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A Level Economics Notes

The document provides summaries of key microeconomics concepts including: 1. Scarcity and resource allocation, where resources must be allocated efficiently between wants and needs. Productive, allocative, and distributive efficiency are discussed. 2. Demand and supply analysis, where the factors affecting market demand and supply are outlined. Interrelated demand and supply are also summarized. 3. Additional microeconomics topics are listed including firms and costs, market structures, market failure, and government intervention. The document appears to be notes for an H2 Economics course, consolidating important microeconomics concepts across multiple pages in outline form for student reference.

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A Level Economics Notes

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For Live Classes, Recorded Lectures, Notes & Past Papers visit:

www.megalecture.com
H2 Economics | Concepts & Summaries

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H2 ECONOMICS c tu
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Notes by Zhuoyi | Consolidated & Updated by Kevin
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CONTENTS PAGES
SUMMARY OF MICROECONOMICS 2
SUMMARY OF MACROECONOMICS 17
MACROECONOMICS CHEAT SHEETS 33
SUMMARY OF SINGAPORE ECONOMY 38

Notes by Zhuoyi. Released under Creative Commons Remix License. 1

Consolidated & Updated by Kevin. Distributed on Erpz.net.
https://www.youtube.com/c/MegaLecture
+92 336 7801123
For Live Classes, Recorded Lectures, Notes & Past Papers visit:
www.megalecture.com
H2 Economics | Concepts & Summaries

SUMMARY OF MICROECONOMICS
CONCEPTS COVERED
SCARCITY & RESOURCE ALLOCATION
DEMAND & SUPPLY
ELASTICITY CONCEPTS
FIRMS & HOW THEY OPERATE
COST IN LONG RUN
GROWTH OF FIRMS
MARKET STRUCTURES
MARKET FAILURE

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GOVERNMENT INTERVENTION
GOVERNMENT FAILURE

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Notes by Zhuoyi. Released under Creative Commons Remix License. 2

SCARCITY AND RESOURCE ALLOCATION

The basic economic problem is that of scarcity – the competition between unlimited wants and limited resources. Hence,
resources have to be allocated in such a way to promote the two main microeconomic aims – efficiency and equity.
The three basic economic questions that arise out of the problem of scarcity are thus
1. What to produce
2. How to produce and
3. For whom to produce.

The Production Possibility Curve is the graph that shows maximum attainable combinations of two goods or services that
can be produced in an economy when all resources are used fully and efficiently, at a given state of technology

Productive Efficiency refers to the absence of waste in the production process. (How)
All points on the PPC are productive efficient, points inside the PPC are inefficient representing either
unemployment (not all available resources being used) or underemployment (resources not engaged
fully)
For producers, all points on the LRAC are PE
For consumers, only the MES (lowest point on the LRAC) is PE

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Allocative Efficiency is the situation in which society consumes a combination of goods and services that maximizes its
welfare – i.e., maximum utility. Only one point on the PPC is allocatively efficient (What)
AE is achieved when P = MC

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AE is achieved when MSB = MSC

Distributive Efficiency is achieved when goods and services are produced to those who want or need them – not affected
by an economy’s position on the PPC (For whom)
M A RK E T SY S T E M S
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In different economic systems, the three basic questions are solved differently.
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In a laissez faire or free market, they are solved by the interaction of the market forces of demand and supply – known as
the price mechanism – setting an equilibrium price and output level. The price mechanism works as consumers and
producers are motivated by self-interest and profit- and utility-maximization.
What to produce: Determined by consumer sovereignity
How to produce: Determined by the relative prices of factor inputs
For whom to produce: Determined by purchasing powers of individuals or households
a

In a command or planned economy, the problems are solved by a central planning body.
eg

The mixed economy strikes the balance between the extremes and uses both free market forces as well as government
intervention to answer these questions. (See notes on Market Failure and Government Intervention)
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Notes by Zhuoyi. Released under Creative Commons Remix License. 3

DEMAND AND SUPPLY

F A C T O R S A F FE C T IN G M A R KE T D E M A N D
Population Affects the number of potential customers – the size of the market
• An absolute increase or decrease in total population,
• A change in composition of the population,
Interrelated goods Change in prices of substitutes or complements
Taste & Preferences Fads may lead to sudden and temporary increases or decreases in demand
New inventions and technology may lead to a permanent decreases in demand
Seasonal changes Climatic conditions, or festivities/holidays may lead to increases in demand for
particular goods (like flowers on Valentine’s day)
Expectations of the future Changes as a result of expectations of future price changes
Income (Y) An increase in income leads to an increase in spending on luxury goods, and a decrease
in demand for inferior goods
F A C T O R S A F FE C T IN G M A R K E T S UP P L Y
Costs Changes in costs of production due to changes in prices of factor inputs like RMs, fuel

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and power will cause the supply curve to shift
Related products, prices of Affected depending on whether the good is in joint or competitive supply with other
products
Innovations Improvements in techniques of production will lower production costs and shift the

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supply curve rightward
Natural factors Favourable climatic conditions lead to increase in supply, while natural catastrophes will
decrease the supply of agricultural produce
Government policies Taxation and subsidy policies affect the cost of production

Expectations of the future

•
• c
Subsidies decrease the minimum price at which producers will supply
Taxes, on the other hand, increase the minimum price
Changes as a result of expectations of future price changes
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I N TE R RE L A T E D DE M A N D INTERRELATED SUPPLY
Goods in joint demands are complements Goods in joint supply are produced together
E.g. petrol and cars E.g. beef and leather
Goods in competitive demand are substitutes Goods in competitive supply are produced at the expense
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E.g. beer and ale of each other

Derived demand refers to the demand of a factor of E.g. milk and leather
eg

production for a good

E.g. steel for cars
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Notes by Zhuoyi. Released under Creative Commons Remix License. 4

ELASTICITY CONCEPTS
P R ICE E L A S T I C IT Y O F D E M A N D
ΔQ P
PED measures the degree of responsiveness of the QDD of a good to a change in its price - ΔP
× Q00
Availability of substitutes Type of Good Proportion of income spent Time period
Determinants
on good
Few substitutes
More inelastic Necessity Small proportion Short run
Not very substitutable
Many substitutes
More elastic Luxury Large proportion Long run
Quite substitutable
Usefulness of PED
Government taxation policies
• Either aim to raise revenue, discourage/encourage consumption
• PED would play some part in determining successfulness of policies
• Raising revenue/increasing consumption
o Indirect taxes should be levied on goods with inelastic demand

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o Increase in P > Decrease in QDD
• Decreasing consumption
o Indirect taxes should be levied on goods with elastic demand
o Greater effect on QDD
Pricing policies of firms

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• Policies will be helpful as long as TR > TC
Effect on prices stability
Product differentiation
• A firm’s products can be changes so that PED is more elastic
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o Gives the firm the ability to increase prices to increase TR
I N CO M E E L A ST I C I T Y O F D E M AN D
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ΔQ Y
YED measures the D.O.R. of the DD of a good to a change in consumers’ income - ΔY
× Q00
Usefulness of YED
Production plans
• Knowledge of YED is can allow firms to ascertain the nature of their product (inferior, necessity or luxury) and
plan future output accordingly
a

o When the economy is favourable, firms should expand their production of normal goods with high YED
(luxuries) and cut back on inferior goods
Targeting different income goods
eg

• A good can be a luxury and low income levels, and an inferior good at high income levels
• Knowledge of YED allows firms to segment their market into different income groups to produce the appropriate
price and income range to cater to different customers

Interpretation of YED
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Not responsive to income change

INFERIOR GOOD NORMAL GOOD

NECESSITY LUXURY

0 1

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CROSS ELASTICITY OF DEMAND

ΔQ A P
CED measures the D.O.R. of the DD of good A to a change in price of good B - ΔPB
× QBA
Usefulness: Provides firms the effects on their products’ demand when faced with a change in the price of a rival’s product
or complementary products. If two goods have a high negative CED, the two firms selling them can come together to sell
the goods jointly.

Interpretation of CED
Unrelated goods

COMPLEMENTS SUBSTITUTUES
STRONG WEAK WEAK STRONG

-1 0 1

P R ICE E L A S T I C IT Y O F SU P P L Y
ΔQ P
PES measure the degree of responsiveness of the QSS of a good to a change in its price - ΔP
× Q00
Factor Spare capacity/

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Determinants Time period Number of firms Production period
mobility stocks
More inelastic Short run Low Few Unavailable Long
More elastic Long run High Many Available Short

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Usefulness of PES
Effects on price stability

APPLICATIONS OF D&S FRAMEWORK c

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I N C I DE N C E O F T AX E S AN D S U B S I D I E S
Tax Subsidy
Inelastic PED Incidence falls more on consumers Consumers receive a higher share of the subsidy
Elastic PED Incidence falls more on producers Producers receive a higher share of the subsidy

E F FE C T S O F P R I C E F L O O R S A N D C E IL I N G S
a

Minimum price – set above market equilibrium Maximum price – set below market equilibrium
Protection of the welfare of certain producers or Set to achieve some form of equity to protect
eg

workers consumers
o Agricultural support prices and the minimum o Price control for basic goods in wartime
wage legislation. o Rent control
May want to create a surplus which can be stored in
preparation for future shortages
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Leads to a persistent surplus: continuous accumulation of Resultant shortages create problems

stocks Misallocation of resources: allocatively inefficient
Misallocation of resources: allocatively inefficient Prices no long serve as signals to distribute scarce
Misinterpretation of price signals: creates illusion of a resources
lucrative market o Alternative allocative mechanisms: balloting,
o Producers become complacent rationing
o May bring in new producers, creating greater Emergence of the black market
surpluses
Stock storage = waste of money

Notes by Zhuoyi. Released under Creative Commons Remix License. 6

FIRMS & HOW THEY OPERATE

The production function is the relationship between output and factor inputs
The short run refers to period of time over which at least one Factors Of Production is fixed
The following assumptions are made during the SR
o Total Product = f(labour, capital) only
o Labour is the variable FOP and is considered homogenous
o Capital is the fixed FOP and technology is held constant
The Law of Diminishing Marginal Returns states that as more units of variable factors are applied to a given quantity of a
fixed factor, there comes a point beyond which each additional unit variable factor adds less to the total output than the
previous variable factor.

OBJECTIVES OF THE FIRM

Explicit costs are payments made to outside suppliers of inputs
Implicit costs are costs which do not involve a direct payment to a third party
Accounting cost is the monetary value of the explicit costs of production
Economic cost is the total monetary value of explicit and implicit costs of production

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Revenue
Total revenue = Price × Quantity
Average revenue = Price = Demand
Marginal revenue is the change in the firms total revenue resulting from a change in its sale by one unite

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• The shape of the MR curve reflects the shape of a firm’s DD curve
• The MR curve is always below a firm’s DD curve

Profit Maximization
Normal Profits
Supernormal Profits
Subnormal Profits
c
Accounting Profit = Implicit Cost
Accounting Profit > Implicit Costs
Accounting Profit < Implicit Costs
Zero economic profit
Positive economic profit
Negative economic profit
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…and if you really don’t know anything at all,

PROFIT MAXIMISATION at MR=MC

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COSTS IN THE LONG RUN

Increasing returns to scale Constant returns to scale Decreasing returns to scale
output increase more than output increases proportionately to output increases less than
proportionately to the increase in the increase in inputs proportionately to the increase in
inputs (technical economies of scale) inputs (technical diseconomies of
scale)

The LRAC curve is a typically U-shaped curve

• From the producer’s point of view, all points on the LRAC are PE
• From the consumers’ point of view, only the lowest point on the LRAC (the MES) is PE
• The downward sloping half of the LRAC reflect technical EOS
• The upward sloping half of the LRAC reflect technical DOS

I N TE R N AL E C O N O M IE S O F S C A L E
IEOS are savings in average costs that occur to a firm as a result of expansion of the firm (LRAC falls)
Technical EOS: Technical and engineering factors

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Factor indivisibility – Equipment cannot be used fully when output is small
• Higher output = more efficient use of machines
Increased dimensions – Large machines may be more efficient
• More output for a given amount of input
• Less people needed to operate machines

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Linked processes – A large factory may take a product through several stages in its production
• Save times and costs – no need to move semi-finished products from one factory to another
Specialization and division of labour – In large scale factories, worker do simpler and repetitive jobs
• Less training is needed
•
•
More efficient in a particular job
c
More time saved in switching from one operation to another
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By-product economies – waste to a small plant may be used in manufacture by larger plants
Managerial EOS: Employment of specialists like financial experts etc.
• Division of work increases efficiency of workers in their own areas of responsibility
• Decentralisation of decision making also increase efficiency of management
o Distortion and delays of information are avoided
Marketing/Commercial Economies: Large firms have bargaining advantage
• Preferential treatment – buying in bulk
a

• Unit costs of transportation is decreased as well

Financial Economies: Large firms find it easier and cheaper to raise funds
eg

Risk-bearing Economies: Large firms have an advantage in bearing non-insurable risk

R&D Economies: Large firms can afford R&D facilities
Welfare Economies: Efficiency of workers can be increased by provision of welfare services
Economies of Scope: Large firms enjoy can enjoy economies of scope by increasing the range of products being produced –
fixed costs are shared among products
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I N TE R N AL D I SE CO N O M I E S O F S C A L E
IDOS are increases in average costs that occur to a firm as a result of expansion (LRAC rises)
Complexity Management: A more complex organization requires more skilful entrepreneurs and managers to coordinate
and control
• Expansion of ownership – incentives for manages to reduce costs/increase profits decrease
• Long chains of authority leads to a time-lag in decision implementation
• Extensive red-tape leads to slow responses to change in D&S conditions
Strained Relationships: Lack of personal loyalties on behalf on workers toward the company

Notes by Zhuoyi. Released under Creative Commons Remix License. 8

E X T E R N A L E CO N O M IE S O F S C A L E
EEOS are the savings in average costs that occur to all firms in an industry as a result of expansion of the industry, or the
concentration of firms in a certain location (LRAC shifts down)
Economies of Concentration: More firms located in the same area derive mutual benefit
Availability of Skilled Labour – increased demand for particular skills give benefits
• Educational institutions set up
• Joint development of research and training facilities
Well developed infrastructure – Better infrastructure is set up to cater for economies of concentration
Reputation – large, well established industries builds up a name which customers associate with quality
1. Brand loyalty, steady clientele
Economies of Disintegration: Creation of subsidiary industries to cater to need of a major industry
Economies of Information: Publication of trade journals increase productivity of individual firms

E X T E R N A L D I SE C O N O M I E S O F S CA L E
EDOS are increases in average costs that occur to all firms in an industry as a result of the expansion of the industry or the
concentration of firms in a certain location. (LARC shifts up)

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Increased strain on infrastructure: Infrastructure will be taxed to its limits
2. Congestion, increased fuel consumption
Rising costs of FOPs: Growing industries may create a shortage of RMs or skilled labour

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Notes by Zhuoyi. Released under Creative Commons Remix License. 9

GROWTH OF FIRMS
M E A S U R I N G GRO W T H
1. Quantity of output sold
2. Turnover (total annual revenue)
3. Market share
4. Capital stock (amount of real assets)
5. Number of employees
M E T H O D S O F G RO W T H
Internal Expansion: Making more of a product, or extending a firm’s product range
Mergers & Acquisitions: Forming of new enterprises by the merging with, or taking over of one or more existing firms.
1. Vertical Integration
o Merger between firms engaged in different stages of a production process
Backward integration (oil refineries buying oil wells)
Forward integration (breweries buying pubs)
2. Horizontal Integration

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o Usually an acquisition of firm(s) at the same stage of production in the industry
Market dominance due to reduced competition
Greater specialization and economies of scale
3. Conglomeration
o Mergers involving firms which are not directly related to each other

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Diversify output
Reduce risks of trading
Ensure long term growth
M O T I V E S FO R G R O W T H
See “Measuring Growth”
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1. Exploit EOS
2. Gaining market share
3. Security through economies of scope
4. Increase market valuation
5. Reduce chances of acquisition by another firm

SURVIVAL OF SMALL FIRMS

Demand-side Factors Supply-side Factors

Nature of product DOS setting in early
eg

Bulky and perishable products: bricks, fresh fish MES is low: tailor shops
Products for which variety is preferred: clothes Vertical disintegration
Specialized products: machines, religious items Small firms perform small parts of a larger production
Prestige markets process when disintegration occurs
Markets limited by prices: luxury vehicles, jewelery Low entry barriers
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Direct, personalized services Lack of capital

G&S where direct, individual attention Is required: lawyers, Product-life cycles
doctors, dentists, hairdressers Banding allows small firms to band together to gain
Geographical limitations advantages of bulk buyinh
Local markets due to larger bulk as compared to value and Non-traditional motives
transport costs etc. etc.

Notes by Zhuoyi. Released under Creative Commons Remix License. 10

MARKET STRUCTURE
Spectrum of Market Structures
Competitive Markets Contestable/Non-Competitive
Perfect Competition Monopolistic Oligopoly or Monopoly/Duopoly
Competition Oligopolistic
Competition

∞ Number of Firms/Sellers 1

Bases for comparison of market structures efficiency and equity

The Theory of Contestable Markets shows how monopolies or near monopolies may practice competitive pricing due to
low barriers to entry and exit
• The market for low cost carriers is extremely contestable (~$10m investments)

The concentration ratio of an industry measures the output of an industry largest firm (or firms) as a proportion of the
industry’s total output.

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• For PC, the concentration ratio extremely low
• For a monopoly, the concentration ratio is almost 100%

Market saturation refers to the situation in which a product has become diffused within a market. A diffused product is

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one that is available to almost all consumers, or more applicably, almost all households, for example the refrigerator or an
automobile. Market growth is constrained and demand cannot be stimulated when a market is saturated.
The factors affecting market saturation include
• Consumer purchasing power and prices
•
•
•
Competition
Technology (dynamic efficiency) c
Product life cycles (when products will get replaced by newer products)
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• Population growth

PRICE DISCRIMINATION
Price discrimination is the situation where (a) a producer sells a good to different buyers at two or more different prices or
(b) when the same consumer is charged different prices for the same product for reasons not associated with cost
differences.
a

C O N D I T IO N S N E C E S S AR Y F O R P R I C E D I S C R I M I N A T IO N
eg

1. Control over market supply

2. Ability to segment the market without possibility arbitrage
3. Market segments must have different PEDs

T Y P E S O F P R I C E D I S C R IM IN A T IO N
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First degree Second degree (block pricing) Third degree

Each customer is charged his Different prices are charged for Same product sold at different prices
reservation price (the maximum price different blocks of the same good. to different customers.
they are willing to pay)
Auctions Utilities, taxi fare Admission tickets to parks, etc.

C O ST S A N D BE N E F I T S O F P R I CE D I S C R IM I N A T I O N
Costs
1. Loss of consumer surplus
Benefits
1. Higher output
2. Higher profits for the firm
3. Provision of goods that would otherwise not be produced
a. With PD, a firm may be able to cover costs

Notes by Zhuoyi. Released under Creative Commons Remix License. 11

MARKET FAILURE
Market failure occurs when the free market fails to allocated resources in an optimum and efficient manner. There are
four main sources of market failure:

1 ) E X T E R N A L IT I E S
Externalities occur when some of the costs or benefits associated with production or consumption of goods and services
spill over onto third parties.
When market failure is present, allocative efficiency is achieved when MSB=MSC

Positive externalities Negative externalities

Occur when society benefits from the consumption or Occur when costs are imposed on society from the
production of a commodity or service consumption or production of a commodity or service
Education, vaccination etc. Pollution, smoking etc.

Merit goods Demerit goods

Goods that society values and judges that everyone should Goods that society values and judges to be bad for and

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have whether the individual wants them or not. individual
Underconsumed due to imperfect information – individuals Overconsumed due to imperfect information – individuals
are unaware of long-term benefits and positive externalities are unaware of long-term detriments and negative
externalities
Consumption of merit goods is believed to generate Consumption of demerit goods leads to a fall in social

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positive externalities (MSB exceeds MPB) welfare (MPB exceeds MSB)
Healthcare, education, public libraries Alcohol, cigarettes, drugs, addiction to gambling

2 ) Z E R O P R O V I S IO N O F P U B L IC GO O D S
A public good is a good/service which is c
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1. Non-rivalrous – its benefits are not depleted by an additional user
o MC = 0, for allocative efficiency, P = MC = 0
o Public goods have to be provided at no charge
2. Non-excludable – impossible (or difficult) to exclude people from its benefits
o ‘Free rider’ problem arises – no one will pay for what he can get free
o Private firms will not provide public goods (unable to charge for consumption)
o Public goods, therefore, have to be provided by the government
a

Examples of public goods include streetlamps and public libraries

Note: a private good is one that is both rivalrous and excludable – automobiles, clothing, food etc.
eg

3 ) IM P E R FE C T CO M P E T I T I O N
Prefect competition does not always exist in real markets, and more often than not, free market forces do not lead to
optimum efficiency in resource allocation.
One example is the monopoly: the monopolist’s output is not allocative efficient as it produces at a point where P > MC,
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creating a DWL of both consumer and producer surplus.

4 ) IN E Q U I T Y
The problem of inequity is distinct from that of inequality. Equity refers to a distribution of income that is considered fair –
a normative issue. An equitable distribution is thus not the same as an equal distribution.
While to some extent, some degree of income inequality is desirable – as incentives to work hard etc., a very unequal
distribution of income has negative repercussions especially on the socioeconomic front.
The solutions to inequity are briefly discussed under “Dealing with Inequality and Inequity”

Notes by Zhuoyi. Released under Creative Commons Remix License. 12

GOVERNMENT INTERVENTION
Problem Intervention Evaluation
Zero provision of Direct provision of public goods
public goods
Negative Financial intervention: taxes (equal to the Advantages
externalities monetary value of the MEC) are imposed on Leaves space for market forces to interact
individuals or a firm, internalizing ECs Provision of revenue for the government
Disadvantages
Difficulty in valuating EC
Overvaluation means output is below social
optimum, as with undervaluation means that
output is not sufficiently lowered (ie, society’s
welfare is not always maximized)
Effectiveness of tax dependent on PED
Legislation: laws and administrative rules are Enforcement is difficult and expensive
passed to prohibit or regulate behaviour that
imposes an EC, e.g. pollution permits

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Education, campaigns and advertisements Benefits must outweigh the costs of
solve the problem of imperfect information implementation.
by allowing the external costs to be made A lot of time may be needed for effects to be felt
known to the consumer, discouraging
demand

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Positive Financial intervention: subsidies made to the Advantages
externalities producer or consumer Considered the most effective way of solving
underconsumption as it is easily implemented
Disadvantages

c Like taxes, the valuation of EB is difficult

High government expenditure is required
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Okun’s leaky bucket: each dollar transferred from
a richer to a poorer individual, results in less than
a dollar increase in income for the recipient.
Leaks arise as a result of administrative costs,
changes in work effort, attitudes etc. arising from
the redistribution
Legislation include regulation seatbelt usage, Enforcement requires constant checking which
a

compulsory education etc. may translate to high costs.

Non provision of There is a need to produce merit goods (which are naturally underconsumed) at low prices or for
merit goods free due to four reasons
eg

1. Social justice: they should be provided according to need and not ability to pay
2. Large positive externalities, for example in the provision of free health services helps to
contain and combat the spread of disease
3. Dependants are subject to their guardians decision which are not necessarily the best,
therefore the provision of services like free education and dental treatment is needed to
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protect dependants from uninformed or bad decisions

4. Ignorance: The problem of imperfect information makes consumers unaware of the positive
externalities and benefits that arise from consumption
Imperfect Imposition of a lump-sum tax on a monopolist (shifts AC upwards), and supernormal profits are
markets taken as tax. Governments may also regulate MC/AC pricing for monopolies.
Government may impose regulations to control a monopolies
1. Forbidding the formation of monopolies (e.g., antitrust laws)
2. Forbidding monopolistic behaviour (like predatory pricing)
3. Ensuring standards of provision.
4. Ensuring competition exists (e.g., deregulation)

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NATIONALIZATION AND PRIVATIZATION

Nationalization refers to the public (governmental) ownership of certain firms to provide goods or services sold in the
market, that is, public corporations engaged in commercial activities. Governments often take over natural monopolies to
prevent monopoly pricing and examples include public utilities.
Advantages Disadvantages
Consumers protected from high prices Cross inefficiency may arise
Ensuring social costs and benefits are taken into account No profit motive may lead to nationalized enterprises being
when production decisions are made allocatively inefficient

Privatization refers to a change in ownership of an activity from the public to the private sector.
State owned companies having lost money may privatize to give new owners the responsibility of restructuring the
enterprise.
F O R M S O F P R I V A T I Z A TI O N
1. Denationalization: Privatization of ownership – sales of assets or shares. The government may retain some
shares in the enterprise, and acts as a regulator in this case to ensure that public interest is protected.
2. Franchising: Gives the private sector a right to operate a particular service/activity for a given length of time.

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May be exclusive or competitive
3. Privatization of production: Government buys goods and services instead of producing them
o Refuse collection services being contracted to private firms
4. Privatization of financing: Government relies on consumer charges rather than tax revenue to subsidize

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operations. (e.g., independent school fees)
5. Deregulation: Liberalization of regulation to promote competition through the removal of barriers to entry
(creation of contestable markets)
o Telecommunications, financial industry, airline (US ‘open skies’ policy)
E V A L U A T IO N O F P R I V AT I Z A T IO N
For
c Against
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Revenue for the government – reduces public-sector Long term revenue loss – future profits from industries are
borrowing requirement. Allows the government to make lost by the state
tax cuts without reducing spending. Revenue might come in Natural monopolies are best left to the public sector as
from higher corporate tax receipts from the privatized duplication of services is unnecessary – wasteful and
companies inefficient and not in the best interests of consumers
Increased competition due to contestable markets and Competition may not increase replacing a public-sector
profit motives which translates to monopoly with a private-sector one does not increase
a

Benefits for consumers in the form of lower prices, wider competition as firms are still able to act like monopolists
choices and better qualities as X-inefficiency is reduced (see
eg

Nationalization)
Increased efficiency and flexibility as private companies are Market forces may not ensure greater efficiency – like
normally more successful in raising capital, lowering prices before, remaining as private-sector monopolies are likely to
and cutting out waste. Little governmental interference earn supernormal profits even if they are inefficient. Large
allows the company to respond to market forces, and make firm size also prevents firms from being taken over
commercially sensible decisions and investments
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Wider share ownership increases accountability to the Private-sector firms may not act in public interest as they
public do not take into account negative externalities (like
resultant unemployment) and are unlikely to base their
output and pricing on social justice and equity
Cost-push inflation is reduced. Private firms are less willing
to accept inefficient working practices. Wage raises have to
be justified by higher productivity.

Notes by Zhuoyi. Released under Creative Commons Remix License. 14

DEALING WITH INEQUALITY AND INEQUITY

The tax system can be used to reduce inequalities in income and wealth.
• Progressive taxes: people earning higher incomes are taxed a higher percentage of their income
o Reducing income differentials
o May create disincentives to work with excessive progressivity
• Direct tax imposition on wealth (e.g., inheritance taxes)

Monetary provision: money raised through the tax system is paid to low-income groups to increase YD
• Means-tested benefits are paid to those that fit certain criteria
Unemployment benefits
o Might create disincentives to work
o Not always claimed by those for whom they are designed
o Expensive to administer
o Low take up rates: bureaucracy and social stigma
• Universal benefits are paid out to everyone in certain categories regardless of income/wealth
State pensions, child benefits
o May imply paying out money to those who do not need it

re
o More expensive
Direct provision of goods and services are also financed through the tax system. Free provision means that if services are
used equally by all, lower income groups gain more advantage, reducing inequality
• Healthcare and education

tu
o Subject to market failure, but justified by inequity

c
Le
a
eg
M

Notes by Zhuoyi. Released under Creative Commons Remix License. 15

GOVERNMENT FAILURE
Government failure arises when government intervention in the market to improve market failure worsens the situation:
increases market distortions and reduces welfare and economic efficiency instead of otherwise.
RE A SO N S F O R GO VE R N M E N T F A I L U R E
Problem of incentives: undesirable incentives may create inefficiencies
• Taxation distorts incentives
o Disincentives to work harder with progressive tax
o DWL of a tax may cause a disincentive to consume and produce
• Politicians motivated by political power rather than economic imperatives
o Policies designed to retain power rather than maximize efficiency
o Political pressures dominates societal welfare
Taxes that reduce externalities may be unpopular are avoided
• Inappropriate incentives of public enterprises
Problems of information arise as, just as the markets lack information, more often than not, governments do too. The
government may not know the full costs/benefits of policies even though it wishes to work to the interests of the
consumer

re
• Imperfect information about the true value of a negative externality
o Difficult to trace the source of a negative externality
o Problems of taxation – difficult to put a figure to EC (see Government Intervention)
• Imperfect information about the level of consumer demand
o Public goods provided may not be needed, or produced are wrong quantities

tu
Problems of distribution arise as policies may affect different groups of people differently
Bureaucracy and inefficiency arise when policies are wide reaching and detailed, more people and resources will be
involved. Inflexibility due to bureaucracy leads to a lack of fine-tuning (governments respond more slowly to problems
when circumstances change)

c
Time lags in planning and implementation of policies cause policies to be ineffective, irrelevant, or come too late to solve a
mounting problem
Le
Frequent shifts in government policy may cause economic efficiency to suffer as firms find it difficult to plan without
knowledge of tax rates, subsidies, wage controls etc.
Vicious circle of government intervention
a
eg
M

Notes by Zhuoyi. Released under Creative Commons Remix License. 16

SUMMARY OF MACROECONOMICS
CONCEPTS COVERED
NATIONAL INCOME ACCOUNTING
AGGREGATE DEMAND
CONSUMPTION FUNCTION
INVESTMENTS
NATIONAL INCOME EQUILIBRIUM
TAXATION
FISCAL POLICY
MULTIPLIER EFFECT

re
INFLATION
UNEMPLOYMENT
ECONOMIC GROWTH

tu
BALANCE OF PAYMENT
INTERNATIONAL ECONOMICS
c
Le
a
eg
M

Notes by Zhuoyi. Released under Creative Commons Remix License. 17

MACROECONOMIC AIMS
1. Low inflation
2. Sustained economic growth
3. Low unemployment
4. Balance of payments equilibrium

NATIONAL INCOME ACCOUNTING

Gross Domestic Produce refers to the value of all final goods/services produced within a given country during a given
period of time
Gross National Produce refers to the value of all final goods/services produced by domestic factors of production during a
given period of time
GDP = GNP + NFIA

U S E F U L N E S S O F N AT IO N A L IN CO M E S T A T I S T IC S
Usefulness Limitations
Economic growth Inaccuracies – output going unrecorded, figures understate

re
Can measure changes in output as well as the rate of output
economic growth Nonmarket activities
Gives an insight into living standards Volunteer work, housekeeping etc. are not recorded in
Is measured on a year-to-year basis on increases in NY figures

tu
national output Underground economy
Illegal – drug dealing, prostitution etc.
Legal – moonlighting with double jobs etc.
Hidden from government records
Comparisons across countries
Measure economic strength of countries
Determines countries’ levels of development
c International comparisons

Procedures differ from country to country
Inaccuracies in data provided
Le
Determines whether countries are in need of aid Conversion to common currency is required (PPP is
Classification of countries sometimes used)
Developed/developing etc. based on per capita income Difference in culture
Differences in population sizes
Differences in size of underground economy
May be in different phases of the business cycle – e.g.
peak vs. trough
a

Measures contributions from various sectors Measuring welfare/SOL

Determines if income is fairly distributed Leisure time
eg

Formulating future policies As GDP increases, leisure time may have to be

Can forecast, as well as interpret trends sacrificed – value placed on recreation may not be
Economic planning, policymaking etc. considered
Environmental degradation
Pollution not considered as costs to rise in output,
finite resources may be delpeted
M

Income inequality
Distribution of income, proportion on spending not
reflected
Note
Though GDP does not measure economic well-being, it is positively
Higher output/production does not necessarily
associated with many things people value including a higher improve consumption – e.g. defence spending
material standard of living, better health and longer life
expectancies, higher literacy rates and educational attainment

N O M I N A L V S . RE A L I N C O M E
Nominal income refers to income at ruling prices, with no account of inflation
Real income refers to income at base year prices and takes into account inflation rates

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B A L AN C E O F P A Y M E N T S
In the BOP receipts from abroad are regards are credits (inflows) and entered in the accounts as positive. Outflows are
regarded as debits and taken as negatives. When the credits and debits are taken, they must sum to zero.
A surplus on the BOP refers to a situation in which international receipts (credits) are greater than international payments
(debits) over a year. Conversely, a deficit on the BOP refers to a situation in which international receipts are less than
international payments.
Goods Balance
Imports and exports of physical goods

BOT
Account
Current

Service Balance
Import and exports of services (e.g., insurance)
Income Balance
Wages, interest and profits flowing into and out of the country

FDI
Inflow and outflow of investments – investments overseas will be seen as outflows, investments
Capital Account

from foreign MNCs (for example) will be seen as an inflow

Note that profits from such investments are to be credited into the current account and not here.
Overall Balance

re
A positive currency flow indicates BOP surplus – increase in foreign currency available for adding
to foreign reserves/paying off foreign debts
A negative currency represents a BOP deficit
Official Reserves (Net)

tu
Shows how monetary authorities due with net currency flows, whether surpluses or deficits

c
Le
a
eg
M

Notes by Zhuoyi. Released under Creative Commons Remix License. 19

AGGREGATE DEMAND
AD is defined as the total level of demand in an economy
In a four sector economy, it is given by AD = C+I+G+(X-M)

The AD curve is downward sloping due to three effects

Real wealth effect – When prices go down, purchasing power goes up. Consequently, consumption goes up
Interest rate effect – When price levels go down, demand for money goes down leading to a fall in interest rates.
This means the cost of borrowing is lowered, increasing demand and subsequently, firms’ level of investment.
International substitution effect – When export prices go down, foreigners buy more. Likewise, when import
prices are relatively higher, imports are substituted by domestic products.
S H I F T S I N AD
Shifts of the AD curve may be effected by a change in any of the following
Real Wealth When real wealth increases, demand increases. AD shifts right.
Interest rates When interest rates go down, price levels go down. Consumers are more likely to purchase now
(as the opportunity cost of investment is lower). AD shifts right
Inflation If there is an expected change in prices in the future, consumers will tend to purchase now. AD

re
shifts right.
Income abroad When income from abroad increases, demand for exports increases. AD shifts right.
Exchange rates As local currency appreciates, there in an increase in imports and a decrease in exports. AD shifts
left

tu
Expectations

AGGREGATE SUPPLY
AS is the total output of each good/service that firms would like to produce at each possible price level.
S H A P E O F T H E A S C U R VE c
Le
Keynesian range
Supply is perfectly elastic
Output is at a level less than full employment
o i.e. there is spare capacity
An increase in output doesn’t reflect any changes in the
general price level.
Intermediate range
a

Level of output is approaching full employment

An increase in output is reflected by an increase in
general price levels
eg

Law of diminishing marginal returns sets in

Classical range
Supply is perfectly inelastic
Output is at full employment
And increase in production has merely inflationary
M

pressure – an increase in general price levels does not

reflect any change in output
SHIFTS IN AS
Shifts of the AS curve may be effected by a change in any of the following
Government policies Depending on type of policy, may affect either SRAS or LRAS.
Inflation If prices are expected to rise, produces supply less. SRAS shifts left.
Factor prices Lower factor prices mean lower costs of production. SRAS shifts right, LRAS may shift right if the
decrease in price is permanent
Technology Lowers costs of production, increases output. Both SRAS and LRAS shift right.
Supply shocks Supply shocks are temporary increases/decreases in supply. Only SRAS is affected.

Notes by Zhuoyi. Released under Creative Commons Remix License. 20

CONSUMPTION FUNCTION (C)

The consumption function is maps the level of aggregate consumption desired at each level of disposable income.
Assumptions of the consumption function are that
1. Technology is constant
2. Potential output is constant (i.e., the PPC does not shift)
3. There is fixed general price level

Autonomous consumption (indicated by a) refers to the level of

consumption that does not vary with income
Induced consumption (indicated by bY) refers to expenditure that
varies directly in income (b = MPC)

Average propensity to consume (APC) refers to the proportion of

total income spent on consumption.
C a+bY
It is given by APC = Y = Y
Marginal propensity to consume (MPC) refers to the proportion of

re
extra income spent on consumption.
∆C
It is given by MPC = ∆Y

tu
The absolute income hypothesis states that an increase in absolute income translates directly to a change in absolute
consumption.
c
On the other hand the permanent income hypothesis states that consumption is dependent, to some extent, on one’s
expected income for the rest of one’s life.
Le
Savings refer to the residual of consumption.
S
The APS is given by APS = Y
= 1 - APC
∆S
The MPS is given by MPS = ∆Y
= 1 - MPC
a

S H I F T S I N T H E C O N S UM P T IO N F U N C T IO N
The consumption function may shift due to changes in the following
eg

Wealth An increase in wealth shifts the consumption function upwards

Interest rates or An increase in interest rates shifts the consumption function downwards
availability of credit
Distribution of income A more equal distribution of income shifts the consumption function upwards
Expectation of future Expectations on future prices or income may shift the consumption function upwards or
prices or income downwards.
M

AGGREGATE EXPENDITURE
AE is defined as the total level of spending in an economy.
In a four sector economy, it is given by AE = C+I+G+(X-M)*
Consumption Investments Government expenditure Exports Imports
Autonomous and Autonomous in the Autonomous Autonomous Induced
induced SR

* Do note that even though it is the same as AD, the axes of the AE graph are different

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INVESTMENT (I)
m
Investment (I ) refers to the act of acquiring fixed capital assets and accumulating stocks and inventories. In essence, it is
the process of adding capital goods in an economy.
Autonomous investment refers to investment influenced by firms’ long run profits outlook (under various influences) and
is independent of NY. Investments are autonomous in the short run.
Induced investment refers to investment that varies directly with NY, and is a result of firms responding the changes in the
flow of income.
The marginal efficiency of investment (or rate of return on investments) is a graph plotted on the axes investments against
interest rates. The MEI curve is interest rate inelastic and downward sloping due to the inverse relationship between
investments and interest rates.
C H A N GE S I N IN V E ST M E N T S
Investments may shift as a response to changes in any of the following
Business confidence A higher business confidence (affected by many things) will increase investments.
Cost and availability of The lower the cost of capital goods, the higher the rate of investments.
capital goods
Rate of change of As the income increases at an increasing rate, investments will increase as well.

re
income
Government policies Government policies (e.g. pioneer statuses, tax holidays) generally work to increase investments
Technology Changes in technology shifts the MEI rightward

tu
NATIONAL INCOME EQUILIBRIUM
The equilibrium level of income is the level of income towards which the economy will tend, and, once reached, will be
under no pressure to shift
c At Y1
There is unsold output
Le
Unplanned investments
Firms reduce output in the next time period

At Y2
There is excess demand
Firms draw on stucks
Unplanned disinvestments
a

Firms increase output in the next time period

E Q U I L I B R I UM A N D F U L L E M P L O Y M E N T
M

Full employment is defined as the level at which all economically

active persons employed in the economy, not taking into account
those that are structurally or frictionally unemployed. (Typically
the unemployment rate at full employment lies between 4-6%)

The deflationary gap refers to the amount of AE that falls short of

the level necessary to reach full employment
The inflationary gap refers to the amount of AE that exceeds the
level necessary to achieve full employment. In real life, this hardly
happens as there is very rarely cases of overemployment where
AE>AEfe

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TAXATION (T)
P U R P O SE O F T A X A T IO N
1. Government revenue
2. Social purpose
a. Reduces inequality in income or wealth distribution
b. Checks on consumption of demerit goods
3. Economic
a. Fiscal tool
b. Changes patterns of demand
c. Influences BOP, protects domestic economics
d. Redirects trade through preferential tariffs
TAX STRUCTURES
Direct taxes are taxes on income and wealth, not passed on to consumers. (Income tax, estate duty etc.)
Indirect taxes are taxes on expenditure/production of goods. They can be passed on, and often, consumers bear the
burden of indirect taxes. (VAT/GST, customs duty, sales tax etc.)

re
The impact of taxation refers to whom a tax is levied.
The incidence of taxation refers to the eventual distribution of the tax burden.
∆T
Marginal tax rate (MTR) refers to the proportion of additional income paid in taxes. It is given by ∆Y
.
T
Average tax rate (ATR) refers to the proportion of total income paid in taxes. It is given by .

tu
Y
Proportional Tax Progressive Tax Regressive Tax
MTR = ATR MTR > ATR MTR < ATR
Corporate tax Income tax GST

E F FE C T S O F T A X A T IO N c
Takes into account ability to pay
Le
1. Production 3. Savings – progressive taxes reduces ability and
a. Affects labour supply – progressive taxes willingness to save
discourages work, lowers income, production 4. Resource allocation – helps in resource reallocation,
and supply of labour different goods are taxed differently
b. Acts as a disincentive for enterprise 5. Inflation – direct taxes lead to investments, higher
2. Investments – lower taxes means a higher MEI, but direct taxes means lower disposable income and lower
also means a higher government deficit leading to export prices. Effects of unions
a

higher interest rates, lower investments. Net effect is

variable
eg

GOVERNMENT EXPENDITURE (G)

TYPES OF GOVERNMENT EXPENDITU RE
1. Operating expenditure: Incurred on a day-to-day basis. More or less anything that isn’t development expenditure.
2. Development expenditure: For economic and social development.
M

EFFE CTS OF GOVE RNMENT EXPEND ITURE

1. Resource allocation – varying the types of government expenditure can affect the pattern of production in an
economy
2. Income and wealth distribution – expenditure on health, education, social welfare, old-age pensions benefits
mainly the poor. Coupled with a progressive tax system, reduces inequalities between the rich and poor.
3. Economic growth – expenditure on infrastructure etc. may improve the productive efficiency of a country.
Output employment and income increases.
4. Economic stability – G used as a tool to influence level of economy activity in depression, inflation etc.

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FISCAL POLICY
Fiscal policy (FP) is the use of the budget (T or G) as in instrument of macroeconomic policy to adjust AD
N O N D I S CR E T I O N A R Y F I S C A L P O L I CY : A U T O M AT I C S T A B I L I Z E R S
Tax progressivity – stabilizes abrupt changes in consumption and economic activity
Unemployment compensation – slows down inflation by offsetting loss of earned Y in the unemployed
Family assistance programmes – stabilizes demand as aid is tied to income level – slows down the fall in consumption and
AD
D I S C R E T IO N AR Y F I S CA L P O L IC Y : B U I L T I N S T A B I L I Z E R S
Expansionary FP Contractionary FP
Effected by Increasing G; Decreasing T Decreasing G; Increasing T
Creates a Deficit (G > T) Surplus (G < T)
Effects Permanently increases NY by a multiple amount Debt reduction – if tax revenue is transferred to
if G is a new expenditure and not a substitution the domestic money market; i/r falls; C and I
of another stimulated
A deficit is financed by either borrowing – which Impounding if the surplus is left idle

re
leads to crowding out effect; lowers Im – or
money creation (without such adverse effects)
P R O B L E M S W I T H F I S C AL P O L IC Y
Nondiscretionary Discretionary

tu
Automatic stabilizers, while helping to reduce the severity Not suitable for SS-side inflation, as FP mainly targets AD
of fluctuations in the economy, do not eliminate them Political pressure – problems of what part of the budget to
Adverse supply-side effects: change due to pressure from various vested interest
High taxes discourage effort and initiative (e.g., highly groups. Changes in G are difficult to administer – especially

progressive income taxes)
High unemployment benefits encourages longer c increasing taxes.
Difficult in prediction
Le
search times and increases equilibrium unemployment Crowding out effect
increase Exact effect may vary
Fiscal drag: In the even of a recession, attempts to move Size of multiplier may mean MPC (and therefore
out of recession would be dampened by the effect of MPM) fluctuates variably
automatic stabilizers. This means that economic recovery Time lags: recognition, administrative as well as operational
takes a longer time lags.
Inflexibility as projects underway are difficult to halt
a

without resource wastage

Crowding out of private investment when government
spending increases
eg

Cost inflation due to rise in corporate taxes

Case: Fiscal Policy with respect Singapore

Note that FP is directed a long-term economic growth, and has a limited effect on Singapore due to our high MPM and
MPS, both of which affect the multiplier which in turns dampens the effect of fiscal policy.
M

Also, we have a low MPT as compared to most developed countries, and need to keep it low to maintain competitiveness,
thus increasing T is not suitable.

Notes by Zhuoyi. Released under Creative Commons Remix License. 24

THE MULTIPLIER EFFECT

The multiplier is a numerical coefficient by which a the change in AE is multiplied to show the final change in NY.
1 1 ∆Y 1
The multiplier is given by k = MPW = MPS+MPT+MPM = ∆AE = 1-MPI

T H E M UL T I P L I E R P RO C E S S

When there is an rise in injections (say, firms decide to invest more), aggregate expenditure (C+I+G+X-M) will be higher.
Firms will respond to this increased demand by using more labour and other resources and thus paying out more incomes
(Y) to households. Household consumption will rise and so firms will sell more. Firms will respond by producing more, and
thus using more labour and other resources. Household incomes will rise again. Consumption and hence production will
rise again, and so on. There will thus be a multiplier rise in incomes and employment. This is known as the multiplier effect.
The process, however, does not go on forever. Each time household incomes rise, households save more, pay more taxes
and buy more imports. In other words, withdrawals rise. When withdrawals have risen to match the increased injections,
equilibrium will be restored and National Income and employment will stop rising. (Sloman)

At Y0, planned AE > planned output

re
Unplanned disinvestments of AB
Firms increase output by BC to match the higher AE, Y0B
NY increases from Y0 to Ya
Consumption rises, AE rises to YaD

tu
Unplanned disinvestments of CD
Firms continue to increase output until planned AE =
output

c
Le
A C C E L E RA T O R T H E O R Y
a

The accelerator theory relates investments to a change in NY. It states that firms will choose to invest when NY is rising at
an increasing rate.
eg

The accelerator process

1. Autonomous AE increases
2. Multiplier kicks in, NY increases – multiplier effect
3. If NY increases faster than before, firms respond by increasing investments
4. The increase in investments increases AE
nd
5. 2 multiplied increase in NY occurs – multiplier effect
M

6. 2nd increase in investments occurs – accelerator effect

Notes by Zhuoyi. Released under Creative Commons Remix License. 25

INFLATION
Inflation refers to a situation in the economy where there Is a general and sustained increased in prices, and is measured
in terms of indices such as the CPI.
CONCEPTS
Inflation may be characterized as moderate (>10%), galloping (double- to triple-digit percentage increases) or in a state of
hyperinflation (up to a million or a trillion percent).
Reflation refers to a period of mild inflation. Disinflation refers to the process of elimination or reducing inflation while
deflation refers to a situation in which there are falling prices. Slumpflation refers to a period during which there is both
inflation and unemployment. Stagflation refers to a period during which there is inflation with no or negligible growth in
GDP/GNP/
C A U S E S O F I N F L A T IO N
Demand-pull inflation (shifting AD) may be caused by
Increased AD (anything that changes CIGXM)
o Reduction in exchange rates
o Reduction in taxes

re
o Reduction in i/r
o Rising consumer confidence
o Faster economic growth externally
Changes in money supply

tu
o Money supply growing faster that output
o Increased bank borrowing
Cost-push inflation (shifting AS) my be caused by
Higher costs
o Wage-push inflation
c
o Profits-push inflation - firms passing on costs to consumers by raising prices
o Supply-side inflation - rise in prices of imported raw materials
Le
o Higher import/export prices
o Increase in the level of indirect taxes
o Structural inflation due to structural rigidities (like labour immobility)
C O ST S O F I N F L A T IO N
Effects of income redistribution Effects on production and investment
Fixed income earners lose out – Yreal falls Mainly depends on the extent of inflation
a

Demand-pull inflation generally widen profit margins, Favourable to economic growth – profits rise, costs lag
cost-pus inflation may squeeze profit margins. In behind
eg

general, consumers lose out if inflation causes Yreal to Sends the wrong signals to produces if inflation is
fall unexpected
Savers lose out Creates uncertainty
Debtors gain, creditors lose out. In general, inflation Increases speculation
tends encourage borrowing and discourage lending.
Effects on balance of payments Other effects
M

Depends on the extent of inflation with respect to other Wage spiral (higher prices Dd for higher wages
countries. Consider the situation in which the domestic higher wages higher prices etc.)
market experiences greater inflation that foreign markets Stimulus: depends on the level of employment at
Exports become less competitive in foreign markets, which the economy is at
foreign imports become more competitive in domestic o Consider the different effects of cost-push
markets and demand-pull inflation

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UNEMPLOYMENT
T Y P E S AN D CA U SE S O F U N E M P L O Y M E N T
Frictional Structural
Arises when people are in between jobs – exists even when Arises due to
the economy is at full employment. 1. Changes in the structure of the economy
1. Imperfect labour market operations 2. Mismatch between skill/location of the labour force
a. e.g. Imperfect information and those required for new jobs
2. Immobility of workers a. Changes in pattern of demand/supply
Classical (Real-wage) Demand-deficient (Cyclical)
1. Monopoly power causing wages to be above market Involuntary unemployment
clearing level 1. Due to lack of AD for goods
a. Role of unions 2. Associated with transitions of the economy through
the business cycle
C O ST S O F U N E M P L O Y M E N T
Lost output
Waste of resources – deskilling of workers over time

re
Government finances
o Lost of tax revenue
Direct – Unemployed do not pay income tax
Indirect – Unemployed consume less and hence pay less indirect taxes

tu
o Increased spending on welfare benefits
Loss of profits
o Firms lose profits from potential output at full employment
Social costs

ECONOMIC GROWTH c
Le
Actual growth refers to the percentage annual increase in national output.
Potential growth refers to the speed at which the economy could grow should no resources be left idle.
F A C T O R S A F FE C T IN G R A T E O F E CO N O M I C GR O W T H
Productivity refers to the quantity of goods/services that a worker can produce for each hour of work
1. Natural resources
a. Increase in natural inputs
a

b. Increase in quantity of labour

c. Increase in population size of participation
2. Human capital
eg

a. Knowledge/skills acquired
b. Education, training, retraining
3. Physical capital
a. Increase in stock of capital goods
b. Economic growth is fastest when the share of output devoted to capital formation is large
M

4. Technological knowledge
a. Innovation, new production methods
C A U S E S O F S L O W / N E GA T I V E E C O N O M I C GRO W T H
1. AD – if AD does not expand at the rate of supply 5. Lack of human capital – education, training and
increase, unemployment may exist and growth may be retraining plays a part in preparing the workforce for
slowed growth.
2. Low rate of Im – may be due to low savings. 6. Sociocultural factors – religious/social norms may
3. Capital accumulation – a lack of increase in capital impact the economy
would mean that growth has an upper limit. 7. Political factors – stability is essential for growth
Technological change would then be necessary for 8. Policy mistakes/external shocks
economic growth
4. Lack of natural resources

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C O N SE Q UE N CE S O F S L O W E C O N O M I C G RO W T H
Unemployment/lost output Less consumption/savings Lower investment/LR growth
Less workers would be hired, capital Lower income means falling Recession may lead to falls in
accumulation falls. expenditure as well as savings. investment via the accelerator effect.
Borrowing may also be greater Long term economic growth is
compromised

COST-BENEFIT ANALYSIS: ECONOMIC GROWTH

Benefits Costs
Increased levels of consumption Present opportunity costs of growth
Higher standards of living To achieve even faster growth, firms have to finance more
Provided economic growth > population growth, it will lead investments etc. These finances come from savings, or
to a higher Y/capita. This leads to a increase in retaining profits or taxes, and raising these means, in some
consumption. way or other, a cut in consumption. In the SR high growth
thus leads to less consumption and more.
Avoiding other macroeconomic problems
Without a growth in productive potential, a demand for Growth my generate extra demand

re
higher Y may lead to higher inflation, BOP disequilibrium “The more people have, the more they want” – higher
etc. Growth helps to meet these demands and avoid such consumption many not necessary lead to higher utility
crises.
Social effects
Income redistribution is easier Materialism, less caring society etc. May drive up violence,

tu
If Ys rise, governments find it easier to redistribute Y to the crime and related social problems
poor without the rich losing out. Also, government
revenues rise (from increases in tax revenue) and such Environmental costs
revenues can be used to alleviate poverty. Without a Society may be more concerned for the environment, but

more limited.
c
continual rise in NY, the scope for helping the poor is much also more likely to destroy it. Higher levels of consumption
translate to higher levels of pollution and waste.
Le
Society feels it can afford to care more for the environment Non-renewable resources
As people grow richer, they may become less occupied with Such resources are rapidly depleted, rather than used more
private consumption, and more concerned to live in cleaner efficiently.
environments. Likewise, the regulation of pollution tends to
be stricter in DCs than in LDCs. Effects on income distribution
While some people may gain from higher SOLs, other may
a

Increase in government tax revenue lose. If the means to growth are greater incentive (such as
cuts in progressivity of Y tax), then the rich get richer and
the poor get poorer – no trickle-down is felt.
eg

Growth may also involve changes in production, which also

means changes in the skills required. People may find their
skills no longer relevant as a result of growth.
Unemployment may rise.
References: Sloman, RJC Economics notes.
M

Notes by Zhuoyi. Released under Creative Commons Remix License. 28

BALANCE OF PAYMENTS
A BOP is in equilibrium if annual trade is in overall balance and the exchange rate remains stable
C A U S E S O F D I SE Q U I L I BR I U M
1. High MPM – caused by a preference for foreign 5. Exchange rates – appreciations of domestic currency
products leading to trade deficits. In Singapore’s case means that imports are cheaper
may be due to lack of natural resources 6. Inflation
2. Changes in pattern of demand 7. Cyclical and monetary changes – and increase in GDP
3. Changes in pattern of production – production may due to higher AD means that imports become cheaper.
shift overseas 8. Institutional changes
4. Changes in terms of trade – if DDM is price inelastic, a 9. Sociopolitical factors
fall in imported goods may mean that BOP improves
C O N SE Q UE N CE S O F P E R S I S T E N T D I SE Q U I L I B R I U M
Persistent Deficit Persistent Surplus
1. Foreign reserves/exchange rates – foreign reserves 1. Other countries’ deficit – another country’s deficit may
decline, borrowing may be necessary to finance deficit, become a problem for the country with a surplus in the

re
currency may depreciate and consequently, external future
purchasing power declines. External debts incurred, 2. Dutch disease – short term capital flows my result in
the servicing of which leads to further outflows of speculation, causing an appreciation in a country’s
currency currency. Exports become uncompetitive

tu
2. Reduction investments – a persistent deficit implies 3. Inflation – if the surplus is due to an increase in AD,
problems in a country. This leads to a loss of inflationary pressures may occur if the economy if
confidence and thus investments close to Yfe
3. Employment – if deficit is due to higher cost of

c
production, a persistent deficit may imply further job
loss is a present threat
Le
a
eg
M

Notes by Zhuoyi. Released under Creative Commons Remix License. 29

INTERNATIONAL ECONOMICS
International trade refers to the exchange of goods and services between countries, involving the use of different
currencies and crossing international borders

The factors encouraging trade are

1. The uneven distribution of resources throughout the world
2. The need for different proportion of factor inputs for the production of different goods
3. The limited international mobility of resources
T H E T H E O R Y O F C O M P A R AT I V E A D V A N T A GE
A country is said to have comparative advantage in the production of a good when the Assumptions held:
country can produce that good at a lower opportunity cost than another country. 1. No transport costs
2. No trade restrictions
The law of comparative advantage states that trade thus arises between two nations 3. Perfect mobility
if there is a difference between the comparative costs of producing particular goods. 4. Full resource employment

re
Production before specialization Production after specialization
Wheat Cloth Wheat Cloth
Country A 100 60 Country A 110 54
Country B 5 10 Country B 0 20
World output 105 70 World output 110 74

tu
Sources of comparative advantage
1. International differences in factor endowments
a. Differences in resources endowments, climate etc.

c
b. The relative prices of factor inputs (and therefore prices of goods and services) thus differ
c. Note how factor endowments may change over time
Le
2. Differences in technology
a. Varying intensities of R&D, ability to keep up with technology
3. Dynamic comparative advantage
a. Refers to the changing pattern in CA
b. Looks to governments to continually establish policies and promote opportunities for countries to best
exploit their areas of CA
a

T R A DE : A N A N A L Y S I S
Advantages Disadvantages
eg

Greater world output, higher consumption of goods and Unfair competition and dumping
services Unfair competition as some imports may be heavily
With trade, consumption can occur outside the PPC at subsidized by governments
previously unattainable levels, directly translating to Local enterprises may be stifled
higher levels of welfare for society
M

Imports of harmful goods

Reduction in unit costs of production
Exploiting EOS by small domestic markets – ability to Overdependence on other countries
export to other countries helps to widen markets for Specialization inevitably means the narrowing of
products economics structures
Changes in market conditions may also cause serious
Stimulate economic development and growth economic decline due to structural rigidities
Expansion of domestic markets Certain goods are basic, essential, or strategic and
Increasing competitiveness of domestic markets countries cannot afford to depend on foreign suppliers
Attracting investment for such goods

Facilitates transfer of technology and ideas

Consumer benefits
Greater consumer choice
Lower prices
Better quality of products

Notes by Zhuoyi. Released under Creative Commons Remix License. 30

B A R R I E R S T O T R A DE
Natural barriers to trade
1. High transport costs (e.g. port taxes, freight charges etc.)
a. Costs of moving and handing goods.
b. Transport costs raises COP and reduces relative efficiency
2. Factor immobility
3. Increasing costs of production
a. Opportunity costs are not constant
b. LDMR sets in, raising costs of production in the process
c. Explains the prevalence of partial, rather than complete, specialization

Artificial barriers to trade: Protectionism

Tariffs
Tariffs are custom duties or taxes on imports imposed by governments, serving to raise the price of imported goods.
Effects of a tariff:
1. Consumers reduce consumption of imports
a. Switching to domestically produced import substitutes
b. Consumer surplus decreases

re
2. Domestic producers expand production
a. Revenues previously earned by foreign producers now go to domestic producers
b. Producers’ surplus increases
3. Gains in government revenue

tu
a. Tariffs received as tax revenues
b. Overall deadweight loss
Note that the overall effect of a tariff, like all taxes, depend on the PEDM

Quotas
c
Quotas are limits imposed on the physical quantities or values of goods imported into or exported out of a country.
The effects of a quota are more or less similar to those of a tariff (but do take note of how the surpluses change and where
Le
profits go in the case of quotas).

Other nontariff barriers

These include embargos on imports, voluntary export restraints, rules of origin etc.
P R O T E C T IO N I SM : AN AN A L Y S I S
a

Point Evaluation
Protection of infant industries
New industries need to be protected from competition in Difficulties in identifying which industries will achieve CA in
eg

their initial stages. Time is needed to develop skilled the LR. Also difficult to determine when the industry is
management, reputation, reap EOS etc. For industries sufficiently established to do without protection.
having potential CA, a guaranteed home marked is
essential.
Protection of mature industries
Traditional industries may lose their CA in world markets. Perpetuates domestic inefficiency and represents
M

Protection is thus needed to allow such industries to decline misallocation of resources. Also likely to be met by
slowly and prevent the precipitation of massive regional retaliation.
unemployment.
Increasing domestic production
Especially during recessions or economic stagnation.
Protectionism diverts demand towards domestic products
Protection against low wage foreign labour
To allay fails fears of SOLs dropping due to import of Goes against the principle of CA – losses in CA should drive
cheaper goods or loss of jobs a country to source for new areas of CA. Benefits of trade
are also subsequently lost under protectionism.
Reduce BOP deficits
Deficits caused by high levels of imports may run down Depends on the PEDM and PEDX. Governments must also
foreign reserves. take into account other causes of the disequilibrium and
tackle these causes directly
Prevent unfair trade practices
Protection against dumping, etc. Protectionism in this case is justifiable – just note that level
of protection should only cover the differences between
the export price and normal selling price.

Notes by Zhuoyi. Released under Creative Commons Remix License. 31

Noneconomic reasons may include political reasons like national security or foreign policy, or social reasons like the
restriction of imports of harmful commodities.
G L O BA L I Z AT IO N
Cost-Benefit Analysis: International capital movements
Benefits Costs
1. Economic growth, employment 1. May stifle local enterprises
2. Increased productivity, higher wages 2. Destabilizing effects of fund movements
3. Transfer of managerial and technical skills 3. Economic dualisms
Host 4. Benefits from technology, PPC shifts outward 4. Crowding out effect
5. Demonstration and competitive effects 5. Environmental degradation
6. Increased exports, forex earnings
7. Government tax revenues
1. Other industries’ contribution to exports increase 1. Short run loss of jobs
2. Income from abroad – remittances etc. 2. Lower wages
3. Investments abroad improve competitiveness 3. Loss of tax base and thus revenues
Source
4. Falling exports if investments from abroad
supplies the market directly from the home
country

re
c tu
Le
a
eg
M

Notes by Zhuoyi. Released under Creative Commons Remix License. 32

MACROECONOMICS CHEAT SHEETS

CONCEPTS COVERED
UNEMPLOYMENT
INFLATION
ECONOMIC GROWTH
BALANCE OF PAYMENTS

re
c tu
Le
a
eg
M

Notes by Zhuoyi. Released under Creative Commons Remix License. 33

UNEMPLOYMENT
Types and Causes Policy Options
Note that some level of unN will always be present in an Expansionary demand Supply-side policies
economy at the level we know as full employment. This management policies increase the productive
natural rate of unN is also known as equilibrium unN. Generally only works for demand- capacity of the
Below are the four main types of unN you should be deficient unN as these policies economy
aware of. increase AD Improving
Frictional Structural employability: through
Arises when people are in Arises due to Fiscal policy education, retraining
between jobs – exists 1. Changes in the structure G↑ on supply-side policies AD↑ etc. (e.g. WDA in
even when the economy is of the economy Income tax ↓ more incentive to Singapore)
at full employment. 2. Mismatch between be employed Improving incentives
1. Imperfect labour skill/location of the labour for people to search
market operations force and those required Monetary policy and accept N (e.g.
m
2. Immobility of workers for new jobs i/r ↓ I ↑ AD↑ through tax/benefit
- Changes in pattern of [xcrp to increase demand for reforms)
demand/supply exports or to decrease amount of Sustaining EG in the LR
foreign labour] - weak constantly creates new

re
jobs
Classical Demand-deficient (cyclical) Conflicts
1. Monopoly power Involuntary unemployment In general solving demand-deficient unN would have demand-
causing wages to be above 1. Due to lack of AD for pull inflationary pressures – demand and costs pressures.

tu
market clearing level goods Also, a low rate of unemployment may result in a current
- Role of unions 2. Associated with account deficit.
transitions of the economy
through the business cycle
Consequences

Ye < Yf
Internal c Decreased FDI
External
Le
unN ↑ output, G, NY all ↓ unN↑ FDI ↓
unN ↑ SOL ↓ Especially in the case of structural unN – labour force is
deskilled, companies tend to pull out
Short run

Loss of potential output that could have been

produce if unemployed were employed less goods [unN↑ M↓ CP, current account ↓] – this point is rather
for consumption weak
a

SOL ↓ for unemployed – forced to consumer less due

to lower YD
eg

Loss of output and profits: Income redistribution

unN limits the outward shift of the PPC The Y-gap worsens as structural/seasonal unN tends to
Structural unN – inward shift of the PPC due to happen to people from lower Y groups
quantity of labour falling
Fiscal costs to governments
Long run

Deskilling – skills becoming obsolete In welfare states, G↑ as unN benefits are paid out.
M

PEG is affected in the LR – PPC moves out less quickly Tax revenues ↓ both directly (as zero Y earners do not pay
income tax) and indirectly (zero Y earners consume less and
Lower PEG thus pay less taxes on C).
unN↑ dissavings S↓ supply of loanable funds
m
↓ i/r ↑ I ↓ K stock ↓ PEG ↓ (outward shift Inefficiency as an economy is producing within the PPC
of PPC limited)
Negative social effects like strikes, crimes and suicide.

Notes by Zhuoyi. Released under Creative Commons Remix License. 34

Refers
efers to a situation in the economy where there Is a general and sustained increased in
INFLATION prices, and is measured in terms of indices such as the CPI.
Types and Causes Policy Options
Demand-pull inflation (shifting AD) Contractionary Supply side policies
Increased AD (anything that changes demand management Market policies
CIGXM) policies. Generally used Manpower policies:
o Reduction in exchange rates for Dd-pull inflation. - Improve efficiency of labour markets such
o Reduction in taxes that unN↓
m
o Reduction in i/r (hence I ↑) Fiscal policy - Better matching of workers to jobs
m
o Rising consumer confidence T↑ I ↓, C↓ AD↓ Pro-competition policies:
o Faster economic growth G↓ AD↓ Reduce the monopoly/market power of
externally unions/business, such they unable to push
Changes in money supply Monetary policy up W rates ahead of average productivity
o Money supply growing faster that i/r ↑ Im↓, C↓ AD↓ increases. (e.g. antitrust laws)
output SsM ↓ i/r ↑ etc Wage-Price policies
o Increased bank borrowing - Wage guideposts
Cost-push inflation (shifting AS) - Price guideposts
Higher costs - Wage-price freeze
o Wage-push inflation Supply side economics

re
o Profits-push inflation - firms - Increase AS e.g., via increasing
passing on costs to consumers by technological capabilities
raising prices Conflicts
o Supply-side inflation - rise in Note that regulating inflation should always be a government’s
governme first

tu
prices of imported raw materials priority
riority as it may lead to a major economic collapse as well as the
o Higher import/export prices implementation of currency reforms.
o Increase in the level of indirect Meeting other policy objectives often conflicts with decreasing
taxes inflation – e.g. increasing employment, economic growth etc.:
o Structural inflation due to
structural rigidities (like
immobility)
like labour c
Phillips’ Curve:: Trade off between unemployment and inflation?
Stagflation, slumpflation
Le
Consequences
Internal External
Case 1: Demand-pull inflation 2 Cost-push inflation
Case 2: BOP – CP, relative prices of exports ↑ quantity of
Negligible change in output, output, unemployment and exports ↓ current account worsens feedback
unemployment and NY - NY all fall mechanism problem worsens especially when
a

economy at Yf. Consequently, SOL falls inflation is cost-push,, may alleviate demand-pull
demand
GPL increases. inflation*
Short run

Consequently, SOL falls. *Cheaper M lower Dd for local goods X-M↓

AE↓

FDI – FDI will probably ↓ (due to inflation being a

sign that the economy is unstable), but depends on
the degree of inflation
M

BOP worsens – pressure on xcr to depreciate.

depr
Lower level of investments Redistribution of income
m
Moderate/high inflation business confidence ↓ I ↓ Wage price spiral
rate of EG limited (PPC does not shift out as much) Prices↑ Dd for higher W W↑ prices ↑ etc.
Mild inflation stimulates EG and builds business confidence as it Function of money breaks down
Long run

m
is a sign of a healthy economy I ↑ PPC shifts outward - Money as a medium of exchange, serves as a store
of value. Under severe inflation, these functions
Savings decrease, consequently, EG is limited break down. Regression of the economy into one
The value of money falls as people would rather consume at the that deals with barter trade. Consequently,
Consequent the
m m
present time SsM available for I ↓ i/r↑ I ↓ EG is price mechanism is distorted (under hyperinflation)
limited and can no longer rationally allocate resources.

Notes by Zhuoyi. Released under Creative Commons Remix License.

License 35

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H2 Economics | Concepts & Summaries

Specifically referring to a growth in real GDP per capita

Actual Economic Growth: Economy moves from a point within to PPC
ECONOMIC GROWTH to another that is closer to the PPC
Potential Economic Growth: Outward shift of the PPC
Causes of PEG Policy options
Increase in the quantity of resources Actual EG - Expansionary Potential EG – Supply-side policies to
m
1. Physical K – I ↑ AD↑, AS↑ demand management increase productive capacity
2. Labour resources – labour force ↑ policies
3. Quantity of land/RM Cutting of tax rates – incentive for
Noting that RM can now be easily Fiscal policy people to work harder and increase
imported T↓ YD↑ C↑ AD↑ productivity
3. Entrepreneurship – innovation, opening G↑ AD↑ Cutting unemployment benefits to
new markets, increased efficiency create more incentives to be
Monetary policy employed
Improvements in the quality of resources i/r↓ I↑ (more borrowing, Education and retraining
Investments in human capital spending) AD↑ R&D to find more efficient ways to
Research and development produce, allocate resources
Improving the quality of land Conflicts
The extent to which AEG benefits the economy is limited by Yf level.

re
Improvements to productivity of resources AEG may lead to demand-pull inflation when the economy is operating
Technological improvements – knowledge at/near Yf.
creation and application Consequently, this affects the BOP as domestic currency strengthens
and X competitiveness decreases, worsening the current account.

tu
Also: Infrastructure and
External influences (growth of trade partners) PEG↑ could mean that the current level of C falls in the pursuit of K
accumulation for future production. This is, however, beneficial in the
LR, provided that governments actively pursues AEG

Consequences
Internal
c External
Le
Benefits Benefits
- Increase in the amount of g/s available for C - If EG is brought about by X↑ CP the current account
- N↑ - more factors employed to produce more g/s improves BOP improves
- These leads to SOL↑ - Stable EG prestige in the international arena
Short run

- Consequently, domestic currency may strengthen

Costs
a

- To achieve higher growth rates in the future, current Costs

C has to reduced – divert more resources into the Appreciation of the currency may lead to loss of X
production of K goods competitiveness
eg

- EG when the economy is at Yf would have

inflationary pressures
Benefits Effects on income distribution
m
- PEG from I ↑ (both domestic investment and FDI) While some people may gain from higher SOL, other may
- Income equality is improved – governments find it lose. If the means to growth are greater incentive (such as
easier to redistribute Y to the poor without the rich cuts in progressivity of Y tax), then the rich get richer and the
M

losing out. Also, a rise in government revenue means poor get poorer – no trickle-down is felt.
Long run

that the gains can be used to help alleviate poverty. Growth may also involve changes in production, which also
means changes in the skills required. People may find their
Costs skills no longer relevant as a result of growth. Structural
- Social costs: increased working hours, structural unemployment may rise.
changes stress and lower QOL
- Environmental damage, depletion of natural The rate of AEG must outpace the rate of population growth
resources. High C means higher levels of pollution and for it to be beneficial
waste

Notes by Zhuoyi. Released under Creative Commons Remix License. 36

Surplus: international receipts (credits) exceed international payments (debits).

BALANCE OF PAYMENTS Deficit: international payments (debits) exceed international receipts (credits).
Causes of a disequilibrium Policy options to manage a BOP deficit
In the current account (goods and services) Expenditure reduction Supply-side policies
1. Changes in the TOT – changes in the price of Contractionary FP/MP: 1. Raising productivity and
exports relative to the price of imports NY↓ GPL↓ X efficiency in the export sector
2. Relative growth rates – growth rates in the competitiveness ↑ DdX↑
domestic economy relative to that in trade partners (X-M)↑ BOP improves 2. Greater investment in new
3. Changing comparative advantage (Dependent on YEDM) K, R&D etc. leading to a faster
4. Changes in exchange rates – BOP deficits/surpluses pace of innovation and
caused by strength of exchange rates Contractionary MP: development of new products
AE↓ i/r↑ SR K flows in export markets.
In the capital/financial account (investments and improves capital and financial
loans) account BOP improves 3. Non-price competition –
1. Short term capital flows (“hot money”) – improving quality/design of
speculative money moving in and out of countries Expenditure switching exports, marketing etc.
looking for best returns Enhancing X competitiveness
2. Long term capital flows – FDI, portfolio 1. Switching to import Direct policies
investments etc. substitutes Protectionism

re
Conflict 2. Increasing foreign demand Reducing import
Technically, rapid EG may happen at the expense of for domestic exports. expenditures, increasing
worsening the current account – especially if EG is export revenues
fuelled by high consumption. This is especially due to i/r ↓ X competitiveness ↑

tu
the cyclical nature of EG and how in influences the (X-M) ↑ BOP improves
BOP.

Consequences

Deficit
(X-M) ↓ AE↓
Internal
Surplus
(X-M) ↑ AE↑
c Deficit
Net outflow of money
External
Surplus
Net inflow of money upward
Le
downward pressures on xcr pressures on xcr
Output↓, employment↓, NY↓ If Demand-pull

Short run
the economy is operating below inflation if the
Yf economy is
operation at Yf
Reduces inflationary pressures if
a

the economy is operating above

Yf
Deficit Surplus
eg

Depletion of foreign Necessarily means that there

Long run
reserves in the LR are trade deficits elsewhere in
national debt incurred to the international economy.
finance deficit Trade partners may retaliate by
imposing trade restrictions
M

Notes by Zhuoyi. Released under Creative Commons Remix License. 37

SUMMARY OF SINGAPORE ECONOMY

CONCEPTS COVERED
MACROECONOMIC OVERVIEW
TRADE
FISCAL POLICY
MONETARY POLICY

M A CROECONOM I C O VE RVI EW
Economic growth Inflation Employment Balance of payments Exchange rate
High, sustained Mild inflation Low BOP equilibrium Modest, gradual

re
Aims economic growth unemployme appreciation of the
nt SGD
1 3
GDP: SGD 59.4b CPI (2004=100) Unemployme Surplus of SGD 38b 2008 Averages
1 2
(2Q09) 2007: 103.5 nt: 3.4% (Sep on the goods balance 1 USD : 1.414 SGD
2 1
Growth: 0.6% 2008: 110.3 2009) in 2008 (down from

tu
1
(3Q09) SGD 59b in 2007)
Statistics
Foreign reserves:
SGD 250b (USD

c 3
176b) (End 2008)
Le
Singapore focuses Mild inflation is Singapore Singapore’s BOP runs Singapore’s exchange
more on of long good as it is a chiefly suffers a surplus (X>M) rate regime is a
run growth than on sign of economic from We tend to managed float. (Read
short run growth growth structural export more more under
unemployme high-value “Monetary Policy”)
Policies in place are Generally nt goods
more on the supply affected by cost- The MAS policy on a
a

side push inflation Result of For major modest and gradual

Attracting moving up exports/imports, see increase of our
investments Especially the value below exchange rate is in
eg

Increasing vulnerable to chain and place to make imports

employability, import-led tertiarization Singapore’s capital cheaper in light of our
education, or inflation (see and financial account dependence on
skills exchange rate) is always negative imports for raw
Remarks
materials (cost of
M

production of our
subsequent exports
are thus cheaper) –
case in point:
granite/sand ban)

The exchange rate is

kept high to avoid
imported inflation.
Note also that we are
able to do this due to
our tendency not to
compete on price.

Notes by Zhuoyi. Released under Creative Commons Remix License. 38

T RA DE
Note that Singapore is a free port, and imposes no tariffs on goods/services entering the country. FTAs, therefore are
signed on terms unrelated to tariffs (on Singapore’s side of the agreements).

Major Exports Major Imports

Refined petroleum, industrial machines, electronic Crude petroleum, iron and steel, industrial machines,
components and parts electonic components and parts

Top trading partners

USA Malaysia China Indonesia Japan Taiwan Thailand
2008 Export
1
volume 33.4 57.6 43.8 50.3 23.4 13.4 18.6
(billions SGD)
2008 Import
1
volume 52.8 53.8 47.5 24.8 36.5 23.2 15.9
(billions SGD)

re
Other partners: Australia, India, Vietnam, Myanmar

Free Trade Agreements (as of 2007)

Aside from being part of AFTA (ASEAN Free Trade Area), Singapore has also established FTAs with the following countries
and blocs: Korea, Australia, Jordan, India, Japan, New Zealand, Panama, EFTA (consisting of Switzerland, Iceland,

tu
Liechtenstein and Norway), Chile and Brunei (with New Zeland, under the Trans-Pacific SEP) and the United States.
ASEAN itself maintains a FTA with Korea, and negotiations are still under way between ASEAN and China for the realization
of ACFTA by 2010, after the signing of a framework agreement between the two parties in late 2001.

c
Also, there are ongoing negotiations between Singapore and various countries for the establishment of FTAs. These include
Canada, China, the Gulf Cooperation Council (comprising of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE),
Le
Mexico, Pakistan, Peru and Ukraine.
Add to these negotiations under way between ASEAN and various countries, including Australia, New Zealand, India and
Japan.

For more information on the various FTAs, head over to Singapore’s FTA Website.
a
eg
M

Notes by Zhuoyi. Released under Creative Commons Remix License. 39

F I SCA L P OLICY
Singapore does not conduct fiscal policy on the demand side due the following
Small, open economy – are price takers
Overall high MPW – multiplier is small
o High MPM – Imports amount to 175% of our GDP (in 2008)
o High MPS – The gross domestic savings (GDS) rate was 50.5% in 2006
o Low MPT – have to maintaing competitiveness, attract investments
Not a welfare state, no need for large tax revenues
Corporate taxes: kept low (lowered from 20% to 18% in 2007)
• Attract foreign investment
• Encourage local enterprise
Income taxes: kept low
• Prevent brain drain
• Attract foreign expatriates

Singapore’s FP is directed primarily towards long term economic growth

The private sector as the engine of growth, with the government providing a stable, conducive environment for

re
the private sector to thrive
A focus on enhancing economic competitiveness, attracting foreign investments (see next point)
Hence, in addition to low corporate taxes, we have tax incentives for MNCs to take root locally

Government expenditure is thus spent on supply-side policies

tu
Improving existing infrastructure
Expanding our labour force and our citizens’ employability
o WIS, retraining etc.

c
Hence, having a prudent FP, Singapore allows other macroeconomic tools (like the exchange rate policy) to be able to focus
on their primary goals without needing to balance these goals against requirements for deficit financing.
Le
a
eg
M

Notes by Zhuoyi. Released under Creative Commons Remix License. 40

M ONE TARY P OLI CY

Our main conduct of monetary policy is through our exchange rate policy
Singapore is a price taker
Wants to allow free capital flows (recall theory of the impossible trinity)
o Forgoes the control of interest rates
Domestic interest rates are thus determined by foreign interest rates
And also by investor expectations of futures in the SGD

Singapore’s Exchange Rate Policy

The S$NEER is managed against a basket of currencies of our major trading partners and competitors
Different currencies given different weights
Based on extent of trade dependence with that country
This basket is periodically revised to take into account changing trade patterns

The exchange rate regime is a managed float

Allowed to fluctuate within an undisclosed policy band
Should the exchange rate move out of the band, MAS intervenes by selling or buying forex
This gives us the flexibility to cope with periods of uncertainty

re
The MAS maintains the SGD at a gradual appreciation
Contributes to low and stable inflation
o (X-M) decreases, reducing demand-pull inflation

tu
o Prices of imported RMs decrease, lowering COP and reducing cost-push inflation
o Prices of imports decrease in general, reduces imported inflation
Contributes to economic growth
1) Investments

c
o A low and stable inflation rate provides certainty in long term planning
o A gradual appreciation of the SGD enhances the value of K assets
o Thus, investments increase, which constitutes a direct injection to AD, increasing NY
Le
o Investments also help to increase the AS in the long run, allowing Singapore to achieve non-inflationary
economic growth
2) Export earnings
o In the long run, exports are more competitive compared to exports of other countries which experience
higher inflation rates
ETC.
a

Singapore’s Gini coefficient is rather high, at .468 in 2006.

It might also be worth noting that in Singapore, SMEs contribute to 46% of the GDP and employ 63% of the workforce. (A
eg

SME in Singapore must employ not more than 200 employees, having fixed asset investments of less that S$15m.)
M

REFERENCES FOR ‘SUMMARY OF SINGAPORE ECONOMY’

1. Singapore Department of Statistics. (October, 2009). Monthly Digest of Statistics (September). Retrieved from Singapore Statistics:
http://www.singstat.gov.sg/pubn/reference/mdsoct09.pdf
2. Singapore Department of Statistics. (November, 2009). Latest Data. Retrieved from Singapore Statistics:
http://www.singstat.gov.sg/stats/latestdata.html
3. Singapore Department of Statistics. (September, 2009). Key Indicators. Retrieved from Singapore Statistics:
http://www.singstat.gov.sg/stats/keyind.html

Notes by Zhuoyi. Released under Creative Commons Remix License. 41

Consolidated & Updated by Kevin. Distributed on Erpz.net.
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