A-Level/JC/H2/H1 Economics Tuition Singapore JC/H2/H1 Economics Tutor

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Economic Growth

I) Definition
General definition, Actual growth, Potential Growth, PPC Diagram to illustrate.

II) Indicators
GDP
Real GDP
Real GDP per capita
Data on labor productivity
Data on capital productivity
Data on land area
Data on labor force
Data on amount of crude oil deposits/reserves

III) Causes of low growth or negative growth (RECESSION)
Lack of AD
Lack of investment into human capital and capital equipment

IV) Consequences of recession
Rising unemployment
Falling standard of living

V) Policies/Limitations (to be covered in future)

VI) Trade-Offs
Growth and Inflation (Arguments and Counter Arguments)
Growth and Balance of Trade (Arguments and Counter Arguments)

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Microeconomics Essay Practice

Time Allowed : 45 minutes

TYS 2012

Most brands of car are available in different models. A large rise in the cost of car manufacture and a rise in incomes are likely to affect the sales of various models of car in different ways.

(a) Explain how elasticities of demand can assist in understanding the effect of each of these changes on the sales volume of different models of car. [12]

(b) Compare and contrast the likely combined impact of both these changes on the revenue earned from the sales of different models of car.
[13]

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Microeconomics Essay Practice

Time Allowed : 45 minutes

TYS 2012

Most brands of car are available in different models. A large rise in the cost of car manufacture and a rise in incomes are likely to affect the sales of various models of car in different ways.

(a) Explain how elasticities of demand can assist in understanding the effect of each of these changes on the sales volume of different models of car. [12]

(b) Compare and contrast the likely combined impact of both these changes on the revenue earned from the sales of different models of car.
[13]

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Topic 2.1 How the Macroeconomy Works
Topic 2.2 Macroeconomic Aims, Problems/Issues, Consequences and Policies

Syllabus
• The Circular Flow of Income
• Sustained rate of economic growth
• Low inflation rate
• Full employment
• Favourable balance of payments

Outcome
• Explain the circular flow of income amongst households, firms, government and international economy.
• Explain the main macroeconomic aims, economic performance and living standards of a country.
• Explain the meaning of a sustained rate of economic growth, real and nominal GDP/GNP per capita, low inflation rate, full employment and favourable balance of payments.

Macroeconomics Lecture 3 : Measuring GDP and Standard of Living

3.1 Difficulties in Measuring National Income

Note 1 : This section may be used as applicable to critique the use of National Income to compare economic performance across countries. Sometimes, this section can be used to critique the use of National Income to compare the economic performance of a country over time.

Note 2 : Note the difference between this section which is about the difficulties in measuring National Income vis-a-vis using National Income or GDP as a measure of well being or living standard. But there may be overlaps!

(a) Omissions

National Income may be understated due to the following :

• Non-marketed activities such as homemaker’s services and voluntary work;
• Illegal activities such as drugs, illegal gambling, smuggling;
• Unreported activities such as private tuition, freelance jobs, washing your neigbour’s cars for money etc.

The above are sometimes referred to as the underground economy or shadow economy or black economy.

(b) Unreliable and Incomplete Information

The sources from which data are obtained to compute National Income are not designed specifically for this purpose. For example, if the source is the tax authority, there are under-reporting to avoid tax.

(c) Depreciation

Depreciation is measured based on certain accounting rules. This may not be representative of depreciation in reality. Although there are rules, there are inconsistencies in the application of the rules by the agents such as firms which are reporting the depreciation.

For the above reason, GDP or GNP is preferred over NNP or NDP.

(d) Double-counting

Double-counting often occurs for intermediate goods as well as transfer income.

(e) Value Inputation

Not all goods and services have a market value. For example, employees’ remuneration in kind such as food and lodging, goods consumed by the producers themselves, owner occupied buildings are “assigned” values that are at best approximated based on similar transactions in the market.

3.2 Standard of Living

Whilst there is no universal acceptable definition of Standard of Living, most people will agree that Standard of Living refers to well-being or the quality of life which includes material and non-material aspects. Material well being refers to quality and quantity of goods and services available for consumption. Non-material well being refers to working hours, environmental pollution, stress levels etc.

3.2.1 Measuring Standard of Living

Real per capita national income is often used as a “quick and dirty” way to measure standard of living. Two common real per capita statistics are :

Real GDP per capita = Real GDP / Population
Real GNP per capita = Real GNP / Population

! Stop and Think : Why is nominal GDP or nominal GNP not a good indication of standard of living?
! Stop and Think : Why is Real GDP or real GNP not a good indication of standard of living?

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Answers to H2 Economics 2007 GCE A Level Exam

Paper 1
CSQ1: OECD report on China, Brazil and the Russian Federation, 2005
ai) China’s budget was in deficit but this deficit was declining throughout.
(N.B.: Answer like “budget is negative and rising at a decreasing rate” – 0 m since negative sign was given in the data and stating this does not mean that student has a grasp of the significance of the figures)
ii) Russia’s budget was in surplus and improves from 2003 – 2004. After which, the budget surplus was declining. This was in contrast to China where even though its budget was in deficit, it has improved throughout.
bi) Nominal GDP growth includes inflation rate while real GDP growth does not.
ii) Russia with nominal GDP growth of 18%

c) Brazil’s projected C/A surplus worsens from 2005 – 2006 due to:
 The depreciation of China’s currency means that these Chinese goods entering into Brazil will be relatively cheaper and hence drive up Brazil’s import
 Recovery in employment and wages implies higher consumer spending. This in turn lead to higher economic growth (since GDP = C + I + G + X –M) in 2004 which implies higher income. Since imports are dependent on income, this leads to higher imports. This is especially so if the goods imported have high income elasticity and the Brazilians have a high marginal propensity to import.
 The appreciation of the Brazilian currency will also have an impact on the C/A. Appreciation would make imports entering into Brazil cheaper and Brazilian -export less competitive in world markets (esp. in China which is a major destination for Brazil’s exports). Assuming Marshall-Lerner condition where sum of price elasticities was greater than 1, then import expenditure would rise and export revenue would fall leading to fall in C/A surplus.

 Brazil’s inflation rate relative to the other countries. Although Brazil’s inflation has been falling steadily over the years while China’s has been rising (albeit marginally in the later 3 years), the latter’s is still lower than Brazil. Hence this may mean that Brazil’s exports may be less competitive in the world markets.

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Concept Lesson I
1) Low inflation

Benefits:
i) Boosts business confidence and hence economic growth and employment. When there is high inflation, firms become less certain about the future prices of their products and the less sure about the rate of returns on their investments, they are less willing to take risks and invest in long term projects.

ii) Higher incentive to save, leading to more loanable funds for investment, resulting in greater rate of growth. Low and stable inflation introduces certainty to future value of money and household are more willing to save this money for future consumption.

iii) With high inflation, households and firms may become pre-occupied with short term, unproductive activities such as investing in properties, which tend to yield attractive returns in an inflationary environment. Such activities will only fuel an unsustainable rise in property prices. Exaggerated gains will further encourage people to borrow to finance their investment. This can lead to instability in the
banking system when property prices eventually collapse and borrowers default on their loans. This can be avoided with low and stable inflation.

iv) Improvement in BOP and hence export-led growth

v) Allocation of resources becomes more efficient. Prices provide important signals to producers in the market economy of Singapore to help them make decisions on how much and what to produce. For example, when a producer sees that the price of the product has increased faster than the prices of other goods and services, he would infer that the demand for his product has gone up much more than the demand for other goods and services. As a result, he would devote more resources to produce a larger quantity of that product. It is through this price mechanism that market achieves allocative efficiency. Unexpected inflation however makes it difficult to distinguish between changes in the price of a specific item and changes in the general price level. As such, a producer could mistake an unanticipated rise in the general price level for a rise in the price of his own product, and hence erroneously devote more resources to produce it. This misallocation of resources, if widespread, may lead to slower growth of the economy.

vi) Minimize redistribution of income between different groups of people (Lender-Borrower and Fixed-Variable Income Earner)

vii) Low shoe-leather costs — Shoe leather cost refers to the cost of time and effort that people spend trying to counteract the effects of inflation, such as holding less cash and having to make additional trips to the bank.

viii) Low Menu-costs
Costs:
i. Risk of deflation and consumer expectations
ii. Low growth or negative growth (AD-AS curve)
iii. Increase in demand deficient unemployment (Philips curve)

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Holiday 15 Oct – Tuesday Economics revision

Lesson 1 : 2.30 pm to 4.30 pm
Break : 4.30 pm to 5 pm
Lesson 2 : 5 pm to 7 pm

Lesson 1
1) A challenging MICROECONOMIC case study that adapts from the best questions of recent prelim questions from various JCs.
2) 1 challenging MICROECONOMIC Essay specially designed to stretch students ability to the fullest.

Topics covered:
A) scarcity, choice and opp cost
B) demand, supply and elasticity
C) market failure due to externalities, inequality, public goods

Lesson 2
For the second 2 hours lesson: (must remind student that the second hour is only for H2)
1) In the first hour, A challenging MACROECONOMIC Case Study that adapts the best questions from recent prelim questions from various JCs.
2) In the second hour, A challenging MARKET structure case study, specially designed to stretch ability to the fullest.

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Introduction

A) What is National Income?
1) National income measures the monetary value of the flow of output of goods and services produced in an economy over a period of time.
2) Measuring the level and rate of growth of national income (Y) is important for seeing:
 The rate of economic growth
 Changes to average living standards
 Changes to the distribution of income between groups within the population
B) Gross Domestic Product
 Gross domestic product (GDP) is the total value of output in an economy
 GDP includes the output of foreign owned businesses that are located in a nation following foreign direct investment. For example, the output produced at the Nissan car plant on Tyne and Wear contributes to the UK’s GDP
C) There are three ways of calculating GDP – all of which should sum to the same amount:
National Output = National Expenditure (Aggregate Demand) = National Income
(i) The Expenditure Method – aggregate demand (AD)
The full equation for GDP using this approach is GDP = C + I + G + (X-M) where
C: Household spending
I: Capital Investment spending
G: Government spending
X: Exports of Goods and Services
M: Imports of Goods and Services
ii) The Income Method – adding together factor incomes
GDP is the sum of the incomes earned through the production of goods and services. This is:
Income from people in jobs and in self-employment
+
Profits of private sector businesses
+
Rent income from the ownership of land
=
Gross Domestic product (by factor incomes)
Only those incomes that are come from the production of goods and services are included in
the calculation of GDP by the income approach. We exclude:

 Transfer payments e.g. the state pension; income support for families on low incomes; the Jobseekers’ Allowance for the unemployed and other welfare assistance such housing benefit
 Private transfers of money from one individual to another
 Income not registered with the tax authorities Every year, billions of pounds worth of activity is not declared to the tax authorities. This is known as the shadow economy.
 Published figures for GDP by factor incomes will be inaccurate because much activity is not officially recorded – including subsistence farming and barter transactions

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Graphing Techniques and Curve Sketching

Question 1:
Alcohol consumption, negative externality, market failure

Question 2:
Effect of education on alcohol consumption
2 Limitations

Question 3:
Effect of taxation on alcohol consumption
2 Limitations

Question 4:
Construction near schools, negative externality and market failure

Question 5
Effect of R and D on construction negative externality.
2 limitations

Question 6:
Traffic congestion, negative externality, market failure

Question 7:
Effect of COE on traffic congestion
2 limitations

Question 8:
Effect of ERP on traffic congestion
2 limitations

Question 9:
Effect of more trains, more buses on traffic congestion
2 limitations

Question 10:
Effect of minimum wage, unemployment
2 Limitations

Question 11:
Does economic growth always lead to economic development?

Question 12:
Effect of price floor, surplus, black market

Question 13:
Consumer, producer burden of taxation

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Sample Essay DD and SS

1. “Motorists face more misery at petrol pumps as oil prices hit record high. The government has proposed to use price controls and subsidies to curb the problem.”

(a) Explain why the price of oil would increase. [10]

Suggested Answer:

1(a) Analysis of Question (to be done in 1-2 mins)

Command word:
Explain – requires you to select and apply economic concepts and principles (in this case dd/ss analysis) to analyse the rise in price of oil

Key word:
Price – to look at demand and supply factors that would cause the price to increase

Key word:
Increase – Note to talk about a rise in the price of oil

Question requirement
This question requires you to clearly explain how the causes (dd and ss factors) lead to the effect (increase in oil price), (Causal Link)

Schematic Plan (to be done in 2-3 mins)

Increase in oil price —-> Increase in demand
– global expansion
– rising national income in emerging countries
– expectations of future increase in prices
——–> Price of oil increase

Increase in oil price —-> Fall in supply
– depletion of oil resources
– political tension in the Middle East has limited oil production
– OPEC cut back SS to increase price
——-> Price of oil increase

Write out full essay (to be done by following closely to the outline in 15 mins)

Introduction:
Define key concepts
The price of a commodity like such as oil is determined by demand and supply conditions where demand is defined as the amount of goods consumers are willing and able to buy in a given period of time, at a given price, ceteris paribus whereas supply is defined as the amount of goods producers are willing and able to sell in a given period of time, at a given price, ceteris paribus. Therefore, changes in demand and supply conditions will cause changes in the price of oil. An equilibrium price occurs when the quantity demanded by consumers is equal to the quantity supplied by producers. A rise in the price of oil can either be caused by an increase in demand for oil or a decrease in supply for oil or both. In this essay, we will be looking at both the demand and supply factors that influence the price of oil to change.

Body: Factor 1 – Global expansion (DD)

The global economic growth has led to an increase in the demand for fuel to power production in most countries. This global economic growth is due to the global expansion. As a country’s output and production increase, the demand for a raw material like oil would increase as well since oil is needed to run the machinery in the plants and factories. Rising national income and strong economic growth would in turn induce optimism in investors who would increase their investment, thus increasing production and the demand for oil. These would thus lead to an increase in the demand for oil, causing the demand curve to shift right from D0 to D1 as shown in Figure 1. During the immediate period, quantity demanded Q2 is greater than quantity supplied Q0 resulting in an initial shortage of Q0Q2 at the original price level P0. In the short run, this shortage will exert an upward pressure on price as unsuccessful buyers are willing to pay a higher price for oil. However, as price rises, there are some consumers who are not willing to pay the higher price. Thus, quantity demanded for oil falls along the demand curve D1. On the other hand, as price rises, quantity supplied will increase along the supply curve S0 as producers are motivated to supply more oil as their profit level will rise when consumers are willing to pay a higher price. Eventually, a new market equilibrium is reached at point E1. This shows that due to global expansion, the equilibrium price and quantity of oil has increased from P0 to P1 and from Q0 to Q1 respectively.

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Demand and Supply Essay

A viral infection destroys a few major sugar cane plantations in many countries.
(a) In the light of the above statement, explain how this can lead to a sharp rise in the price of sugar. [10]
(b) Evaluate the measures taken by the government to help the consumers cope with the sharp rise in the price of sugar. [15]

Part (a)
Introduction
Define demand and supply
Demand is the willingness and ability of consumers to buy a particular good per period of time.
Supply is the willingness and ability of producers to produce and sell a good in a given time period.

State direction of answer:
Price of sugar is determined by intersection of demand and supply curves. Any change in demand or supply will affect the equilibrium price.

Body
Point of Discussion

1:The infection will reduce supply of sugar cane and shift the supply curve to the left, leading to an increase in the price of sugar cane.
E/E
As sugar cane is a factor of production of sugar, cost of producing sugar will increase. Hence, it becomes less profitable to produce sugar and the supply of sugar will drop.

Draw Graph Price Vs Quantity

At the original price of 0P0, there is a shortage. When there is a shortage, it means that the quantity supplied is less than the quantity demanded. Those consumers who could not get the goods will bid a higher price for them. The shortage will exert an upward pressure on the price. At the same time, some consumers may not be willing to pay the higher price. So, they will reduce their quantity demanded. Sellers will also increase their quantity supplied in response to the increase in price. Thus, as price rises, quantity demanded

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Economic Growth – Concept Reinforcement

Essential Question: Should the pursuit of economic growth be the main macroeconomic objective of a government?

1. What does it mean when a country achieves economic growth?

2. What is the difference between potential and actual growth?

3. What are some of the benefits and costs to a country when there is increasing economic growth?

4. What is likely to be a disadvantage of attaining economic growth?
(a) Fall in unemployment
(b) Fall in standard of living
(c) Depletion of resources*
(d) Fall in government tax revenue

5. Which of the following may be caused in the long term due to economic growth?
(a) A rise in structural unemployment*
(b) A rise in interest rate
(c) A high level of inflation
(d) A fall in standard of living

6. What might have fueled the high economic growth achieved by India?
(a) An increase in interest rates
(b) An increase in exports*
(c) An increase in unemployment
(d) An increase in imports

7. Which of the following might not result in economic growth?
(a) Upgrading the skills of workers
(b) Improvement in technology
(c) Investment in capital goods
(d) Increase prices of goods*

8. One of the ways to achieve economic growth is by____________________.
(a) Increase in income tax
(b) Increase the range of consumer goods
(c) Increase in the investment in capital goods*
(d) Increase in unemployment benefits

9. What are some of the strategies that a country can adopt to promote economic
growth?

10. What determines the choice and timing of these strategies?

Key Question 1: What is economic growth and how do we measure it?
Key Question 2: What are the benefits and costs of economic growth to an economy?
Key Question 3: What are the sources of economic growth

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An Introduction to Macroeconomics

Essential Question: How does AD/AS analysis help explain and illustrate macroeconomic phenomenon in an economy?

Key Question 1: What is aggregate demand (AD) and aggregate supply (AS) and what are their key determinants?

Part 1: Making Sense of AD-AS

1. Explain what is aggregate demand and why AD curve is downward sloping?

AD = C+I+G+X-M.
As price falls, ability and willingness to consume rises so C rises.
I will also rise as it is cheaper for firms to make purchases.
G is independent of GPL.
As for X, as the country’s goods becomes more competitive, exports rises. At the same time local goods become cheaper relative to foreign goods and this causes M to fall.
Thus AD is inversely proportional to prices and hence slopes downwards.

2. Explain what is aggregate supply and why AS curve is upward sloping?

Aggregate supply is the total output that firms in the economy are willing and able to supply at different price levels in a given time period.
AS can be differentiated into short run AS and long run AS. SRAS is the output which will be supplied at different price levels in a period of time when prices of factors of production remain unchanged. LRAS is the output which firms would produce after price level and factor prices have fully adjusted.
AS curve is upward sloping because output of all firms varies directly with price levels

3. What are the components of aggregate demand?

The components are consumption expenditure, investment expenditure, government expenditure and net exports

4. What are the determinants of consumption expenditure, investment expenditure and government expenditure?

Determinants of consumption expenditure
 Accessibility of credit
 Level of interest rates
 Government policy
 Price expectations
 Savings
Determinants of investment expenditure
 Interest rates
 Business expectations
 Government policy
Key Question 1: What is aggregate demand (AD) and aggregate supply (AS) and what are their key determinants?
 Technological change
 Infrastructure
Determinants of Government expenditure
 Budget policies

5. What are the factors that shift aggregate supply?

Factors that shift AS curve can be broadly divided into 2 main groups:
1) Factors that affect productive capacity
 Discovery of new resources
 Advances in technology
 Immigration
2) Factors that affect the costs of production
 Increases in prices of factor inputs like raw materials
 Increases in wages

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(a) Explain how the concept of opportunity cost can be used to analyse the basis for trade between countries. [10]

Introduction
– Define concept of opportunity cost: cost of next best alternative foregone, usually measured in terms of goods, services and monetary value given up.
– State that a country enjoys comparative advantage over another country when it can produce a good with a lower opportunity cost in terms of other goods foregone – hence the concept of opportunity cost is used to determine a country’s comparative advantage.
– And theory of CA states that trade can benefit countries if they specialize in producing and exporting the goods in which they have a comparative advantage, ie the goods that they can produce at a lower opportunity cost relative to other countries.

Body
– Explain how two countries can benefit from trade, using a numerical worked example or using dd & ss/production possibility curves
– In either case, the following should be included:
o Assumptions of the theory: each country uses the same amount of resources that is divided equally between the production of two goods (specific egs); resources fully employed and mobile between the two goods; no transport costs; constant returns to scale in production; exchange based on barter trade
o Identify internal opportunity cost for each country’s production of the two goods, and then comparative advantage for each country with the use of context (link to factor endowment)
o Show scenario of complete specialization and explain the benefits of specialisation
o Work out terms of trade (or rate of exchange) that is mutually beneficially
o Can use PPC to illustrate but numerical figures must be incorporated to illustrate O/C
o Show gains from trade for both countries

Conclusion
• The concept of opportunity cost can be used to determine countries’ production decisions as it forms the basis of the theory of how all parties engaged in trade can benefit from specializing in and exporting the goods in which they have a comparative advantage

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It is often observed that even when crude oil prices have fallen, the price of petrol at the petrol kiosks refuses to slide.

Discuss why changes in the price of petrol at the petrol kiosks do not always follow changes in the price of crude oil. [25]

Introduction:
• Mkt for crude oil and Mkt for petrol at petrol kiosks are 2 separate Mkts. Mkt for crude oil is an international Mkt whereas petrol kiosks are essentially operating in the domestic Mkt.

• The 2 Mkts are governed by diff DD & SS conditions though they are linked. Link – crude oil is refined to produce petrol.

Note: changes in price of petrol do not ‘follow’ changes in price of crude oil in terms of direction and magnitude.

Development:
• Why crude oil prices have fallen.
Crude oil prices are determined by global demand and supply.
Eg. global economy contract
–> global DD down
–> Pc oil down

Eg. easing of political tension in ME
–> ↑supply

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