in both the actual output of goods and services and potential output that can be produced in Singapore. In Extract 5, when the Singapore government allocates a portion its budget to launch the Professional Conversion Programmes, it means that the government expenditure (G) will increase, for example, when the Singapore government increases its spending on building training centres and hiring of trainers for its Programmes to equip the workforce with skillsets such as the “use of technology and automation in the 23 sectors”.
The programme can bring about actual economic growth.
Hence, this rise in G will cause a rise in the aggregate demand (AD) for domestically produced goods and services such as trainers for the programmes. Thus the AD shifts from AD1 to AD2. Assume that the economy is operating at less than full employment. Given the same AS curve in the diagram, at OP1, aggregate demand will be greater than aggregate supply of goods and services, giving rise to a unanticipated decline in stocks. As a result, the general price level will rise, incentivising profit maximising producers to increase output as stocks deplete. Hence, we can see that the actual total output of goods and services has increased from Y1 to Y2 in the country, bringing about actual growth in Singapore.
Diagram
Description automatically generated
The programme will also increase the potential growth of Singapore. This is because training workers with new and better skills would increase the productivity of the workers in long run. An increase in productivity means each worker is able to produce more goods and services per worker in the same time period (output per man hour has increased) This increases the productive capacity of the country where the maximum possible total output that Singapore can produce at full employment of all its resources will increase from Yf1 to Yf2. This is shown by the shift of the long run aggregate supply of goods and service curve (LRAS1) to LRAS2, illustrating a rise in the potential growth of Singapore.
Discuss whether the data provided in Table 1 are sufficient to conclude an individual in Singapore has experienced an improved standard of living over time from 2016 – 2018.
Definition of SOL
What is the data required to measure SOL over time? [Hint: the most important indicator is real GDP. GDP at market prices is nominal GDP. What other indicator would you need from Table 1?]
What are the limitations of the data provided?
What additional data would you need to measure the improvement in SOL?
Conclusion
Write out full answer. Stop writing at 14:25
Introduction:
2017: 7.65% growth rate (real GDP growth is: 7.07%)
2018: 6.96% growth rate (real GDP growth is: 6.52%).
Direction: to explain how data in Table 1 is used to assess material SOL but with limitations in measuring both material and non-material SOL
Body:
R1: Data is sufficient
To conclude whether GDP has improved over time, it is important to look at the GDP growth rates. In 2017, the growth rate was 7.65%; in 2018, the growth rate was 6.96%. Together with the data on inflation rate, we can therefore derive the real GDP growth rate, which are 7.07% and 6.52% respectively.
Given that there is positive growth rates, this tells us that the final output produced in the economy has increased over time after adjusting for price changes. This gives us certainty that the quantity of goods and services available for consumption has improved over time rather than the increase in GDP being contributed by potentially prices as well (as seen in nominal GDP). With more wants being satisfied, we can therefore assume that material SOL has improved over time.
Moreover, with the Gini coefficient staying the same while having real GDP increase, we could say it is sufficient to conclude that there is growth without worsening of income inequality on average in the country, and therefore there is inclusive growth allowing for majority of the people having a share of the increased income, allowing for more goods and services to be consumed on average, contributing to material SOL improvements.
R2: Data is insufficient
However, the increase in real GDP may not be sufficient as there is a lack of data on population changes. For example, should the % increase in population (e.g. 10%) be higher than the % increase in real GDP, then the real GDP per capita may have fallen over time, thereby contributing to a fall in material standard of living for an individual in Singapore, despite a rise in real GDP.
There is also the lack of data on non-material SOL. For example, with Singaporeans having one of the longest working hours in Asia and in the world, should the increase in real GDP be due to an increase in working hours, then Singaporeans may actually have more stress/ less leisure time/ more prone to falling sick. All these contribute to potentially a reduction of non-material SOL. The fall in non-material SOL may be greater than the improvement in material SOL such that overall SOL may still fall despite rising GDP figures.
Evaluation/conclusion:
Therefore, I think that the data is sufficient, but does not paint a complete picture of the improvement of SOL of an individual in Singapore over the period of 2016 – 2018. I recommend that other than ensuring that real GDP per capita growth is used for calculating material SOL, other key indicators that are relevant for Singapore, such as number of leisure hours and PM 2.5 levels/ Pollutants Standard Index to track changes in the air quality and thus effects on health of Singaporeans might help us have a more holistic picture of both material and non-material aspects of an individual in Singapore.
Alternatively, the government can use Measure of Economic Welfare, which allows for non-material standard of living indicators such as pollution rates and leisure hours to be included in the calculation, thereby providing a more well-rounded indication of both the material and non-material standards of living.
OR
I would recommend HDI which is a composite index since it takes into consideration GNI per capita, literacy rate (number of schooling years) and life expectancy, as the changes in value of HDI could help to provide a general indication of the change in standard of living, either through the change in the material side (GNI per capita) or a change in the literacy rates and/or life expectancy, which would showcase a change in the non-material side of SOL.
Explain why any two 2011 indicators might have been of concern to the Japanese government.
Indicator: Negative GDP growth rate of -0.6% ie. a recession.
Explain: This indicator should be of concern to the Japanese government as it means that the country experienced a fall in its national income. With this, there would be a fall in purchasing power and the ability to purchase goods and services, causing a fall in the material standard of living of its residents.
Indicator: Negative inflation of -0.3% which is also a sign of deflation.
Explain: Deflation refers to sustained fall in general prices. In a deflationary spiral, consumers anticipate prices to fall further and will defer their spending. Falling prices also reduces the profits of firms and expectation of future consumer demand and hence lower business optimism and expected returns on investment.
Thus, there would be fall in consumption and investment expenditure. This fall in consumption and investment expenditure would likely lead to a fall in AD in the future and hence a further fall in real national income. This would worsen Japan’s recession and increase its unemployment level.
Discuss the usefulness of Table 1 for comparing the living standards between Indonesia and Japan in 2011.
Question analysis
Discuss -> require a two-sided response
R1: Table 1 is useful for comparing living standards
R2: Table 1 is not useful for comparing living standards
Conclusion required with stand and justification on overall usefulness of the data in Table 1. You can provide HDI as an suggested indicator that is more holistic.
Comparing living standards between country -> question requires content from SOL comparison across space and you must include both material and non-material SOL in your considerations.
Defintion
Living standards consists of material and non-material aspects. The material aspect of living standards refers to the quantity and quality of goods and services available for consumption whereas the non-material aspect of living standards refers to the more intangible aspects of life such as amount of leisure time and quality of the environment.
[R1] P1: Table 1 is useful for comparing the living standards between Indonesia and Japan in 2011
Table 1 is useful for comparing the living standards between Indonesia and Japan as it shows the GDP per head (US$) of both countries. GDP is the total money value of all final goods and services produced within a country’s geographical boundary during a given period of time. GDP per head goes one step further by dividing the GDP by the population of the country. As population size across countries will vary, it is important to account for the difference in population sizes when determining differences in standard of living. GDP per head is a more accurate reflection of the average material standard of living of each resident in each country as it shows the amount of goods and services enjoyed by residents of each country on average and can be used to compare material standard of living. Furthermore, the GDP per head data was converted into a common currency which is in US$. Hence it has already been adjusted for difference in exchange rates. Table 1 shows that Japan’s GDP per head is more than 13 times of Indonesia’s in 2011, indicating that residents in Japan had a higher purchasing power and were more able to purchase goods and services, hence enjoyed a higher material standard of living.
Table 1 also reflects the distribution of income in both countries. The Gini coefficient, which measures the extent to which the distribution of income deviates from a perfectly equal distribution, is provided for both countries. Its value lies between 0 and 1, where 0 reflects perfect equality and 1 represents perfect inequality. Since Japan’s Gini coefficient is relatively smaller than that of Indonesia’s, the income distribution is relatively more equal in Japan. This means that the increase in availability of the goods and services due to economic growth is applicable to a wider proportion of the population in Japan than in Indonesia. Hence, the Japanese citizens can be said to enjoy a higher standard of living than Indonesian citizens.
Lastly, Table 1 provides life expectancy data for both countries. Since Japan’s life expectancy is at 82 years while Indonesia’s is at 69 years, we can infer that in terms of healthcare, the Japanese enjoyed better healthcare goods and services and hence enjoyed a better quality of life, compared to the Indonesians. This would mean that the non-material standard of living may be higher in Japan than Indonesia.
[R2] P2: Limitations of Table 1 to compare the living standards of Indonesia and Japan
On the other hand, there are limitations of Table 1’s data to compare the standard of living between both countries. Firstly, the GDP per head data does not take into account the difference in cost of living between Indonesia and Japan. The prices of goods and services in Indonesia may be lower than Japan, where US$100, for example, would be able to buy more goods and services in Indonesia than in Japan. Hence even though Japan’s GDP per head is more than 13 times of Indonesia’s, it does not mean that residents in Japan enjoy 13 times higher material standard of living than residents in Indonesia due to differences in cost of living between the 2 countries.
For a more useful comparison, the GDP per head data should be converted to purchasing power parity (PPP) adjusted GDP per head, using the PPP exchange rate. The PPP exchange rate is the rate at which the currency of one country would have to be converted into that of another country to buy the same amount of goods and services in each country. It equalises the purchasing power of different currencies by eliminating the difference in price levels to determine and compare the purchasing power of the residents in Indonesia and Japan and thus their material standard of living more accurately.
Besides life expectancy, Table 1 also does not reflect other aspects of non-material standard of living of both countries, such as literacy rates, crime rates, pollution levels and stress levels. Without these data, it is less possible to holistically compare the standard of living of both countries. For example, high growth in one particular country could be achieved at the expense of polluting and harming the environment, negatively affecting non-material standard of living of its citizens. On the other hand, another country may be able to achieve sustainable economic growth. The citizens in the latter country can be said to enjoy a better quality of life and enjoy higher non-material standard of living.
[8]
d) Discuss whether the Human Development Index is a perfect measure to
compare living standards in different countries.
Living standards comprise of material and non-material standard of living.
R1: HDI is a good measure to compare SOL across countries.
HDI is a composite index that takes into account achievements in these three
dimensions, the ability to live a long and healthy life (life expectancy), knowledge
(mean years of schooling and expected years of schooling) and a decent material
standard of living (GNI/capita(PPP$). These three basic dimensions are included as
it is thought that people’s welfare is influenced not only by the goods and services
available to them but also by their ability to lead a long and healthy life and to acquire
knowledge. It is expressed as a value between 0 and 1. The higher the score (i.e.,
closer to 1) the better will be the quality of life.
The material standard of living dimension is measured by PPP-adjusted Gross
National Income (GNI) per capita. This indicator provides a good comparison of
material SOL across countries as it measures the level of purchasing power after
adjusting for differences in cost of living between countries. When a country has
higher GNI/capita (PPP$), on average, the residents will have higher purchasing
power and they can consume more goods and services. This would result in higher
material standard of living.
HDI also provide information on non-material standard of living, for example, the
acquisition of knowledge. When the residents have higher years of schooling, or they
are more educated compared to other countries, they will be more confident and
assured. They can also better understand the information available. As a result, the
quality of life will be higher as compared to other countries. Life expectancy could also
be an indicator for the quality of life. When a country has longer life expectancy, we
can interpret that the residents are healthier and suffered less physical and emotional
distress from being sick. Thus, the quality of life can also be said to be higher.
As HDI measures different aspects of SOL, it can be said to be a good indicator.
R2: However, HDI is not a perfect measure to compare SOL across countries as
there are other factors that could affect the comparison of SOL across countries
but are not considered under HDI.
However, it is not the perfect indicator. GNI/capita in PPP$ only measures the average
income per person in that country. It does not consider the income distribution which
is measured by the Gini coefficient. The Gini coefficient measures the extent to which
the distribution of income deviates from a perfectly equal distribution. Its value lies
between 0 and 1, where 0 reflects perfect equality and 1 represents perfect inequality.
While a country may have higher GNI/capita (PPP$) than the rest, if the country also
experiences very high income inequality, then HDI may not be able to help us to make
an accurate comparison of standard of living between two countries. This will be a
significant problem when the two countries in comparison have significantly large Gini
coefficient values.
Moreover, non-material SOL is not just about the education level or the longevity of
the people. Other elements such as quantity of leisure time, pollution level, access to
internet etc are also important to quality of life. For example, a country may have high
income in terms of GNI/capita in PPP$ and higher level of education. However, the
residents may have little leisure hours as they experience long working hours or
© Anderson Serangoon Junior College Economics Department C9
Section C: Suggested answers
stressful education. As such, their overall SOL may not be as high as what HDI
suggested.
Summative conclusion (based on situation)
Components of HDI such as GNI/capita would provide an understanding of the
amount of financial resources that the economy or government has to enhance SOL
in the other aspect such as to clean up the pollution and to build infrastructure to
enhance internet connectivity. This is especially true for countries with uncorrupted
governments that collect sufficient tax revenue and channel them to the right use such
as to fund social services and infrastructures. Other components of HDI such as life
expectancy could also serve as a proxy indicator for the level of pollution and leisure
hours since lower pollution and higher leisure hours could both lead to higher life
expectancy. As such, while not a perfect measure, HDI can be considered as a
very good indicator to compare living standards across countries as it is a more
holistic measure.
Definition: Standard of living
Standard of living is defined as the overall quality of life of the average
citizen living in that economy. Standard of living encompasses both the material
standard of living which measures the amount of consumption goods that the
average citizen in the economy is able to enjoy and non-material standard of living
which measures the quality of life enjoyed by the average citizen.
