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

Hi H2/H1 Economics Tuition Students

A. Explain the concept of barriers to entry. [10]

B. Assess the validity of the view that the profits and efficiency of firms in a market is determined by the level of competition. [15]

Suggested Answer:

Synopsis: Essay should define barriers of entry and explain with examples the natural and artificial barriers to entry. Explanations should show within each category the differences in strengths of the different features facilitating/allowing the barriers to be maintained.

a. 1. Define: Barriers to entry
2. Classified into 2 categories: Natural barriers and Artificial barriers
3. Explanation of 2 or more examples of barriers to entry for EACH category.

Intro: Define BTE: Barriers to entry are obstacles that prevent new competitors from competing on an equal basis with established firms in an industry. The obstacles may be naturally existing or artificially created by firms.

Impact on firms: The level of barriers to entry determines the profit equilibrium or what type of profits a firm could earn in the long run.
Type of BTE: Natural and Artificial BTE
(A) Natural Barriers to Entry:

– Existing firm experiencing Economies of Scale = Firm achieves economies of scale –> lowers average cost per unit  potential firms wanting to enter unable to compete since not able to enjoy cost advantage –> barrier to entry
– High Sunk Cost = Poses a type of barrier to entry since high sunk cost would become a big risk since the sunk cost cannot be recovered if firm decides to leave the industry
– Natural Monopoly due to small market = a situation where long- run average costs would be lower if an industry were under monopoly than if it were shared between two or more competitors.
– High Fixed Costs = nature of production requires high fixed cost –> the average cost would also be high since average fixed cost is high –> requires a large amount of output in order for average cost to eventually fall –> discourages the less financially able firms from entering

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Hi H2/H1 Economics Tuition Students

General advice from Cambridge Part 1

• Read each question carefully and make sure you know what it is asking, and what you have to do, before you begin your answer. Focus your answer on the question – do not write about something else.

° You may answer a question about inflation and write all you know about its causes and consequences, but the actual question asked wanted you to write simply about how it is measured.

° You could be told that ‘Low unemployment is one of the aims of government policy. Choose two other macro-economic aims of the government and explain what they mean.’ Some candidates may ignore the word other and explain low unemployment as one of their two aims. No marks would be given for that part of the explanation.

° For longer questions, check every so often to make sure that you are answering the question correctly.

• Look at the command words in the question. These tell you what we are looking for.

° Identify or state means you do not need to write very much – just show the examiner that you know the answer.

° Define means you need to show you understand the meaning of an economic term or topic and distinguish means you need to show you understand the differences between two or more terms.

° Describe or explain means you need to go into more detail, clearly showing you understand what something is or how something happens – ideally giving a relevant example, or using a diagram, to help your description or explanation.

° Analyse, discuss and to what extent require you to go into much more detail and your answer should be longer and include relevant examples and/or diagrams. You will usually be expected to look at something from two contrasting points of view and then come to a reasoned and well supported conclusion. Full sentences and paragraphs should be used – avoid bullet points.

• Look at the number of marks for each part of a question. This should guide you as to how long you should spend on it. Some questions will only gain you two or three marks while others may be worth as many as ten marks.

• Wherever possible, use a diagram to aid your explanations and make sure that it is accurately drawn and correctly labelled. Ensure that you refer to it in your answer and demonstrate to the examiner that you know what it shows.

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Essay Question

2010 marked a trying time for the airline business. The eruption of the Icelandic volcano caused cancellations of 95,000 flights over Europe. One week later, the BP oil well exploded in the Gulf of Mexico, resulting in the worst oil spill in US history.
Using economic analysis, discuss the likely impact of the above events on the airline industry and related markets. [25]

Introduction
• Explain how market equilibrium price and quantity is achieved: via the intersection of the demand and supply curves.
• Identify that supply of airline travel has fallen due to cancellations of flights in Europe and the oil spill which led to an increase in costs of production.
• Identify that the demand for airline services over Europe would be affected due to the volcano eruption which has caused fear of flying (effect on demand depending on whether it is for holiday or business as tourists may choose to switch to other destinations or travel by other modes of transport but a businessman may need to travel by air for work)
• The related markets in this suggested answer would look at the market for a complementary good like the hotel industry and a substitute like rail travel.

Market for the airline industry
• Overall demand for air travel is expected to fall due to Icelandic volcano eruption (fear of flying). Demand for travel by holiday makers may fall but demand for business travel may not be affected by the fear of flying)  leftward shift of the demand curve
• Demand for air travel tends to be price elastic due to the presence of substitutes like rail travel, land travel like long haul buses and cars.
• The price elasticity of demand measures the degree of responsiveness of the quantity demanded of a good to a change in its price, ceteris paribus
• Illustrate how a leftward shift of the supply curve from S0 to S1 due to an increase in COP will have different effects on price and quantity, given different PED value.
• With reference to Figure 1, the demand curve D1 is relatively more price inelastic than demand curve D0. Given a leftward shift of the supply curve from S0 to S1, the more price inelastic the demand, the greater the effect on its price. As seen from Fig 1, for D1 the fall in quantity (demanded) Q1 is less than proportionate to a rise in its price, ceteris paribus.

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Essay Question

With growing affluence, Singaporeans are changing their consumption pattern. Coupled with a more health conscious mindset, there is an increased consumption of yoga services. With greater expected profitability, there has been an emergence of large yoga studios such as Absolute Yoga and small yoga studios in the neighbourhoods, where large studios offer a wider range of services.

(a) Explain the likely effects of these changes on the market for yoga membership. [10]

(b) Large studios enjoy greater advantages as compared to small studios. To what extent do you agree with this statement? [15]

Suggested Answer Scheme

Part (a)
Candidates are expected to use demand and supply analysis to illustrate the effects of the changes on the market for yoga membership. Candidates are expected to explain the simultaneous shifts in demand and supply, and its resultant effects on price and quantity. The best candidates are likely to incorporate the concept of YED into their explanation to demonstrate the eventual increase in price for yoga membership.

Introduction:
 State that the market equilibrium is the situation whereby there is no tendency for change in the market. This occurs when quantity demanded equals to quantity supplied (Qd = Qs). Thus, there is no shortage or surplus in the market.
 Hence, changes in the demand and supply conditions would result in changes in the market equilibrium price and quantity.
 There is an increase in demand for yoga and an increase in supply of yoga services. Thus, equilibrium quantity will increase but price of yoga membership may be indeterminate.

Body:
Increase in Demand
 Define demand to be the quantity of a well-defined good or service (i.e: Yoga services) that consumers are willing and able to buy at each price, ceteris paribus.
 Possible non-price determinants causing an increase in demand for yoga
 Changes in consumers’ taste and preference. A health conscious mindset and a greater awareness of wanting to keep trim and fit will cause an increase in quantity demanded for yoga at every price level, resulting in an increase in demand for yoga as shown in Figure 1.
 Changes in consumers’ income. With increasing affluence, it could mean that Singaporeans’ income is increasing. Thus, there is an increase in quantity demanded for yoga at every price level, resulting in an increase in demand for yoga as shown in Figure 1.
 Notably, as the demand for yoga would be considered a luxury good to most households in Singapore, the demand is relatively income elastic. Thus, there could be a more than proportionate increase in demand for yoga. This is illustrated by a relatively large extent of shift in demand curve.

Increase in Supply
 Define supply to be the quantity of a well-defined good or service (i.e. Yoga services) that sellers are willing to put up for sale at each price, ceteris paribus.
 Non-price determinant that caused an increase in supply
 Producers’ expectations of expected profitability. Studios expect that in near future there will be a surge in the number of people going for yoga lessons. Thus, studios may open up more classes or build more studios to cater to the increasing number of health conscious consumers in Singapore. This causes an increase in quantity supplied at every price level, resulting in increase in supply for yoga services.

Simultaneous shifts in demand and supply
 The above should be accompanied by a graphical representation of the simultaneous increase in demand from D0 to D1 and supply from S0 to S1. Equilibrium quantity of yoga membership will increase, price may be indeterminate.
 However, given that yoga membership is considered a luxury good as explained earlier, there will be a more than proportionate increase in demand for yoga.
 In addition, demand may increase more than supply as it takes time for yoga studios to be built. Thus, the supply of yoga services may not match the increase in demand for the services. Therefore, price of yoga membership increases.

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J2 H1 Economics for Academic Year 2014

Topic 2.2 Macroeconomic Aims, Problems/Issues, Consequences and Policies

Syllabus

Macroeconomic Problems and their Causes
• Undesirable rates of economic growth
• High inflation rate
• High unemployment rate
• Persistent or large balance of payments deficit

Outcome
• Explain the meaning of undesirable rates of economic growth, high inflation rate, high unemployment rate and persistent or large balance of payments deficit.
• Analyse the causes and consequence of macroeconomic problems.

Macroeconomics Lecture 4 : Undesirable Rates of Economic Growth

4.1 Recap : Economic Growth

Economic Growth is the increase in an economy’s level of real output over time.

Rate of Economic Growth is the percentage increase in national output over a 12-month period.

Aim of governments : High and sustained rates of economic growth.

Reason : To advance the standard of living of the people.

4.2 Recap : Actual Growth Vs Potential Growth

Actual economic growth is the annual percentage increase in national output i.e. the rate of growth in actual output. Published statistics on growth rates (such as that in Table 1) are examples of actual economic growth.

Potential economic growth is the speed at which the economy could grow. It is the annual percentage increase in the capacity (potential) of the economy to produce or develop i.e. the rate of growth in potential output.

Potential economic growth may be achieved by :

• Increase in the quantity of available resources such as labour, land, capital and entrepreneurship.

• Improvement in the quality of the available resources.

Actual and Potential Growth may be illustrated by 2 models :
• PPC
• AD/AS

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Appendix to CSQ on Economic Growth

1) APEC = Asia Pacific Economic Cooperation
a) 21 members, including Singapore
b) A forum for ministers from member countries to discuss and cooperate on policies.
c) Mission Statement: To support sustainable economic growth and prosperity in Asia-Pacific Region

2) Example of APEC involvement in inter-country policy making:
a) When APEC Leaders gathered in Bogor, Indonesia in 1994, they committed to achieve free and open trade and investment by 2010 for industrialized economies and by 2020 for developing economies. APEC members agreed to pursue this goal by further reducing barriers to trade and investment and by promoting the free flow of goods, services and capital.
b) These targets became known as the “Bogor Goals,” an ambitious manifestation of APEC’s common belief that free and open trade and investment are essential to realize the growth potential of the region and enhance economic and social outcomes for all APEC economies.
c) In 2010, the target year for the industrialized economies to achieve the Bogor Goals, five industrialized economies, as well as eight volunteering developing economies, underwent a detailed assessment of progress made in free and open regional trade and investment under the Bogor Goals, which was conducted by APEC.
d) Based on the analyses of these efforts and achievements made by these thirteen economies, and taking into account the various developments of global circumstances, APEC Leaders concluded that while more work remains to be done, significant progress has been made toward achieving the Bogor Goals at their Meeting in Yokohama, Japan in 2010.

3) Examples of Singapore’s effort to target new niche areas via R and D
a) Automotive
b) Lifestyle Products/Services
c) Nanotechnology
d) Natural Resources
e) Safety and Security
f) Space

4) Balance of Payments
a) Current Account
i. Balance of Trade (Export Earnings – Import Spending)
ii. Net Property Income from Abroad
b) Capital Account
i. Short Term Capital Flow
ii. Long Term Capital Flow
c) Official Financing Account

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Macroeconomics Lecture 6 : Inflation Part 2

6.1 Describing Inflation

There are 4 ways to describe inflation.

(a) Moderate or Mild Inflation

This type of inflation occurs when price levels are rising slowly. We might arbitrarily classify this as less than 3% annually. The consequences of mild or moderate inflation are as follows : people do not spend time trying to unload their money because its real interest rate is acceptable, inflation expectations are relatively stable, people are not afraid to write contracts in nominal terms (the opposite is people insist to write contracts where the price is indexed to inflation).

(b) Creeping Inflation

This occurs when inflation is higher than mild inflation but still less than 10% per annum.

(c) Galloping Inflation

This occurs when prices start rising at double or triple-digit rates of 20%, 100% or 200% a year. Once galloping inflation takes hold of the economy, people would index their purchases to a foreign currency. Because money loses its value so quickly, people avoid holding any more than the bare minimum. People hoard goods, buy houses; and do not have incentives to lend money at ordinary interest rates.

(d) Hyper Inflation

This is worse than galloping inflation where inflation rates are at a thousand, or a million or a trillion per cent annually. For example, Germany experienced hyper inflation in the early 1920s, as did China after the second world war, Zimbawe in 2008 (98% per day). Hyper inflation generally leads to a currency reform or a major economic collapse.

6.2 Causes of Inflation

Economists distinguish between two types of inflation so that the right remedy actions can be taken.

(a) Demand-Pull Inflation

Changes in the price level have been attributed to an excess of total demand in a period close to or at full employment. The economy may attempt to spend beyond its capacity to produce, i.e. AD increases relative to AS at, or close to full employment. The business sector cannot respond to this excess demand by expanding real output because all available resources are already fully employed. Therefore, this excess demand will bid up prices of the fixed real output, causing demand-pull inflation. In short, “too much spending chasing too few goods.”

The increase in AD may be attributed to the following :

(i) Increases in the components of AD

• Consumption expenditure increases due to consumer optimism
• Investment expenditure increases autonomously due to the opening up of export markets, technological innovations
• Government expenditure increase due to increases in national defence expenditures, increase in social needs such as education and healthcare.
• Net export income increases due to affluence abroad.

(ii) Over-issuance of Money by Central Bank

An expansionary monetary policy when the economy is at full employment will only cause price increase.

Demand-Pull Inflation may be illustrated by the following AD/AS diagram :

(b) Cost-Push Inflation

The theory of cost-push inflation explains rising prices in terms of factors that raise per-unit production costs at each level of spending. A per-unit production cost is the average cost of a particular level of output. This average cost is found by dividing the total cost of all resource inputs by the amount of output produced. That is,

Per-unit production cost = Total Input Cost / Units of Output

Rising per-unit production costs squeeze profits and reduce the amount of output firms are willing to supply at the existing price level. As a result, the economy’s supply of goods and services declines and the price level rises. In this scenario, costs are pushing the price level upward.

The sources of cost-push inflation are as follows :

(i) Wage Push
Due mainly to the power of trade unions (imperfect competition in the factor market), higher wages raises the costs of production and hence resulting in an leftward shift of the AS curve.

(ii) Profits Push
If markets are imperfect e.g. monopoly market structure, output will always be less than socially optimal level, hence AS shifts left.

(iii) Supply-side Shocks
Natural disasters or epidemics, abrupt increases in the costs of raw materials or energy inputs push up the costs of production and shifts the AS to the left.

(iv) Structural Rigidities and the Ratchet Effect
Supply side rigidities prevent the efficient reorganization of factors of production to meet changes in the demand for goods and services in the economy in the short run, causing prices to rise rapidly.

(v) Currency Depreciation
A weaker currency makes imported raw materials more expensive, thereby leading to higher costs of production. Thus, AS shifts left.

(vi) Tax Push

This occurs when an increase in indirect taxes adds to the cost of living. An example will be the introduction of a goods and services tax. Firms will increase prices and pass some of the increased costs to consumers and cut back on production, causing AS to shift to the left.

Cost-Push Inflation may be illustrated by the following AD/AS diagram :

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Topic 2.2 Macroeconomic Aims, Problems/Issues, Consequences and Policies

Syllabus

Macroeconomic Problems and their Causes
• Undesirable rates of economic growth
• High inflation rate
• High unemployment rate
• Persistent or large balance of payments deficit

Outcome
• Explain the meaning of undesirable rates of economic growth, high inflation rate, high unemployment rate and persistent or large balance of payments deficit.
• Analyse the causes and consequence of macroeconomic problems.

Macroeconomics Lecture 7 : Inflation Part 3

7.1 Redistributive Effects of Inflation

Recall the following :

Nominal Income : Number of dollars received as wages, rent, interest or profits.

Real Income : Measure of the amount of goods and services nominal income can buy; it is the purchasing power of nominal income, or income adjusted for inflation.

Real Income = Nominal Income / Price Index (in hundredths)

Anticipated Inflation : Inflation whose full extent was expected.

Unanticipated Inflation : Inflation whose full extent was unexpected.

When unanticipated inflation occurs, not everyone’s nominal income rises at the same pace as the price level. Therein lies the potential for redistribution of real income from some to others.

There are generally two groups of people who are affected by inflation, namely, (a) those hurt by inflation and (b) those unaffected or helped by inflation.

(A) Hurt by Inflation

Unanticipated inflation hurts fixed-income recipients, savers and creditors. Inflation redistributes real income away from them and toward others.

(i) Fixed Income Receivers

People whose incomes are fixed see their real incomes fall when inflation occurs.

Examples :
• Retirees who receive pensions or annuity payments that are not pegged to inflation.
• Landlords who receive lease payments of fixed dollar amounts during the contracted lease period.
• Workers whose incomes are dictated by fixed pay schedules.
• Minimum wage workers and families living on fixed welfare incomes.

(ii) Savers
Unanticipated inflation hurts savers. As prices rise, the real value, or purchasing power, of an accumulation of savings deteriorates. Paper assets such as savings accounts, insurance polices, and annuities that were once adequate to meet rainy-day contingencies or provide a comfortable retirement decline in real value during inflation.

(iii) Lenders / Creditors

Unanticipated inflation harms creditors because as prices go up, the value of the dollar goes down. So the borrower pays back less valuable dollars than those received from the lender.

(B) Unaffected or Helped by Inflation

(i) Flexible Income Receivers

People who have flexible incomes may escape inflation’s harm or even benefit from it. For example, some union workers get automatic cost-of-living adjustments in their pay when the CPI rises, although such increases rarely equal the full percentage rise in inflation.

Some flexible-income receivers and all borrowers are helped by unanticipated inflation. The strong product demand and labour shortages implied by rapid demand-pull inflation may cause some nominal incomes to spurt ahead of the price level, thereby enhancing real incomes.

Examples :
• Some property owners faced with an inflation-induced real estate boom may be able to boost flexible rents more rapidly than the rate of inflation.
• Some business owners may benefit from inflation. If product prices rise faster than resource prices, business revenues will increase more rapidly than costs. In those cases, the growth rate of profit incomes will outpace the rate of inflation.

(ii) Borrowers / Debtors

Unanticipated inflation benefits borrowers. Borrowers borrows “dear” dollars but, because of inflation, pays back the principal and interest with “cheap” dollars whose purchasing power has been eroded by inflation. Real income is redistributed away from the lenders towards the borrowers.

The redistribution effects of inflation are less severe or are eliminated altogether if people anticipate inflation and can adjust their nominal incomes to reflect the expected price level rises or anticipated inflation.

Nominal Interest Rate = Real Interest Rate + Inflation Premium

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Topic 2.2 Macroeconomic Aims, Problems/Issues, Consequences and Policies

Syllabus

Macroeconomic Problems and their Causes
• Undesirable rates of economic growth
• High inflation rate
• High unemployment rate
• Persistent or large balance of payments deficit

Outcome
• Explain the meaning of undesirable rates of economic growth, high inflation rate, high unemployment rate and persistent or large balance of payments deficit.
• Analyse the causes and consequence of macroeconomic problems.

Macroeconomics Lecture 8 : Unemployment

8.1 Unemployment Definitions

Unemployment refers to a situation where a worker of working age will like to work but cannot find work.

The economy’s natural rate of unemployment refers to the amount of unemployment that the economy normally experiences.

Note : Natural does not imply that this rate of unemployment is desirable. Nor does it imply that it is constant over time or has no influence to economic policy.

8.2 Measuring Unemployment

The government statistics agency measures unemployment by surveying households and classify adults into anyone of the three categories :

• Employed;
• Unemployed;
• Not in the workforce

A person is considered employed if he or she spent some of the previous week working at a paid job. A person is unemployed if he or she is on temporary layoff or is looking for a job. A person who fits neither of the first 2 categories, such as a full-time student, homemaker, or retiree, is not in the labour force.

Labour Force = Number of employed + Number of unemployed

Unemployment Rate = (Number of Unemployed / Labour Force) X 100

Labour Force Participation Rate = (Labour Force / Adult Population) X 100

Unemployment Rate and Labour Force Participation Rate may be computed for specific groups of people, for example, amongst men, women, people above 55 etc.

! Stop and Think : Refer to handout to find out how Singapore defines unemployment

8.3 Shortcomings of the Unemployment Rate and More insights into Unemployment

It is not easy to distinguish between a person with a full-time job and a person who is not working at all; it is much harder to distinguish between a person who is unemployed and a person who is not in the labour force.

Movements into and out of the labour force are, in fact, very common. More than one-third of the unemployed are recent entrants into the labour force. These entrants include young workers looking for their first jobs, such as recent graduates. They also include older workers who had previously left the labour force but have now returned to look for work. Moreover, not all unemployment ends with the job seeker finding a job.

Because people move into and out of the labour force so often, statistics on unemployment are difficult to interpret. On the one hand, some of those who report themselves unemployed may not, in fact, be trying hard to find a job. They may be calling themselves unemployed because they want to qualify for a government aid or because they actually working and being paid “under the table”.

On the other hand, some of those who report being out of the labour force may, in fact, want to work. These individuals may have tried to find a job but have given up after an unsuccessful search. Such individuals, called discouraged workers, do not show up in unemployment statistics, even though they are truly workers without jobs.

In light of the above, alternative measures that take into account discouraged workers, workers who falsely declare their employment status etc are constructed to give economists a better idea of the extent of joblessness.

If unemployment is short-term, it may not be a big problem. But if unemployment is long term, then it is a serious problem. Economists have found that most spells of unemployment are short, and most unemployment observed at any given time is long-term.

In the short-run, there are always some workers without jobs, even when the overall economy is doing well. In other words, the unemployment rate is not likely to fall to zero. Instead, it fluctuates around the natural rate of unemployment.

In the long-run, unemployment can be due to frictional unemployment or structural unemployment.

Please contact Angie Hp 96790479 or Mr Ong 98639633 if you need help in Economics and complete Notes

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

Topic 2.2 Macroeconomic Aims, Problems/Issues, Consequences and Policies

Syllabus

Macroeconomic Problems and their Causes
• Undesirable rates of economic growth
• High inflation rate
• High unemployment rate
• Persistent or large balance of payments deficit

Outcome
• Explain the meaning of undesirable rates of economic growth, high inflation rate, high unemployment rate and persistent or large balance of payments deficit.
• Analyse the causes and consequence of macroeconomic problems.

Macroeconomics Lecture 9 : Balance of Payment Part 1

9.1 Definition

The Balance of Payments (“BOP”) means that a nation’s total payments to other nations must be equal to, or balanced by, the total payments received from other nations.

Nations keep BOP accounts in order to keep track of their economic transactions with other nations.

A nation’s balance of payments account records all the payments that it makes to other nations, as well as all the payments that it receives from other nations during the course of a year. The total volume of payments made to other nations is exactly equal to the total volume of payments received from other nations.

9.2 Composition of BOP

The BOP account of a nation comprises the following :

(A) Payments to other nations broken down by :
• The amount spent on foreign goods;
• The amount spent on foreign services;
• The amount loaned to foreign businesses, households and governments;
• The amount invested abroad.

(B) Payments received from other nations broken down by :
• The amount of foreign purchases of the nation’s goods;
• The amount of foreign purchases of the nation’s services;
• The amount of foreign lending to the nation’s businesses, households, and government;
• The amount of foreign investment in the nation.

Accounting convention classifies the above into 3 main categories, namely Current Account, Capital Account, Overall Balance.

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

Topic 2.2 Macroeconomic Aims, Problems/Issues, Consequences and Policies

Syllabus

Macroeconomic Problems and their Causes
• Undesirable rates of economic growth
• High inflation rate
• High unemployment rate
• Persistent or large balance of payments deficit

Outcome
• Explain the meaning of undesirable rates of economic growth, high inflation rate, high unemployment rate and persistent or large balance of payments deficit.
• Analyse the causes and consequence of macroeconomic problems.

Macroeconomics Lecture 10 : Balance of Payment Part 2

10.1 Balance of Payments Deficits and Surpluses

In the news we often hear or read about a nation’s balance of payments deficit or surplus. But if the balance of payments must balance, why the talk about deficits and surpluses?

Sometimes, commentators are referring to the balance of trade although they are technically inaccurate and hence should be more explicit. In general, however, such references are made with respect to the balance of payments excluding government capital account transactions in official reserve assets (foreign currency, gold, and standard drawing rights) and liquid claims against these reserves.

10.2 Balance of Payments Deficit

10.2.1 Definition

A balance of payments deficit means that the government is reducing its holdings of official reserve assets or that the liquid claims of foreign governments against these reserves are increasing, or both. The deficit equal the excess of the nation’s payments to other nations over the payments received from other nations exclusive of government capital account transactions in official reserves and liquid claims.

10.2.2 Causes

(a) When there is a deficit in the Balance of Trade, the value of exported goods is less than the value of imported goods.

Terms of Trade is the rate at which units of one product can be exchanged for units of another product; the price of a good or service; the amount of one good or service that must be given up to obtain 1 unit of another good or service.

A deficit in the Balance of Trade (thereby contributing to a deficit in the Current Account) is due to a worsening of the Terms of Trade.

It can arise because of

(i) A fall in export which may be due to
• Increase in the relative price of exports due to (i) inflation; or (ii) strengthening of the exporting country’s currency or weakening of the importing country’s currency; (iii) deliberate use of monopoly power by the producer(s) in the exporting country
• Fall in the quality of exports
• Natural disasters that destroy the export output
• Import substitution by trading partners
• Changes in tastes and preferences of foreign consumers
• Increase in retained output for home consumption
• Fall in the volume of services rendered to foreigners due to higher prices or other unforeseen political events such as war etc.

(ii) An increase in imports which may be due to
• Lower import prices due to inflation and/or strengthening of the exporting country’s currency or weakening of the importing country’s currency
• Reconstruction after natural disasters
• Rising incomes
• Rising population
• Large imports of raw materials and investment goods for economic development
• Large imports of consumption goods
• Large imports of essential raw materials that have risen in price e.g. oil.

(b) When there is a deficit in the Current Account due to investment income paid to foreigners. Examples include dividends paid to foreigners for their financial investments in the country; profits repatriated to foreign direct investors for their FDIs in the country. A deficit in the Current Account can also be due to an increase in net transfers (-ve sign) due to a fall in repatriation of salary from workers living abroad or an increase in repatriation of salary of foreign workers in the country.

(c) When there is a deficit in the Capital Account due to (i) short term capital outflows and (ii) long term capital outflows.

Long term capital outflows can arise from investments in foreign countries e.g. Government Investment Corporation of Singapore (“GIC”) investing in Citibank. As this will bring in eventual inflow of profits, it would not be undesirable. Other long term capital outflows can be due to structural changes, political changes and changes in government policy. For example, if a country loses its cost competitiveness, multinational companies may exit the country by closing down its manufacturing facilities thereby resulting in long term capital outflows. If a country’s government is hostile to foreign investors, foreign investors will exit the country and with their exit, a long term capital outflow.

Short term capital outflows are caused by changes in money supply and short term interest rate changes. Specifically, when the central bank increases money supply, the interest rate falls, leading to capital outflows in search of higher interest rate returns overseas. Short term capital outflows can arise from financial panic or speculation which are undesirable for the country’s financial stability.

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Lesson Plan for 22nd Feb 2014 JC1 H1/H2

Econs

I) Recap (Know or You “Die” Concepts)
1. Explain the concept of scarcity, inevitability of choice and opportunity cost.
a) Scarcity arises because of limited resources and unlimited wants. Resources are limited because the world has a finite amount of them. Unlimited wants refer to the desire for ever higher levels of consumption once a particular level of demand is met. Due to the problem of scarcity, factors of production must be utilized as efficiently as possible to produce the goods and services most desired by society. Some wants might have to be given up because the
limited resources require us to fulfill more basic urgent needs. Hence because of scarcity, choices have to be made.
b) Choice refers to the act of selecting among alternatives and it
involves sacrifices known as opportunity cost. In making choices, the four most fundamental problems an economy must resolve are:
i. What to produce
ii. How much to produce
iii. How to produce
iv. For whom to produce
c) Opportunity cost = the next best alternative forgone.

2. Explain the meaning of resources and the factor payments associated with each resource type, with examples.
a) Land – all plots of ground and other natural resources used in the production of goods and services. Rent is received by land owners for the use of land.
b) Labor – All human efforts, both physical and mental which are used in the production of goods and services. In return for their services, human receive wages.
c) Capital – All man-made aids which are used in the production of further wealth. It can be distinguished between physical and human
capital. Physical consists of manufactured items that are directly used in the production of goods and services. For example, machines, roads. If the owner of a machine rents outs his machinery, he receives interests as payment for the rental. Human capital consists of the knowledge and skills people develop through education and on-the-job training that enhance one’s ability to produce. For example, the knowledge and skills of a surgeon acquired through education in medical school.
d) Entrepreneurship – All managerial, organizational and decision making skills put together for more effective methods of producing goods and services. In return, entrepreneurs receive profits for risk-taking.

3. Explain the concept of opportunity cost at individual, firm and national levels.
a) Individuals (Fixed income)
b) Firm (Fixed financial capital, raw materials)
c) Country (limited resources)

4. Define the PPC.
a) The PPC is a curve which shows all the possible combinations of 2 goods that a country can produce within a specified period of time with all its resources fully and efficiently employed and at a given state of technology.
b) Key assumptions: produce only 2 goods, fixed quantity and quality of resources, full employment and fixed technology.

5. Use the PPC to illustrate scarcity, choice and opportunity cost
a) Scarcity = downward sloping shape of PPC
b) Choice = movement along PPC
c) Opportunity Cost = Negative slope of PPC

6. Understand the significance of points under, on and beyond PPC
a) Points inside = attainable but inefficient
b) Points outside = not attainable but desirable due to scarcity

7. Explain factors that can cause movement onto PPC

8. Explain the factors that can cause the shift in PPC and what are the implications of a shift on economy and standard of living
II) Demand Concepts
a) Definition
b) Law of Demand
c) Graph for demand
d) Determinants of demand
i) Price of the product
ii) Consumers’ income
iii) Prices of substitutes and complements
iv) Taste and preferences of consumers
v) Consumers’ expectations
vi) Number of consumers in the market
e) Complementary demand
f) Competitive Demand
g) Derived demand
III) Supply Concepts
a) Definition
b) Law of Supply
c) Graph for Supply
d) Determinants of supply
i) Prices of the good/service
ii) Prices of Inputs
iii) Current state of production technology
iv) Producers expectations
v) Number of producers in the market
vi) Governments Policies
e) Joint supply
f) Competitive Supply

IV) Price and Quantity Determination

V) Price Mechanism

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

Question Type

Discuss how [a policy] in Country A affect the [goal] of another country B.

Answering Technique
i) Introduction

(1) Define the policy in general
(2) Explain the policy’s specific type and what economic problem(s) did A face that induces its lawmakers to implement this particular policy
(3) Define the goal of country B in general
(4) Explain the economic relationships between these two countries

ii) Thesis

(1) Explain how A’s policy can negatively/positively affect B’s goal. Use concepts
such as:

iii) Anti-thesis 1

(1) Explain how A’s policy may have limited impact on B’s goal. Use concepts such as:
(a) Economic Restructuring/Rebalancing – Diversifying trade partners,
diversifying the industry of specialization, diversifying into domestic
sources of growth rather than external sources or diversifying into external sources of growth rather than internal sources
(b) B’s government counter measures – property cooling measures, counter
inflation measures etc

iv) Synthesis

Sample Questions

1. With reference to the data, discuss and compare the effects of China’s revaluation of the Yuan on the other emerging economies and the advanced economies.

2. Suggest how deflation in Japan may affect China’s aggregate demand

3. Discuss how the reduction of interest rates by Federal Reserve affects the Singapore’s economy.

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

Lesson Plan for JC1 on 22nd March 2014

I) Recap

a) Demand
b) Supply
c) Complementary Demand

This exists when 2 or more goods are used jointly to satisfy the same want.

d) Competitive Demand

This exists when a want can be satisfied by any one of the products available.

e) Derived Demand

This exists when a product is demanded not for its own sake but for its
contribution to the manufacture of another product. It applies to the demand for productive resources.

f) Competitive Supply

This exists when an increase in the supply of one commodity brings about a reduction in the supply of another commodity.

g) Joint Supply

This exists when the production of the product gives rise to the production of other commodities at the same time.

II) New Concepts of The Day

a) Taxes

b) Subsidies

c) Price Floor

i. Definition: A price floor is a legally established minimum price. When the price floor is established, firms are permitted to sell at prices at or above the minimum price.
ii. Graph

d) Price Ceiling
i. Definition: A price ceiling is a legally established maximum price. When a price ceiling is imposed, firms are only permitted to sell at or below this upper limit
ii. Graph

III) Practice Makes Perfect

a) JC Prelim 2013

Explain the role of prices in resource allocation in a market economy.[10]

b) Common Test 2009:

The problem of drug addiction has led to the increase of illegal drug use and crime as addicts need quick cash to support their habit. To arrest the problem, the government cracks down on drug smuggling and pursue a policy of drug education.

Using demand and supply analysis, assess the possible impact on the market for drugs.

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

Lesson Plan for 29th and 30th March 2014

International Trade Notes Part I
I) Explain the principle of comparative advantage

a) The theory of comparative advantage is based on the following assumptions:
 There are no trade restrictions/trade barriers
 There are no transport costs
 There are no exchange rates
 Constant opportunity cost of production
 Perfect mobility of resources within a country

b) Suppose there are two countries – Utopia and Happyland. These countries produce two products – hardware and software. According to the theory of comparative advantage each country should specialize in production of a good where it has a lower opportunity cost.

c) Pre trade situation and opportunity costs
The graph below shows production possibilities for Utopia and Happyland.

Figure 1 Production and consumption possibilities before trade
Assume that before trade each country uses a half of its resources to produce hardware and another half to produce software.

To produce 1 more Hardware Utopia has to give up 5 units of Software, e.g. 1 hardware = 5 Software

To produce software more Utopia has to give up 1/5 Hardware, e.g.
1 Software = 1/5 Hardware

Happyland:
To produce 1 more Hardware Happyland has to give up 15 units of Software, e.g.
1 hardware = 15 Software
To produce software more Happyland has to give up 1/15 Hardware, e.g.
1 Software = 1/15 Hardware
In conclusion, Utopia has a comparative advantage (lower opportunity cost) in production of Hardware and should specialize in production of Hardware.

Happyland has a comparative advantage (lower opportunity cost) in production of Software and should specialize in production of Software.

d) Specialization
The table below shows specialization based on comparative advantage.

e) Trade
As each country produces only one good, they will have to trade to be able to consume some of the other good. The terms of trade must settle somewhere between the two opportunity cost ratios to ensure that both countries benefit. As we saw earlier:
In Utopia 1 Hardware = 5 Software and in Happyland 1 Hardware = 15 Software, so the terms of trade (the world price) is 1 Hardware = 10 Software If the countries agreed to trade 75 units of Hardware for 750 units of Software, then Utopia and Happyland will have the following amounts of Hardware and Software available for consumption:

Figure 2 Production and consumption

Both countries are better off from specialisation and trade, because they can reach higher levels of consumption of both goods than was possible before specialisation. After trade they are both able to consume beyond their production possibility curves.

f) Limitations of comparative advantage theory
 Trade Barriers. For example, tariff.
 Transport costs and exchange rates may change the relative prices of goods and may distort
comparative advantages. For example, production of bricks in Singapore.
 Non constant opportunity cost of production
 Imperfect mobility of factors of production
 Imperfect competition may lead to prices being different to opportunity cost ratios.

II) Sources of Comparative Advantage

 Differences in factor endowments
 Economies of Scale

III) Explain the benefits (both mutual and individual) of free trade

 Consumption gains
 Lower prices
 Larger variety of goods and services
 Economies of scale. Without international trade, a country would not specialize
in producing the goods in which it has a comparative advantage in due to small
domestic market.
 Economic growth
 Employment
 Balance of payments surplus
 Increased efficiency
 Technological transfers and potential growth.

IV) Protectionism

a) Definition
b) Protectionist Measures
i. Tariffs
ii. Import quota
iii. Subsidies
iv. Procurement Policies
v. Voluntary Export Restraints
vi. Exchange Controls
vii. Health and safety regulations
viii. Embargoes

V) Explain the reasons for protectionism

 Declining industry argument/Reduce structural unemployment
 Correct balance of payment deficit
 Infant Industry argument
 Anti-dumping
 Protecting jobs during a recession/Reduce cyclical unemployment
 Environmental cost – Free trade tends to encourage relocation of polluting
firms from developed to less developed countries
 Diversification
 Strategic industry argument

VI) Explain reasons against protectionism

 Allocative Inefficiency in long run
 Downward multiplier effects/Beggar Thy Neighbor
 Retaliation
 Allocative inefficiency in short run
 Increased cost of production for downstream producers
 Lack of substitutes

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