Year 5

Central Economic Problem

1. Normative vs positive statements
a. normative is a opinion
b. positive is facts
2. Scarcity
a. Capital
i. resources available for use in production
ii. used in the production of other final goods and services and may not
be immediately used up in the process of production
b. Entrepreneurship
i. Special type of human effort takes the overall responsibility for the
decision-making process in the firm so that the other factors of
production(land,capital labour) can be combined to provide a good or
service
c. Land
i. all natural resources available like land, minerals, fossil fuels and
nutrients
d. Labour
i. people including their skills and abilities as human resources that can
be used for production
3. Opportunity costs
a. Definition:value of the next best alternative foregone or sacrificed
4. Decision making framework
a. Determine objectives
i. consumer: maximise satisfaction and utility
ii. producers: maximise profits
iii. Government:attain societal goals
b. Gather information by considering various perspectives
i. recognize constraints
ii. consider costs including opportunity costs
iii. consider benefits
c. Weigh costs and benefits to arrive at decision
i. intended consequences
ii. unintended consequences
d. Review decision
i. intended outcomes are not achieved
ii. adverse unintended consequences outweighing intended benefits
iii. changes in the internal and external environment
5. Marginalist Analysis
a. Marginal Benefit is the additional benefit derived from consumption or
production of one additional unit of activity
b. Marginal Cost is additional cost derived from consumption or production of
one additional unit of activity
Possibility Production Curve
1. definition:Maximum alternative combinations of 2 goods which economy can
produce when given a quantity and quality of resources are fully used and efficiently
at a given state of technology
2. Key Assumptions
a. only 2 goods produced in economy
b. state of technology remains unchanged
c. Quantity and Quality of resources are unchanged
d. Efficient use of all resources in production
e. Within a specified time period

3. Points outside PPC

a. economy cannot produce outside its current PPC if the quantity and quality of
resources are fixed and technology is held constant
b. shows concept of scarcity
c. economy have unlimited wants to produce beyond PPC but limited resources
will mean it is constrained to producing at points on/within PPC
4. Points on PPC
a. Due to scarcity economy must choose from among combinations of the two
goods which are attainable
b. economy will produce on PPC if all resources are utilised efficiently to achieve
maximum output possible hence achieving productive efficiency
c. hence all points on PPC are productive efficient
d. Productive efficiency: is where firms are producing the maximum amount of
output for a given amount of inputs
e. Allocative Efficiency: Current combinations of goods produced and sold
gives maximum satisfaction for each consumer at their current levels of
income
i. Only one point on ppc is allocative efficient and is most desired by
society, location of point depends on preferences of society
ii. all other points are allocative inefficient
5. Points within PPC
a. assumption that resources will be used efficiently will not hold
b. hence points within PPC gives inefficient outcomes
 c. unemployment or underemployment of resources in economy as economy is
not producing the maximum output possible
d. hence points within PPC are considered productive inefficient
i. Unemployment:not all resources are used in production of goods and
services
ii. Underemployment:not all resources are utilised efficiently

6. PPC illustrating opportunity Cost

a. Slope downward ppc: as one good must be given up to obtain more of
another good
b. why ppc concave: resources not homogeneous and hence not transferable
perfectly from one use to another
7. Actual Growth
a. growth in actual output
b. movement of points in PPC
8. Potential Growth
a. increase in potential output or the increase in the economy's capacity to
produce more goods.
i. outward shift means economy can produce more of both goods
b. will shift outwards when
i. quantity of resources increase
ii. quality of resources increase
iii. state of technology improves
Demand
Inverse relation between quantity demanded and price of good
1. Determinants of Demand
a. income of households
b. price of related goods(joint or competitive)
c. taste and preference
d. consumer expectation(of future price or income)
e. Population
f. government policy
Supply
directly relation between quantity supplied and price of a good
1. determinants of Supply
a. cost of production
b. price of related goods
c. expectation of future prices
d. expectation of future prices
e. size of industry
f. government policy
Market Inefficiency
1. Allocative efficiency
a. market equilibrium occurs when supply of the good or service meets the
demand. This implies that society's resources are utilised to produce the
amount of goods and services to satisfy consumers
 b. allocative efficiency is achieved when society's welfare is maximised (when
consumers and firms maximise gains/welfare
2. Productive Efficiency
a. achieved as production involves the least cost combination of inputs, thus
answering the how to produce question in the best way possible
b. only achieved in the presence of perfect competition, perfect information and
absence of externalities and public goods
Price Elasticity Demand
1. definition:Measure of responsiveness of quantity demanded of a good to a change
in its price ceteris paribus
2. Equation
a. PED = (%change in quantity demanded of Good X) / (%change in price of
good)
3. Sign
a. as law of demand states inverse relation between the price and quantity
demanded
b. PED is always negative and hence negative sign is often ignored
4. Magnitude
a. PED > 1:
i. price elastic
ii. change in price leads to more than proportionate change in quantity
demanded
b. PED<1 :
i. Price inelastic
ii. change in price leads to less than proportionate change in quantity
demanded
5. Determinants of PED
a. Availability and closeness of substitutes
i. more substitutes, more elastic the demand as others can always
switch to alternatives when prices of goods rise
b. Proportion of income spent on good
i. Larger portion more responsive hence more elastic
c. Need for a good
i. more need for a good more price inelastic
d. Time period
i. longer time period, consumers can find or develop substitutes hence
longer time period more elastic
6. Applications of PED for producers
a. explain total revenue when price changes
i. TR = P x Q
ii. refer to notes
7. Applications of PED for government
a. Discourage consumption of certain goods(for price inelastic goods
need a heavier tax like cigs as it is a habit)
b. Raise tax revenue(usually on price inelastic goods)
Price elasticity of supply
definition: measures responsiveness of quantity supplied of a good to a change in its price,
ceteris paribus
1. Formula
a. PES =(%change in quantity ss) / (%change in price)
2. Sign
a. Always positive as direct relation between price and quantity demanded
3. Magnitude
a. PES>1
i. elastic
ii. change in p lead to more than proportionate change in qty ss
b. PES < 1
i. inelastic
ii. change in p lead to less than proportionate change in qty ss
4. Determinants
a. Availability of spare capacity
i. more spare capacity allows producers to increase production when
price increases
b. availability of unsold stocks
i. if producers can keep finished goods as unsold stocks then quantity
supplied can be more responsive to changes in price(but for things
that expire then not elastic)
c. factor mobility
i. ease of factor mobility increase more elastic
d. time period
i. Long run: more elastic as have time to increase factor inputs
ii. Short run, relatively elastic as only some factor inputs can be
increased
iii. momentary period: highly inelastic as little to no factor inputs can be
increased
5. Applications of PES
a. Producers:make better output decisions
b. Government:step in to stabilise price of agriculture to protect income of
farmers where goods that are price volatile( change in demand lead to
significant change in price)
Rationale for and impact of government intervention
1. Direct taxation
a. is a compulsory levy imposed on goods and services
b. in order to
i. discourage consumption
ii. obtain tax revenue to finance expenditure on public goods and
services or as transfer payments
c. Graph
i. causes a leftward and parallel shift of supply curve and cost of
production increases for each output (levelcheck notes)
 2. Subsidies
a. Payment made by government to producers to encourage the
production of certain goods and services, not in exchange for any
goods or services
b. in order to
i. encourage overall consumption of good
ii. help poor afford it to reduce problem of inequitable distribution of
income
c. consumers hence benefit more from lower prices and producers benefit from
lower production costs
3. Price controls
a. Maximum price
i. make good and services more affordable
ii. during wartime or to control price of essential goods
b. minimum price
i. protect incomes of certain groups of people
ii. like minimum wage law
4. Quantity controls
a. quota
i. When is it used
1. reduce consumption and/or production of a goods
2. increase or maintain price and revenue of producers in
particular group

Market Failure
happens when:Free markets fail to allocate resources towards production/consumption of
goods in an efficient way that maximises society's welfare
1. 4 sources of Market Failure
a. Non-provision of public goods
b. presence of externalities
c. Merit and demerit goods
d. Information Failure
2. Decision making framework
a. Potential benefits and costs(including opp costs)
b. Constraints
i. political and public acceptability
ii. which determines feasibility of implementing policy
iii. Feasibility:
1. if can be carried out in the real world
c. intended and unintended consequences(including trade offs)
d. Limitations like effectiveness of policy
i. effective if it brings about the intended effect/ addresses the root
cause of the problem
ii. policy effectiveness can be affected by availability of information,
achievability of intended consequences and acceptance of policy by
different economic agents involved
Non-provision of Public Goods
Public goods are non rivalrous and non excludable
1. Non-rivalry
a. consumption of a good or service does not diminish amount available to
others
2. Non-excludable
a. situation where consumption or use of a good or service is not limited only to
those who paid for it
-non-rivalry hence no additional cost to provide it to additional consumer hence it has no
marginal costs. Therefore firms would not be incentivised to supply good when price is 0
-non-excludability gives rise to freeridership hence no one willing to pay for goods or
services leading no effective demand

hence, due to non effective demand and supply for public good price mechanism does not
work to allocate any resources for production for public good leading to perfect market failure

Government intervention for non-provision of public goods

1. Direct provision of public goods
a. directly provide the public goods
b. Effective?
i. Only way to solve non-provision as no private firms would ever
provide such goods hence correcting allocative efficiency
ii. Governments however have information failure and are thus unable to
accurately estimate the socially optimal quantity of public goods that
will maximise social welfare. So although social welfare improved it is
not maximised effectively
c. Feasible?
i. Government must ensure budget allocated to projects that increase
social welfare in the most cost efficient method as government has
limited resources and need to allocate them efficiently among
unlimited wants
ii. might not have sufficient budget to provide good or service at socially
optimal quantity to remove the social welfare loss
d. Appropriateness
i. opp cost incurred
ii. so government need to weigh cost and benefits
Presence of externalities
externalities are uncompensated third party effects arising from consumption or production
of the goods
1. Why cause Market Failure
a. consumer and producers only care about MPC and MPB without caring for
MSB and MSC, as no incentives to consider external costs and benefits
2. Positive externalities
 3. Negative externalities

Government intervention for positive externalities

1. subsidies
a. government provide or subsidise production of goods with positive
externalities
b. tackles root cause of underconsumption/underproduction of goods
c. this encourages producers and consumers to internalise the external benefits
d. Moves MPC vertically downwards
i. Making new MPC : MPC-subsidy
e. Effectiveness
i. does address root cause of the problem
ii. imperfect information hard to estimate correct amount of subsidy
government should provide. If subsidise too much lead to
overconsumption if too little it might not be able to bring output to
socially optimal level
 iii.
subsidies may not increase consumption of goods much if it is price
inelastic hence subsidy must be sufficiently high for it to have a large
impact
f. Feasibility
i. providing subsidies may stress government budget and drain
government resources
ii. restricted by budget
g. Appropriateness
i. allows market to continue to play a role in resource allocation and
bring about consumer sovereignty
ii. not appropriate for governments with limited budgets or have financial
difficulty
iii. if MEB small, then no need to subsidise(magnitude of MEB)

Government intervention for negative externalities

1. Indirect taxes
a. tax imposed on producers
b. aims to tackle overproduction or overconsumption of a good
c. Effectiveness
i. imperfect information so government dunno how much to tax and
hence can lead to too much tax which results in underconsumption.
Too little tax will be insufficient in bringing output to socially optimal
level
ii. if demand is price inelastic the tax must be high for it to be effective
d. Feasibility
i. no budge constraints
ii. but high taxes on widely used products such as alcohol can lead to
unhappiness from the public and hence government may lose power
in the next election hence not politically feasible
iii. tedious to set up mechanism to collect taxes and set up compliance
as firms will find ways to pay less taxes to tamper with monitoring
devices
e. Appropriateness
i. lower pollution as firms have to adopt more greener methods of
production
ii. firms adopting less pollutive methods will lead to proliferation of green
technology in the long run and government would not need to
intervene as much
iii. flexible as amount of tax can be adjusted to reflect changes in MEC
iv. tax revenue collected can be used to fund researches to develop
cleaner and greener methods of production hence reducing MEC in
the long run
2. rules and legislations
a. Effectiveness
i. more effective than taxation if demand of good is inelastic as firms
have to adhere to the rules
 ii. hard to specify all rules and hence loopholes might be found rendering
policy ineffective
b. Feasibility
i. easy to implement and administer
ii. but high monitoring costs as inspectors need to conduct regular
checks to ensure compliance
c. Appropriateness
i. direct approach as it forces people to comply hence direct;y reducing
negative externalities to social optimum level
ii. the government has limited financial resources and it can be costly to
set up regulatory bodies. Opp cost also need to be considered
iii.
3. quota
a. Limit consumption or production of good to socially optimal level
b. Effectiveness
i. effective if price inelastic and firms and consumers need to adhere to
the quota
ii. exact quota hard to ascertain due to imperfect information
c. Feasible
i. easy to implement
ii. but high monitoring costs
d. Appropriateness
i. directly forces the consumer and producers to consume or produce at
socially optimal level and reduce level of MEB to desirable level
ii. may not be appropriate as it is a blunt measure. For example in the
case of pollution, each company may have different amount of
pollutions due to size of operations and a quota will not differentiate
4. tradable permits
a. Effectiveness
i. can be effective if government is correctly able to estimate the opimal
level of production or consumption and hence decide on number of
permits
ii. internalises external costs
b. Feasible
i. no cost involved so no government budget spent
c. Appropriateness
i. targets root cause of a problem as now firms internalise the
externalities
ii. pollution can be reduced in a effective way and hence firms can
decide whether to pay for a permit or invest in greener technology
Merit and Demerit goods
have 2 distinct characteristics:
-imperfect information
-externalities

Government intervention
1. rules and legislation
 a. increase consumption merit goods and decrease consumption of demerit
goods
b. Effective
i. direct approach of compliance hence force them to consume or
produce at socially optimal level
ii. policy effective if enough supervision to ensure compliance
iii. good for low price elasticity as compared to subsidies and taxation
iv. hard to specify rules hence loopholes may be found rendering policy
ineffective
c. Feasibility
i. easy to implement
ii. high monitoring costs, consider opp costs
d. Appropriateness
i. appropriate for countries with good law enforcement and low
corruption\
ii. overall appropriate for price inelastic demand
iii. although cost can be covered partially by fines, government budget
may be drained hence consider opp cost
2. Provision of information
a. shifts MPB perceived to MPB actual hence increase consumption so lower
extent of overconsumption
b. shift MPC perceived to MPC actual to reduce consumption so lower extent of
overconsumption
c. Effectiveness
i. depends on public receptiveness and can be costly in long run with
uncertain outcomes
d. Feasibility
i. short term costly and drain government budget if not successful
e. Appropriate
i. Directly addresses root cause of problem of information failure
ii. sustainable policy if campaigns successful and if successful can
reduce government burden in long run as no need to subsidise good
in the future for merit goods
iii. requires long time tho before results can be seen as habits such as
smoking take a long time to change
3. Direct provision of merit good
a. Effectiveness
i. depends on level of information government possesses
b. Feasibility
i. strains government budget as government charge little for merit goods
c. Appropriateness
i. Government can provide good at a discount or free of charge
ii. overall cost to supply good low as bulk purchase
iii. Lack of profit motive so higher cost and inefficiency borne by
taxpayers
Government Failure
1. Information gaps
 2. time lag from red tape bureaucracy
3. inefficiency due to lack of profit motive
4. political interest
a. government pursue policies which are popular with voters or big corporations
who fund campaigns
5. weak institutions
a. lack competence and corruption

Year 6
Macroeconomic Goals
1. Sustainable and inclusive economic growth
a. Real GDP/GNI
b. index of sustainable economic welfare(ISEW)
2. full employment(or low unemployment)
a. unemployment rate
3. Price Stability(Low inflation)
a. Inflation rate

Standard Of Living (Material)

1. Gross Domestic product(GDP)
a. defn: total money value of all final goods and services produced within the
geographical boundaries of a country in a given period of time
b. Higher GDP indicates more goods and services have been produced in the
economy and are thus available for consumption, translating to higher
national income and thus higher disposable income. Hence, households will
be able to purchase more goods and services which increase their material/
quantitative standard of living.
2. Real GDP per capita
a. defn: is the level of GDP adjusted for both inflation and population size
b. discounts the effect of inflation on the money value of goods and services
produces and hence is a truer measure of the purchasing power of money
and thus a better reflection of the amount of goods and services that can be
consumed
c. Per capita divides real GDP by population size and indicate the amount of
goods and services that can be consumed for the average citizen
3. Gross National Product(GNP)/ Gross National Income(GNI)
a. defn: Total money value of all goods and service produced by nationals of a
country irrespective of whether they are living in the country or abroad, in a
given period of time
b. reflects the national income of citizens of the country, regardless of where
they are located. Higher GNP/GNI indicates more goods and services have
been produced by factors of production owned by citizens of the country.
4. Unemployment rate
a. Shows proportion of the labour force that is not employed.
 b. Lower unemployment rate means higher degree of resource utilisation and
hence production. With higher production of goods and services and more
wants can be satisfied
c. Lower unemployment rate means more individuals are employed and earning
an income. Hence, more households will be able to purchase goods and
services to meet their needs and hence translates to a higher material SOL
Standard of living(Non-material)
1. Leisure hours
a. More leisure hours can be used to pursue activities that can raise a person's
welfare hence more time to relax etc. Increase in non material SOL
2. Externalities
a. Environmental degradation, pollution, congestion
3. Quality of health
a. Infant mortality rate, life expectancy etc
4. Quality of education
a. Higher literacy rates leads to higher non material SOL as improvements can
lead to increase in RNI and SOL as having basic education allows one of
prevent a cycle of poverty where individuals do not have access to education
5. Gini Coefficient
a. Represents the income distribution of a nation and used to measure
inequality
b. zero is perfect equality and 1 is perfect inequality
c. lower it is, most citizens have more equal abilities to enjoy the goods and
services available in the economy
Composite Indicators of SOL
1. Human Development Index(HDI)
a. Summary measure of human development, measures average achievements
of a country in 3 dimensions
i. Life expectancy
ii. Adult literacy rate and years of schooling
iii. GDP per capita
2. Measure Of Economic Welfare(MEW)
a. Refine the use of National income stats by making adjustments for other
economic and social indicators
b. Adjust GNP through
i. Add value of leisure
ii. add value of unpaid work
iii. Add value of GDP
iv. Deduct value of environmental impacts
3. Index Of Sustainable Economic Welfare( ISEW)
a. Measure sustainable and inclusive growth
b. used to better reflect economic welfare by taking into consideration other
aspects of sustainable growth not reflected by GDP
c. ISEW starts with consumption, measured in GDP then adjusts for factors
such as inequality, household production, expenditures to offset the adverse
environmental effects of economic growth, commuting costs, environmental
costs as well as resource depletion and damage
Types Of Economic Growth
1. Sustained Economic Growth
a. Achievement of high rates of economic growth over the long term
b. growth can be sustained over years and not just a temporary phenomenon
c. Achieved with simultaneous increase in Potential and Actual economic growth
2. Sustainable Economic Growth
a. Added focus on the environmental aspects of growth
b. indicates growth that can be maintained without creating significant economic
problems such as depleted resources and environmental problems for future
generations.
c. High growth rate at the expense of depleting natural resources is not
sustainable in the long run
3. Inclusive Economic Growth
a. Focus on the social aspect of growth
b. refers to economic growth where the benefits of growth are distributed across
society and does not contribute to the worsening of inequality

Impacts of Economic Growth on SOL

1. Impacts of sustained economic growth on SOL
a. Without government intervention, economic growth leads to rich getting richer
and poor getting poorer especially if economic growth rate is accompanied by
large scale and frequent structural changes brought about by technological
advancements and progression in the productive methods used by the
economy where lower skilled workers may find their skills becoming obsolete
b. Economic growth allows government to redistribute incomes from the rich to
the poor as a rise in income will bring about additional tax revenue, enabling
the government to spend more on social welfare to help poverty, leading to
greater equality in distribution of income and thus higher material and non-
material well being
2. Impact of sustainable economic growth on SOL
a. as economic growth is positive,real incomes rise and increase in population
ability to purchase goods and services for consumption leading to higher
material SOL with a more lasting availability of goods and services for future
generations
b. Environmental issues will be sufficiently addressed leading to decrease in
environmental degradation and pollution hence has a positive impact on
health of citizens, increase in non-material SOL
3. Impact of inclusive economic growth on SOL
a. When there is inclusive growth, sustained economic growth does not
contribute to worsening income inequality
b. with a positive economic growth rate, real incomes are rising. With inclusive
economic growth, rise in real incomes is experienced by the majority of the
population
c. with inclusive economic growth, gini coeff is likely to be maintained or
lowered. With more equal income distribution there will be less social issues
or disharmony
Economic indicators for economic growth
1. Gross domestic product(GDP)
a. GDP growth rate = (GDPt - GDPt-1)/GDPt-1 x 100%
2. Gross National Income
a. Same as GNP
b. when GNP/GNI increases, the money value of the output of the country
increases. More goods and services will be available for consumption in the
country hence shows that citizens in the country are materially better off
3. GDP vs GNI
a. GNI takes into account the nationality of the owners of the factors of
production where GDP focuses on the economic activity within territorial
boundaries
b. Net income from abroad = GNI - GDP
c. Many developing countries have net income from abroad due to massive
foreign investment in the country. Property income paid abroad is more than
the property income from abroad due to the huge size in foreign investments
this results in GDP being bigger than GNI
Ways to present National Income statistics
1. Nominal National income/ Nominal GDP
a. Is national income valued at current prices
2. real national income / Real GDP
a. GDP adjusted for inflation and measures actual volume of production
b. Use a base price for a year e.g.2012 then multiply quantity of year to compare
to price in 2012 so we do not care about monetary value of the goods and
services just the volume compared
Calculate real growth rates from nominal growth rates
i. RealGDP(%) = NominalGDP(%) - InflationRate(%)
3. Real National Income per capita(RNI)
a. Size of population must be considered so that an average figure or per capita
figure can be obtained.
b. Higher real national income per capita, more Goods and Services an average
person in the country can enjoy and hence it could be inferred that the
standard of living is higher
c. Note: if income disparity is significant then the real national income per capita
is not representative of the material SOL of the country as rich get richer
4. Purchasing power parity
a. Comparing SOL between countries
b. Problem with this is that national income is measured in different countries
and hence needs to be converted to the current exchange rate for
comparison. However, current market exchange rate may be a poor indicator
of the purchasing power of the currency at home
c. Hence, to compensate for this GDP/GNI can be converted into a common
currency at a purchasing power parity rate which is a rate of exchange that
would allow a given amount of money in 1 country to buy the same amount of
goods in another country
d. Purchasing power parity rate reflects relative prices of goods and services in
various countries
Price Stability(Low inflation)
1. Meaning of inflation
a. defn: Sustained and inordinate increase in the general price level of a country
and can be measured by annual rate of change of the Consumer Price
Index(CPI)
b. CPI is designed to measure the average price changed in a fixed basket of
goods and services commonly purchased by residents of a household over
time
c. Positive inflation rate means a rising price level of goods and services in a
country means that the general price level and cost of living has
increased.Cost of living means the amount of money needed to sustain a
certain level of living

Inflation rate in 2013= (CPI2013-CPI2012)/CPI2012 X100%

if inflation rate = 2.3%, means that general price level has
increased by 2.4% compared to 2013
Impact of price stability on SOL
1. Impact on rising general price level on SOL
a. Increase in GPL means fewer goods can be bought with a given level of
income hence inflation will result in a fall in the internal value of money and
purchasing power has fallen. Hence, consumers can buy lesser goods and
services which lowers the satisfaction and utility thereby worsening the
material SOL
2. impact of price stability on SOL
a. When GPL are stable, citizens are better able to predict the purchasing power
of their money income and make economic decisions with more certainty and
can lead to better budgeting and better maximisation of satisfaction and utility
in the purchase of the different goods and services, increasing material SOL.
Stability also promotes lower stress levels and higher non material SOL
Full Employment(or low unemployment)
1. Meaning of unemployment
a. Defn: someone of working age who is actively searching for a job is unable to
get a job at current wage rates
b. Full employment is around 1to6% unemployed
2. Impact of unemployment on SOL
a. Increasing unemployment can decrease material SOL as individuals who are
unemployed have no income and households will have lesser purchasing
power
b. Prolonged periods of unemployment can cause hardship and suffering
leading to a decline in both physical and mental health and hence increase in
crime and social problems which leads to a decrease in non material SOL
The Inner Flow
1. Domestic firms
a. Producers of domestic goods and services
b. Employers of labour and other factors of production
2. Domestic Households
 a. Consumers of domestic goods and services
b. suppliers of labour and other factors of production
Withdrawals
1. savings(S)
a. part of the income earned that households choose not to spend but to save
for future
b. withdrawal from inner circular flow and flows to banks

2. Taxes(T)
a. Income and property tax to government
b. taxes withdrawn from circular flow and flows to government
3. Import expenditure(M)
a. Expenditure on imported goods
b. income withdrawn from circular flow and find its way abroad to the foreign
producers of the goods and services
Injections
1. Investments(I)
a. amount firms spend after obtaining loans from financial institutions
2. Government Spending(G)
a. Government spend money on newly produced domestic goods and
services, considered injection to inner flow
b. does not include transfer payments. For it to count as injection, goods
and services must be provided in exchange for services
3. Export Earning/Revenue(X)
a. Income flows into inner flow from abroad when foreigners buy
domestically produced Goods and services

AD/AS analysis
1. AD-AS Diagram
a. Y-axis is the General Price Level
b. X-axis is real national output / real national income
c. Vertical Asymptote of AS shows maximum capacity of a economy, so if point
of AD is at the Vertical Asymptote of AS, then it represents full employment
where all resources in the economy are put to use
Aggregate Demand
refers to total amount of domestically produced final goods and services demanded within
the economy at every price level at a given time
1. AD Components
a. Household spending /Consumption Expenditure(C)
b. Firm spending(F)
c. Government Spending (G)
d. Foreigner spending on domestic goods and services(D)
e. Net of domestic spending on foreign goods and services(M)
AD = C + F + G + F- M
 2. Shift of AD
a. rightward shift of AD curve represents a rise in AD while a leftward shift
represents a fall in AD
b. Change in GPL will cause movement along the AD curve
c. AD will shift if there is a change in any of its components

Consumption Expenditure(C)
1. Defn
a. Spending by domestic households on all final consumer goods and
services, including both domestically-produced goods and foreign
imports
2. Types of consumption
a. Autonomous consumption:independent of changes in the level of
disposable income
b. Induced consumption: varies with level of disposable income
3. Changes in Autonomous consumption factors
a. Change in interest rate
i. Borrower perspective: Increase in interest rates means cost of
borrowing increases and hence items are less affordable and
hence consumption falls
ii. Saver perspective:Increase in interest rates increases incentive
for households to save in order to yield higher returns
b. Change in expectation of Economy and Prices
i. If consumer expects economy to grow(positive economic
outlook) then they will increase consumption as they expect
bonuses or salary to increase
ii. if consumer expects General Price Level to fall, they may
withhold consumption of goods and services leading to a fall in
consumption
c. Change in personal income tax rates
i. Increase in personal income tax rates leaves the consumer with
lesser disposable income and hence lowers purchasing power
leading to a fall in consumption
d. Changes in availability of credit
i. e.g. like a minimum salary for a loan
ii. increase availability of credit will lead to a increase in
consumption
e. Changes in wealth level
i. wealth refers to the value of assets owned by households such
as houses,cars and shares. When value of assets increases,
 households feel wealthier and hence more willing to spend a
larger portion of their income
4. Changes in induced consumption factors
a. Change in size of disposable income
b. defn: Disposable income is household income after deduction of taxes
and the addition of transfer payments
c. In times of economic growth, disposable incomes will rise leading to
households having higher purchasing power and hence consumption
expenditure will increase.
Investment Expenditure(I)
defn: Expenditure by firms on goods that can be used to produce other goods and services
1. Types of investment
a. Fixed capital investment, which are assets and capital investments that are
needed to start up and conduct business. Assets are fixed and cant be
destroyed or consumer, but are reusable. Such as tools, offices and factories
b. Residential Investment, which is the spending on the construction of new
houses
c. Inventories Investments which is the spending on stocks of finished goods
and raw materials that firms keep in reserve to meet orders
d. Human capital Investment, which is the spending on the accumulation of
knowledge and skills that make a worker productive
2. Factors causing a change in investment
a. Change in interest rates
i. to firms, lower the interest rate, less expensive it is for firms to finance
their investment and the more profitable the investment will become
ii. Interest elasticity of investments depends on a few factors, such as
the extent to which the firm is reliant on borrowing from domestic
banks.
iii. Interest elastic companies may have other ways to firm such as Angel
Investors or having a parent company overseas
iv. if firms are less responsive to interest rates, investments are interest
inelastic
v. So, increase in interest rates will lead to fall in investments
b. Changes in business expectations/sentiments
i. Firms aim to maximise profits and hence a higher expectation of
higher profits would increase investments
ii. if aims are confident in economic outlook, then they will expect
customers to consume more of their goods and services which would
lead to an increase in willingness to invest and produce more goods
which will increase the firm's ability to make investments as they have
more funds from the profits to do so
c. Change in corporate tax rates
i. Corporate tax rates influence post-tax profits of investors
ii. fall in corporate tax rates will increase the firm's post tax profits and as
firms are profit maximising, they will be more enticed to invest which
means a increase in willingness to invest and produce more goods
 which leads to a increase in the firm's ability to make investments as
they have more funds from the profits to do so
iii. hence increase in corporate tax rates lead to a fall in investments
d. Technology Advancements
i. Tech advancements encourages more investments by improvements
in products and the production process
ii. tech advancements lead to new innovation which can better meet the
taste and preference of consumers which will lead to higher demand
for good and service and hence higher total revenue for firms
iii. Tech advancements lead to a more efficient production process where
firms are able to increase output with a similar input which leads to a
reduction in the unit cost of production per unit
e. Changes in availability of credit
i. Increased availability of credit means increase in ability and
willingness of firms to borrow for investments
ii. due to banks being more willing to undertake risks to increase their
profit and increase availability of credit, banks will give out more loans
and hence there will be a increase in willingness and availability for
firms to borrow leading to a increase in ability to undertake
investments
iii. Government relaxing bank regulations to encourage economic activity
when there is an economic crisis by pumping huge sums of money in
the banking system or government guarantees for a certain sum of
money borrowed n
f. Changes in Business environment
i. more pro- business environment will result in existing firms to expand
its existing operations or for entrepreneurs to set up new ones
ii. facilitated by reduction in number of processes and approvals needed
to set up business and reduction in time needed to register a business
and less restrictive labour laws
iii. so anything that minimises cost and maximises profits
iv. hence firms will be more willing to increase investments
Government expenditure(G)
defn: government spending on final goods and services
1. 2 types of government expenditure
a. Operating expenditures
i. Refer to recurring expenses related to the ministry's programme such
as manpower cost, maintenance cost, utilities and administration costs
b. Development expenditure
i. refer to spending on developing the economic and social infrastructure
to enhance productive capacity and or competitive edge of the
economy
can depend on the economic situation. During a recession,, government will want to
increase spending to increase AD and stimulate the economy. When inflationary pressure is
high, the government may reduce its spending to reduce excessive AD in the economy.

Net Exports(x-m)
 1. Definitions
a. export revenues(x)
i. sale of exports represent expenditure by foreigners on a country's
domestically produced output and accrues to the country as export
revenue. Exports therefore make a direct contribution to the country's
national income
b. import expenditure(m)
i. Refer to expenditure by the domestic economy on foreign- produced
goods and services. when domestic households, firms or government
spend on imports, we will have less to spend on domestic goods and
services as imports are not part of the expenditure on domestic output
and hence not part of AD
c. net exports
i. X-M
2. Factors that cause a change in net exports
a. Change in exchange rates
i. Fall in exchange rate: i.e depreciation of domestic currency will cause
the price of the economy's exports to be relatively cheaper in foreign
currencies and hence more foreigners will buy domestic products.
However, imported goods for locals will be more expensive, leading to
a more than proportionate decrease in quantity demanded and hence
reduction in import expenditure
b. Change in relative inflation rates/ General price level
i. If the economy experiences low inflation rates, prices of the
economy's exports become lower and foreigners will switch to buy
more of the country's exports. Foreign products more expensive now
and hence fall in import expenditure
c. changes in relative income levels
i. Demand for export depends on the national income of an economy's
trading partners. If national income of the trading partners rise, there
will be a rise in purchasing power and ability to import, export revenue
will of exporting economy is likely to rise hence increase in net exports
if we assume import expenditure is unchanged
d. changes in quality of domestically produced goods as compared to that
of foreign imports
i. Increase in quality of domestically produced goods as compared to
that of foreign imports. Hence more countries will want our goods,
Locals will also want our goods even more. Hence X increase,M
decrease

Economic Growth
Defn: Refers to increase in national income/output of an economy over time
-Measured by GDP on a year by year basis

Determinants of Economic Growth(Actual Growth)

1. Increase in AD
a. Rightward shift in AD curve
 b. shift in AD curve could be a result in
i. change in macroeconomic variables triggered by economic
events/situations
ii. Government policies
2. Increase in SRAS
a. downward shift of SRAS curve as a result in fall in unit cost of production
b. Change in SRAS can be a result of
i. change in macroeconomic variables triggered by economic
events/situations
ii. government policies

Determinants of Economic Growth(Potential Growth)

1. Increase in LRAS
a. Shift in vertical portion of AS curve as a result of an increase in quality and
quantity of resources as well as a increase in Technology
b. generally attained by government pursuing supply-side policies

Sustained economic growth

For an economy to experience sustained economic growth, it must achieve both actual and
potential growth over a period of time. This results in an increase in real GDP over a period
of time. Putting it more simply, both AS and AD must increase over an extended period of
time for sustainable growth to be possible

without an increase in productive capacity, the increase in actual output will eventually be
not possible once spare capacity is exhausted

Beyond sustained economic growth

Consider environment and ecosystem vitality as well as distribution of gains from economic
growth
1. Sustainable economic growth
a. defn:Refers to a positive and stable growth rates over an extended period of
time which can be maintained without creating other significant economic
problems such as resource depletion and environmental degradation,
particularly for future generations
b. can come about if economies
i. Adopt greener methods etc

c. Indicators of sustainable economic growth

i. Areas and volume of forests i.e. percentage of forest trees damaged
by defoliation and proportion of land mass covered by forests
ii. Material footprint : volume and quality of available renewable
resources
iii. Index of coastal eutrophication and floating plastic debris density
2. Inclusive economic growth
 a. Defn:Refers to growth that is sustained over a period of time, is broad-based
across economic sectors, and creates productive employment opportunities.
Often focused on preventing rising income inequality
b. Can be achieved when
i. Income is redistributed through taxes and subsidies
ii. education and training opportunities are increased
c. Concepts and Indicators(refer to written notes)
i. Lorenz curve: shows the proportion of national income earned by any
given percentage of the population(measured from poorest upwards)
ii. Gini Coefficient: Ratio of the area between the lorenz curve and the
45 degree line and the total area under the 45 degree line
Benefits of sustained economic growth
1. Reduction in poverty
a. economic growth means creation of jobs for workers who previously
have no income or are dependent on irregular jobs in the informal
sector of the economyHence availability of formal jobs can move them
out of poverty
b. Government also has higher tax revenues which can be used to fund
training or education programmes as well as provide basic healthcare,
enhancing the citizen's ability to work and hence enhancing social
mobility and moving them out of poverty
2. Higher SOL
a. with positive economic growth rate, there will be higher real income
and purchasing power increases, allowing households to have greater
willingness and ability to increase consumption of goods and services
of better quality, improving the satisfaction and utility derived from
consumption, leading to higher material SOL . Households can also
save for future and have higher current and future material SOL
b. For individuals, more income is also available to spend on quality
education and healthcare which enhances literacy rate and life
expectancy hence improving quality of life and non-material SOL
c. Government also has higher tax revenues to fund education and
training programmes as well as basic healthcare, allowing for a
increase in non-material SOL for citizens
3. Achieving other Micro/Macroeconomic goals
a. increase employment rate
i. as increase in real output is due to higher level of production
which requires a greater demand for factors of production such
as labour. When economy experiencing sustained economic
growth, investors more likely to invest in domestic economy
and hence these investments will help create job openings and
employment opportunities
b. Low inflation(price stability)
i. SRAS increase due to lowering of unit cost of production in
economy , general price levels fall as well, hence reducing cost
push inflation
 ii. if economic growth is sustained, increase in AD is
accompanied by a increase in LRAS and also results in GPL
rising only at a moderate pace
iii. When the rise in economic growth is due to an increase in AD
only, it could drive an increase in GPL leading to demand-pull
inflation in the economy. However, if the increase in AD is
complemented with the increase in LRAS where productive
capacity of the economy increases and is better able to meet
the demands of the economy, slowing down increase in GPL
and hence slowing down the rate of demand-pull inflation.
Hence sustained economic growth is sometimes known as
"non-inflationary growth"
c. Greater efficiency in resource allocation
i. increase in real output needs greater employment of resources
and hence implies greater rate of resources utilisation, as the
economy moves towards operating closer to the full
employment output. Hence, helps to achieve productive
efficiency which in turn supports the achievement of efficient
resource allocation
d. Greater equity in resource allocation
i. Higher tax revenue brought about as a result of economic
growth could be used to fund public goods and infrastructure
and enable the lower income segments of the population to
gain access to sufficiently high quantity and quality of goods
and services which are deemed as important to society(merit
goods)
ii. Government subsidies increase the ability of lower income
groups to demand for these goods. When price mechanism
considers the dollar votes by the low income earners,
producers will allocate more resources to the low income
earners and hence improve allocation of resources among
consumers
e. Reduce unequal income Distribution
i. Higher tax rev collected can be redistributed by the
government in the form of basic income support schemes.
Costs of sustained Economic growth
1. Environmental Degradation
a. Rapid economic growth in many countries are driven by industrialisation
causing deterioration of the environment. Worsen quality of life for consumers
living near pollution centered areas. Hence decrease non-material standard of
living
2. Rapid resource Depletion
a. If economic growth involves using a greater amount of resources, rather than
using the same amount of resources more efficiently, certain non-renewable
resources will run out more rapidly. Some economies are highly dependent
on the export of natural resources and hence increase in unit cost of
production for the economy. Cost push inflation will happen and eventually
 without sufficient resources, economy will stop growing unless attempts have
already been made to diversify the economy
3. Rising income inequality
a. growth pattern within economy is always uneven and growth tends to bring
greater benefits to the better educated or highly skilled and those who have
significant wealth and own factors of production such as landlords and
business owners
b. unskilled workers can even experience a fall in income due to such growths
4. Worsening inequality in resource allocation
a. High income earners with greater purchasing power are able to signal to
producers to produce goods and service whenever they want
b. in key markets like housing and healthcare, prices will be pushed up making
them unaffordable to those who have not experienced the benefits from
economic growth
c. since lower income group are unable to demand for the good due to their
lowered purchasing power, without the dollar vote they are unable to signal
the market
d. producers would hence allocate more resources to the higher income earners
who are able to signal the market and hence leading to inequitable
distribution of resources
Benefits of sustainable economic growth
1. Higher SOL
a. sustainable growth has a positive impact on non-material SOL. less pollution
hence lead to improvement in quality of life and life expectancy
b. more sustainable use of resources in the economy and hence resources can
be more readily available across generations. A sustainable inter-generation
consumption of resources would ensure that sufficient goods and services are
available for the following generations and hence sustaining their SOL
2. Achieving other micro/macroeconomic goals
a. Low unemployment
i. investments into sectors of the economy such as renewable energy
and cleantech innovation, as well as sectors which support cleaner
methods of production may increase, there will be a rise in demand of
labour and hence generate jobs in sustainable industry
ii. investors more confident in economy will invest and create job
opportunities thus decreasing unemployment
b. Efficiency in resource allocation
i. Sustainable practices when firms reduce pollution created from
production process would decrease the external cost from negative
externalities generated
ii. MEC lowered and hence a reduction in overproduction of goods since
market can accommodate more output with the sustainable practice
that has lesser MEC. Market with lesser over production , improved its
resource allocation and hence deadweight loss is lesser. This helps to
tackle problem of market failure caused by goods with negative
externality
Cost of sustainable Economic growth
 1. reduction in growth
a. means economies can no longer grow at the rapid rate where resource is
depleted and environmental impacts are disregarded
2. Higher cost of production
a. Pursuit of sustainable growth may lead to a rise in production costs in the
short term as firms seek cleaner methods of production or if government
implements carbon tax, Unless government intervenes and subsidises the
firms, firms may pass on the rise in cost of production in the form of higher
prices to consumers leading to a higher inflation rate
b. reduced goods and services exported as green policies raise the cost of
production and in turn the price of exported goods. Rise in price lead to fall in
quantity demanded and assuming the possibility of many substitutes, fall in
quantity demanded will be more than proportionate. Hence, decreasing export
revenue and hence there could be a worsening of balance of trade position as
well since net export revenue falls, ceteris paribus
3. Political cost to government
a. Land reforms and other regulations may be politically unpopular hence could
cost the government to lose its political office
Benefits of inclusive economic growth
1. Higher SOL
a. wages across various sectors should rise over time and a larger proportion of
the population can enjoy higher purchasing power and can afford to purchase
more goods and services. Higher consumption of goods and services
increases satisfaction and utility, translates to higher non-material SOL
2. Less government expenditure on social benefits
a. With more lower income households gaining employment and earning decent
wages, the government can in turn save on unemployment benefits and other
social or welfare spending. This can free up resources to invest in supporting
the growth as opposed to supporting the segment of the population which are
excluded from gains
b. Tax revenue can be used to fund other government projects for economic and
social development
3. Achieving other Micro/Macroeconomic goals
a. Low unemployment
i. employment opportunities are created for most of the country's
population. This in turn lead to an increase in employment for a wide
range of sectors, allowing the economy to take full advantage of
human capital available in different sectors with differing skills. With a
diverse labour group benefiting from an inclusive growth, economy will
achieve a lower unemployment
b. Greater equity in resource allocation
i. Growth takes place in various sectors of the economy and wages
across various sectors of the economy should rise over time and
income inequality should not increase significantly. Households would
have the purchasing power to participate in markets with essential
goods, and would have lesser chances to be priced out of them,
Hence seen as a more equitable outcome where producers would be
 more equitable in the production of goods and services.Taking into
consideration of more individuals in the society
Cost of inclusive economic growth
1. Reduction in growth rate/slowdown in pace of growth
a. Similarly, economies may face a slowdown in economic growth in the short
term if they choose to pursue a more inclusive growth as benefits of growth
are distributed across different sectors instead of being concentrated at
certain sectors. Adopting more distributive policies could also see government
diverting resources away from other developmental projects which may slow
down growth
b. cause high net worth individuals to leave the country and bring firms to base
in other countries instead. Higher tax rates on high earners will discourage
foreign investors from investing in the country as they would have to pay high
taxes, reducing AD and leading to economic slowdown. This also deters
foreign talents from migrating into country hence reduction in increase in
LRAS, daunting potential economic growth
2. Inefficiency in resource allocation
a. inclusive growth brought about by increase in transfer payments for lower-
income groups, work efforts may be discouraged and may have an adverse
impact on efficiency as there could be underemployment of resources where
resources are not utilized at full potential
Causes of poor/unsustained economic growth
1. Fall in AD/ weak AD
a. fall in AD leads to fall in real NY and GPL
2. Fall in SRAS
a. leftward shift of LRAS curve often due to rise in unit cost of production across
the economy
b. can be domestic factors such as rising cost of resources, labour and land cost
c. can be external factors such as rising energy and commodity prices
3. AD rising faster than LRAS
a. causes economy to operate close to its productive capacity
b. excessive growth in AD as increase does not translate to increase in real
output
c. actual growth outpaces potential growth and growth is unsustainable
d. when this happens, real output grows at a slower rate than increase in 2GPL
e. leads to slower increase in real NY compared to rise in GPL
4. What causes it??
a. Difficulties in expanding productive capacity(Increase LRAS)
i. Due to insufficient resources, time lags or structural rigidities.
ii. ageing workforce
iii. strict immigration policies preventing inflow of foreign labour in
economy
iv. lack of incentives for firms, limiting the increase in quantity and quality
of capital goods
v. structural rigidity due to government failure
1. inadequate government efforts in retaining and upgrading of
current skill sets of workforce or lagging education
 2. Government fail to adopt to change in technology and is
unable to keep pace with rapid technological advancements
leading to a decline in productive growth
Causes of unsustainable Economic growth
1. Undiversified economy
a. Economy faces unsustainable growth often driven by growth in one or 2
sectors
i. rich in specific resources hence reliance
1. If the economy is solely dependent on extraction and exports
of 1-2 natural resources/commodities in order to generate
growth, this expedites the process of resource depletion.
Eventual depletion of resource will result in growth coming to a
halt
ii. Decline in sector due to external force
1. Economy is dependent on one or two factors, growth will halt
when global demand falls for that product
2. increase in supply when other countries enter the market such
that the country can no longer be a dominant producer of the
good, which is often the case with natural
resources/commodities
Causes of Non-Inclusive economic growth
1. undiversified economy
a. an undiversified economy will experience economic growth when the sector in
which it is focused on, experiences growth. However, it will only benefit those
who are in that sector as those who do not possess such skills will not benefit
from economic growth
b. training can be used to address this but some people may not have the talent
to take advantage of opportunities in that sector
2. Globalisation and rapid economic restructuring
a. Globalisation increases trade and mobility of capital and labour leads to shifts
in country's comparative advantage(if one country has lower production
costs) as well as relative competitiveness in different sectors/industries
b. When the economy restructures, jobs are created in new sectors. However,
workers may not have skills to work in the new sectors
Consequences of slow/unsustained economic growth
1. Lower SOL
a. When the economy is in a recession and economic growth is negative, real
income per capita falls. This implies lower purchasing power for households
and ability of households to consume goods and services to decrease and
hence decrease in satisfaction and utility hence fall in non-material SOL
b. also cause stress among employees due to fear of retrenchment.
2. Rise in unemployment and fall in output levels
a. negative growth implies lesser goods and services produced and consumed
than before hence a fall in production implies a fall in demand for factors of
production, including labour. Resulting in cyclical unemployment and lower
real national output
 b. uncertainty affects consumers and producers hence will postpone
consumption and production decisions and adopt a wait and see approach.
Investors can hold back on new investments and scale back production,
demand for factors of production including labour will decrease and in such
cases, economy may stagnate further
c. leads to further increase in cyclical unemployment in the short run and over
extended period of time the productive capacity of the economy may even be
adversely affected if gross investment does not match the rate which capital
goods depreciate.
d. Long unemployment can lead to their skills deteriorating or becoming
irrelevant to the economy. Worsening the quality of the labour force in the
economy
3. Price instability(high inflation)
a. If the economy only pursues actual growth by increasing AD it will eventually
approach its productive capacity and any subsequent increase in AD will lead
to rapid rise in GPL. While output remains the same, Hence economy
overheats leading to demand-pull inflation
b. the rise in GPL without the increase in National Income reduces real
purchasing power. This has implications on consumption and savings of
households as households reduces their consumption of goods and services
and savings hence reducing the current and future material SOL of citizens
4. Rise in unemployment and unequal distribution of income
a. Certain segments of the economy may not benefit from the economic growth
specifically if growth is not inclusive. For instance economic growth is driven
by structural changes in the economy, and workers who are not equipped
with skills required by growing sectors of the economy are laid off and unable
to find new employment as their skills are no longer required in the economy.
This causes a rise in structural unemployment and these workers are left
out from the benefit of growth

Consequences of unsustainable Economic growth

1. Lower SOL
a. unsustainable growth leads to more rapid resource depletion and
environmental degradation having a serious impact on material and non-
material SOL on future generation
2. Rise in unemployment and fall in output levels
a. For the future generation, resource depletion results in lower output level,
unless technological improvements can make up for the loss in production
from a reduction in resources
3. Price instability
a. For the future generation to maintain the same SOL with fewer resources
implies greater competition for scarce resources. Greater competition for a
lesser amount of resources will put upward pressure on prices, resulting in
high inflation.
Types and causes of unemployment
1. Cyclical unemployment
 a. Definition:Occurs when AD is insufficient to purchase all the economy's
potential or full employment level of output. This type of unemployment is
often associated with changes in business conditions arising because
economy is in a recession and there is a deficiency in AD
b. Arises from
i. Fall in AD
ii. leads to consumer demand for good and service falls during recession
iii. in turn, firms experience difficulties selling all their current output
iv. as a result the firms cut back production and subsequently reduce
their demand for factors of production(retrenchment and reduce
demand for labour)
v. causes unemployment rate to rise above the natural rate of
unemployment
vi. leads to a fall in national income and fall in GPL(from graph)
2. Structural unemployment
a. Definition:Occurs when there is a mismatch between skills of the
unemployed and those required by producers seeking factors of production.
Can occur when economy is not in a recession
b. Arises from changes in supply or demand in economy
i. Pattern of demand in product market
1. change in taste and preference away from certain goods and
services such as shift in demand away from coal to alternative
fuel resources
2. advent of a superior product that is a close substitute such as
the introduction of tablets which resulted in a shift in demand
away from pc
3. long term increase in income leading to a decrease in demand
for what is considered a inferior good
ii. Supply aspects of the economy
1. change in methods of production such as technological
revolution reducing reliance on labour leading to a permanent
decrease in demand for labour at the current output
2. Fall in cost competitiveness, where another economy can
produce same good at a lower cost of production, prompting
firms to shift manufacturing plant location to take advantage of
the lower costs hence there will be a change in the type of jobs
required by the economy and workers in one part of the
industry become redundant and unable to take up jobs in new
economy despite there being job vacancies. this is structural
unemployment

iii. Restructuring the economy

1. when the economy undergoes deliberate shift in focus from
one industry to another. Workers in old industry may find
themselves out of job but are unable to find jobs in the new
industry due to lack of skills
 2. lead to change in demand of skills set among employers. This
change in demand might not be met by the current skills set of
the labour force who are yet trained in relevant skills since
training to meet job requirements of the employers is more
responsive than proactive in nature
3. mismatch in skills lead to employers unwilling to hire labour
without the relevant skills set bringing about structural
unemployment
3. Frictional unemployment
a. Definition: Occurs when people leave their jobs and are without work for a
period while they are looking for a new job
b. How it arises
i. it takes time for people to find the right jobs and for employers to find
the right people to hire but there exists market imperfections such as
imperfect information
ii. hence as a result there is some lag time between leaving and finding
employment which leads to inevitable some form of frictional
unemployment in any economy at any time
iii. inefficiency of information worsens the time lag between leaving and
finding employment and job seekers who are frictionally unemployed
are usually unemployed for a relatively short period of time
iv. frictional unemployment can be made worse when there is cyclical
unemployment as less jobs available in the labour market
Consequences of high unemployment/ rising unemployment
1. Using ADAS analysis
a. If unemployment is cyclical in nature it would have been brought about by fall
in AD
b. resultant fall in RNI accompanied by a rise in cyclical unemployment
c. Furthermore whether cyclical unemployment is accompanied by changes in
GPL depends on state of economy
d. If economy lies on upward sloping region of AS the rise in cyclical
unemployment is likely to be accompanied by a fall in general price level
2. Consequences on the economy
a. Forgone output and income
i. Extent of unemployment represents the degree of loss in potential
output in an economy. The opportunity cost of unemployment is
therefore the production and national income that could otherwise
have been made.
ii. society thus deprived of a higher output and higher SOL as long as
there is unemployment, resources not fully utilised to produce
maximum amount of goods and services possible in the economy
iii. extent of cyclical unemployment is often measured by difference
between actual output and potential output
b. Fall in economic growth
i. Potential Economic Growth
1. In addition, the duration of unemployment may hinder potential
growth and prolonged unemployment may cause a person to
 lose touch of the skills and knowledge he once possessed.
There is therefore a higher possibility of them becoming
deskilled where labourers deteriorate in their skill set leading to
a fall in the quality of labour, reducing productive capacity of
the economy leading to negative potential growth
ii. Actual Economic Growth
1. Rise in unemployment means lesser consumers with income
and purchasing power. Prolonged periods of high
unemployment will lower consumer confidence and reduce
domestic consumption further reducing AD, profit maximising
investors will predict a lowered revenue due to poor business
expectations and would be unwilling to invest in the economy.
2. with fall in consumption and production, AD will fall further and
economy will suffer a fall in actual economic growth
iii. Sustained fall in GPL(deflation)
1. prolonged unemployment lead to poor consumer confidence
and business expectations which lowers AD as consumption
and investment expenditure falls, leading to both a fall in GPL
and national output. As GPL falls consumer hold back
spending as expect it to fall further , leading to fall in
consumption and investment eventually leading to a fall in GPL
accompanied by a sustained fall in national income, ceteris
paribus
iv. Worsened Government Budget
1. With fewer people working there will be a fall in tax revenue
and hence because unemployed people spend less on goods
and services as well as pay no tax hence also reduce the
revenue collected from GST.
2. government also has to provide social welfare for
unemployment benefits and hence will have worsening
government budget
v. Lower SOL
1. Decrease material SOL as income loss lead to fall in
purchasing power and hence lead to a decrease in the ability
of consumers to demand for goods and services leading to a
decrease in consumption and hence a decrease insatisfaction
and utility worsening material SOL
2. prolonged period of unemployment will cause hardship and
suffering leading to a decline both physical and mental health
of individuals leading to increase crime rate, divorce rates and
lower life expectancy etc which are non-material SOL
3. government has lesser funds for the provision of public goods
or merit goods like infrastructure, healthcare and education
leading to a lower quality of life and literacy rate as well as life
expectancy are stunted leading to worsening of non-material
SOL
Price stability(low inflation)
 1. Benefits of price stability
a. preserves internal purchasing power to maintain SOL
b. maintain equity where fixed income earners and those living on savings can
maintain purchasing power and SOL thus promoting a sense of equity or
social justice(poor not seen as victims of rising living costs)
c. promotes investment and growth, where stable prices can allow business
to make investment decisions with far more confidence as there is greater
certainty on economic outlook. Increase in investments in turn can bring
about sustained economic growth
d. Maintain export competitiveness as when a country has low inflation
compared to other countries, prices of exports are cheaper and hence export
revenue will rise therefore price stability helps to keep export price
competitive in international market to help country achieve a favourable trade
balance
Inflation
Definition:situation where sustained and inordinate increase in GPL, it is where average
prices of Goods and services are increased over a period of time excessively
1. Consumer Price index
a. commonly used indicator to measure changes in CPI(in SOL lecture Notes)
2. Degree of inflation
a. mild inflation
i. GPL rising slowly around 2 or 3 percent
b. creeping inflation
i. substantial and persistent increase in GPL (6 to 10 percent)
c. galloping inflation/hyperinflation
i. when GPL within the economy accelerates and prices are rising so
fast that money ceases to be a medium of exchange and a store of
value. GPL can rise more than 100 percent
d. disinflation
i. happens when there is a decrease in rate of increase in GPL. still
increase but at a decreasing rate
e. deflation
i. Sustained decrease in GPL( negative inflation rate)

Types and causes of inflations

1. demand pull inflation
a. definition: caused by AD rising persistently where economy is near or at full
employment level such that GPL rises due to increased competition for factor
inputs
b. AD AS
i. shift in AD along AS
c. why demand pull inflation arises(Factors of AD)
i. increase in household consumption
ii. increase in investment spending
iii. rise in government spending
iv. rise in net exports
2. Cost push inflation
 a. definition:occurs when a unit cost of production rises persistently
independent of AD
b. how it arises
i. when firms experience a rise in unit cost of production leading to a
leftward or upward shift of AS. Firms respond by raising prices and
partly by cutting back on production , reflected by a fall in AS(move
upwards) thus a twin problem arises when real output(Real NY)
decreases and GPL increases
c. why cost push inflation arises
i. Increase in wages: trade unions can bring about increased wages
without increase in productivity thus increasing labour costs faster
than productivity gains. This is known as wage-push inflation. If this is
paired with high AD this can lead to a wage-price-spiral
ii. Increase in prices of imported factors of production: Price of
imported factors of production may rise independently of AD(crude oil
price increase or depreciation of domestic currency) as price of
imported goods increase, unit cost of production increases for firms
that use imported factors of production, causing a fall in horizontal and
upward sloping portions of the AS(upward shift) and result in a rise in
GPL known as imported inflation
Consequences of Inflation
1. impacts on output and employment
a. for households , if nominal incomes are unchanged, then real incomes will
fall(or increase in case of deflation) with time. Consumption decisions will be
made with less certainty during periods of high inflation and consumption
expenditure will tend to fall
b. for firms, periods of high inflation will impact the certainty of expected profits
as such firms will be less able to make accurate projections of future profits
and would be less willing to undertake investments leading to a fall in
investment expenditure
c. For the foreign sector, high inflation reduces export price
competitiveness(assuming rate of inflation in a country higher than trading
partners). A relatively higher export price lead to foreigners switching away
from the economy's exports, reducing export revenue and prices of imports
will become relatively cheaper too and domestic households, firms and
government may import more foreign goods and services, raising import
expenditure hence leading to a fall in net exports
2. impact on SOL
a. inflation leads to a fall in the internal value of money. Internal value of money
affects the purchasing power of households. Hence if there is a increase in
GPL(inflation rate), fewer goods can be bought with given level of income
hence decreasing material SOL
3. Impact on income distribution
a. purchasing power of different groups of consumers will be affected differently
by high inflation rate
i. Savers or lenders
 1. savers hurt because real value of their savings will fall with
inflation.Borrowers gain as purchasing power of money that
they have valued far exceed the value of the money they have
to return
ii. Receiving fixed incomes or variable incomes
1. harm fixed income while benefit those whose incomes are
linked to price movement. Fixed income owners include bond
holders and pensioners. As nominal income is fixed , the real
value of their income will be eroded by inflation. However
those with variable incomes will enjoy an increase in nominal
income as real income is not eroded. Conversely deflation
does the opposite
4. Impact on net exports
a. When a country has higher inflation than the trading partners, the price of
domestic goods and services will increase faster than foreign goods and
services and hence exports will be relatively more expensive and less price
competitive in the world of market. Foreigners will switch away from buying
the economy's exports resulting in a fall in export revenue
b. goods and services imported will be relatively cheaper. If domestic
households are willing to switch from consuming domestic goods and
services to purchasing imports leading to a higher import expenditure
c. when value of export earnings fall while import expenditure rises leads to
decrease in net exports
5. Impact on exchange rates
a. high inflation rates affects external value of money, which is measured by the
exchange rate of the country's currency against another country's currency
b. inflation reduces competitiveness of its exports, foreign consumers will switch
to relatively cheaper substitutes from other countries. At the same time, as
foreign firms lower their demand for investments due to uncertainty, they may
divert investments elsewhere which will lead to a decrease in demand for the
country's currency in foreign exchange market
c. local consumers may switch to relatively cheaper substitutes from other
countries which increase import demand and increase supply for the country's
currency in foreign exchange markets
d. if currency is under a freely-floating regime then the exchange rate of the
country's currency will then depreciate when measured against its trading
partners

Deflation
1. definition:Fall in GPL in economy, indicated by negative inflation rate
2. Causes of deflation
a. Persistent decrease in AD
 i. Could be due to low confidence in economy, setting off a vicious cycle
of depression and deflation as producers and consumers do not feel
confident in commiting to a long-term production or consumption
decisions
ii. lead to consumption and investment expenditure to stagnate or even
fall leading to a persistent fall in AD which leads to a fall in GPL
b. lower unit cost of production in economy
i. result in a rightward and downward shift in the economy's AS resulting
in lower GPL and higher GDP. Thus, increase in AS must be matched
by increase in AD for economies to avoid situation of deflation
ii. Deflation due to a persistent fall in AD below the full employment level
of national output is a relatively greater cause for concern compared
to an increased productive capacity of the economy. Because
deflation due to persistent fall in AD would usually result in economic
agents having lower confidence in the economy which then disrupts
production and consumption activities in economy
3. Consequences of Deflation (Recession)
a. consumers may form expectations that GPL will fall and choose to postpone
consumption.
b. In the face of depressed demand, inventories pile up and firms are forced to
lower prices and cut back on production. In addition, due to loss of business
confidence, investment falls leading to further fall in AD and subsequently fall
in output and income. As firms respond to the fall in output by demanding less
labour, cyclical unemployment increases.
c. Fall in investments adversely impact productive capacity of the economy in
future, limiting the ability of the economy to attain its macroeconomic goals,
slowing down potential growth.

Intro to macroeconomics policies

1. undesirable economic growth
a. unsustained
b. unsustainable
c. non-inclusive
2. Price Instability
a. Demand-Pull inflation
b. Cost-Pull inflation
c. Deflation
3. High unemployment
a. Cyclical
b. structural
c. frictional
In order to resolve these issues and achieve the various macroeconomic objectives relating
to internal and external economic stability, government has to make decisions to put in place
policies. These policies are known as macroeconomic policies and in general, these policies
influence economic conditions such as AD and economy's productive capacity and hence
can be broadly categorised into demand-management policies and supply-side policies.
Hence we must apply decision making framework.
Approach to policy making using decision making framework
1. information
a. state of economy
b. severity of a problem (how high is inflation rate)
c. effectiveness of policy
d. Forecasting/Projections
2. constraints
a. Government budget
b. resource constraints
c. factors that limit the working of economy(nature of economy)
3. benefits
a. effectiveness of policy in achieving macroeconomic goals
b. other positive impacts
4. costs
a. implementation costs
b. monitoring costs
c. opportunity costs
5. intended and unintended consequences
a. conflict with other macro-aims
b. creation of other economic problems (impact on future generation

Fiscal Policy
involves the use of government expenditure and government taxation to influence
different aspects of the economy. Used primarily to to influence AD hence considered
as a demand management tool
1. Government Budget Position
a. some fiscal policies involve the use of government revenue and expenditure
b. Government budget serves two purposes
i. Serves as a record of the approved levels of expenditure and
accountability in the usage of government funds
ii. plan of the estimated government revenue and expenditures for the
financial year
1. Balanced budget refers to a budget where estimated
government revenue just covers the planned government
expenditure, so government expenditure equals tax revenue
2. Budget surplus refers to a budget where estimated
government expenditure is much lesser as compared to the
Government Budget, which could happen if government
employed the use of contractionary fiscal policy
 3. Budget deficit refers to a budget where the estimated
government expenditure exceeds the government budget, can
happen if government had employed the use of expansionary
fiscal policy
note:when government incurs a budget deficit then extra financing must be financed by
other methods, such as borrowing(Budget Financing) or financed using the past reserves
accumulated during years of budget surpluses(if any)

2. Types of fiscal policies

a. Discretionary Fiscal Policy
i. deliberate manipulation of government expenditures and/or direct tax
rates to achieve their macroeconomic objectives
b. Non-discretionary fiscal policy
i. built in features of the economy that operate automatically to smooth
out peaks and troughs of business cycles
Discretionary Fiscal Policy
1. Expansionary Fiscal Policy
a. through increase in government expenditure and/or reduce direct tax rates
with the intent of increasing country's AD and bring about actual economic
growth
b. Typically carried out during
i. recession
ii. periods of sustained fall in prices(deflation)
iii. periods of high cyclical unemployment(demand deficient
unemployment)
c. Expansionary fiscal policy can involve one or both of the following:
i. Government Expenditure can be increased in the form of spending
on domestically produced goods and services as well as capital
goods.
ii. Direct tax rates like personal income tax and corporate taxes can
be reduced as well
1. A cut in personal income tax rates means that households will
have higher disposable income. They are hence more likely to
spend on consumer goods and services to satisfy their wants.
results in a increase in consumption and hence expenditure
2. corporate tax is a levy placed on the profits of a firm. Cut in
corporate tax rates increase after-tax profits for firms and
hence firms are more likely to invest in capital goods and
hence a increase in investment expenditure
d. Economic Analysis of Expansionary Fiscal Policy
i. increase in G such as construction of roads and public buildings
increase AD level, leading to a rightward shift of AD from AD1 to AD2
ii. with increase in AD, firms will face unplanned running down of stocks
and would set up production to meet the increased demand and
restore the optimal level of inventory
iii. Hence, firms will hire more factors of production such as labour, and
pay out more factor incomes, decreasing cyclical unemployment.
 iv. increased in factor incomes will induce a further increase in
consumption expenditure and set off the multiplier effect
v. result in a increase in RNY by multiples, more than proportional to the
increase in G, leading to actual growth from Y1 to Y2 higher general
price level and lower cyclical unemployment
2. Contractionary Fiscal Policy
a. meant to cut government expenditure or increase direct tax rates, done with
the intent of reducing AD
b. Happens when economy is
i. overheating which results in inflation
ii. or when excessive high rates of growth bring about negative impacts
of the economy
c. Cutting government expenditures
i. in the form of reducing spending on domestically produced goods and
services as well as capital goods. (e.g. reducing purchase of military
equipment, slow down construction of roads and hiring fewer civil
servants
d. Direct tax rates like personal income tax and corporate taxes can be
increased as well
i. rise in personal income tax rates means that households will have
lower disposable income, Hence less likely to spend on consumer
goods to satisfy their wants
ii. a rise in corporate tax rates reduces after-tax profits for firms. Hence,
firms are more likely to cut down investment expenditure and reduce
demand for capital goods(factors of production)
e. Economic analysis of contractionary fiscal policy
i. if economy is booming and overheating then contractionary fiscal
policy can be implemented to reduce demand-pull inflation
ii. government could raise taxes or reduce planned government
expenditure by postponing development of projects
iii. could reduce fall in not only government expenditure but also
consumer and investment expenditure
iv. AD falls due to fall in component of AD(G,C,I) there will be unplanned
accumulation of inventory stocks and firms will find the need to cut
down on production in order to maintain profits
v. as such, demand for factors of production falls, releasing previous
utilised factors of production back to the economy, hence reducing
factor prices as competitiveness for factors of production reduces,
hence bringing down production costs
vi. firms cost savings translates to lower general price levels and hence
reduces demand-pull inflation
Evaluation of fiscal policy
1. Constraints of expansionary fiscal policy
a. State of government fiscal balance/treasury reserves
i. for countries accumulating reserves through persistent budget
surpluses government can just draw from reserves if they require to
run expansionary fiscal policy hence feasible
 ii.countries in debt due to persistent budget deficits can only finance
government expenditure through borrowing. Borrowing also
accumulates more debt which will require even more interest
payments hence no feasible in this case
b. Size of government sector
i. government sector takes up a smaller portion of GDP than other
components of AD meaning that government would have to increase
government expenditure more than proportionally to offset any fall in
AD
ii. in singapore, external demand takes up a relatively larger percentage
of national income and hence a fall in external demand will need more
than a more than proportionate increase in government expenditure to
compensate the slowdown in growth of AD and RNI
2. Extent of benefits of both expansionary and contractionary fiscal policy
a. Economic outlook
i. during recession or economic uncertainties, government can reduce
tax rates to induce investment and consumption
ii. however with poor economic outlook, households and investors may
have a lower confidence level and hence less responsive towards tax
reduction and hence as a result there might be a smaller extent of
increase in consumption and investment than desired
iii. hence during economic boom, with strong economic outlook and
confidence level, opposite is through that extent of decrease in
consumption when tax rates increase may be less than desired
b. State of economy
i. If AD increases at a state where there is existing spare capacity, it
implies that spare resources are readily available for employment and
hence RNY can increase easily with little to no inflationary pressures.
ii. But if AD increase at a state where economy is near to full
employment with little spare capacity then increase in AD will only
result in slight increase in RNY or even no change
iii. If AD decrease at a state where there is existing of spare capacity,
then RNY can decrease significantly with little to no reduction in
inflationary pressures
iv. if AD decreases at a state where economy is near full employment
with little spare capacity then decrease in AD will only result in slight
decrease in RNY with significant reduction in inflationary pressures

c. Crowding out effect

i. Resource crowding out
1. when G increase, government need to use more resources like
labour and raw materials which would otherwise be used by
 public sectors and hence government is now seen as a
competitor for resources and hence a fall in Investments
especially if economy operating near full employment
ii. Financial crowding out
1. government may incur debts and budget deficits and hence to
increase G might lead to government borrowing from banks
and public hence competition for funds lead to increase in
interest rate and cost of borrowing can lead to decrease in
private investments as
a. firms will cut back on investments as profitability is
lowered
2. higher interest rates will encourage households to save and
hence lower consumption and such overall increase in AD
becomes very small
3. hence increase in G will be dampened by fall in Investments
and Consumption and thus lead to a less than desired
increase in RNY
Unintended consequences of Expansionary Fiscal Policy
1. worsens inflation
a. AD increase reduce cyclical unemployment and achieve actual economic
growth, there is a risk of causing demand-pull inflation especially if extent of
increase in AD is not well calibrated
2. Increase burden on future generations
a. If govt on budget deficit and borrow, government need pay back the interest
rate due to increase in interest rate as cost of borrowing from other
governments increase due to inability to repay debt
b. I and C decrease (lose confidence)
c. future gen recession ggwp
3. Worsens efficiency
a. Governments, unlike private firms, are typically not profit-oriented and not
subjected to market forces. Hence increase in G crowd out C and I and hence
lower productive and dynamic efficiency to some extent
Unintended consequences of Contractionary Fiscal Policy
1. worsens economic growth and cyclical unemployment
a. while AD falls to curb demand-pull inflation. It could lead to increase in
cyclical unemployment and lower economic growth rates
2. Impact on future generation/potential growth
a. impact of reducing operating expenditure on demand-pull inflation is primarily
short-term in nature
b. however reduction in development expenditure may have adverse impact on
long-term productive capacity as less resource is added to capital goods by
government- hence a possibility of hindering the extent of the economy's
potential growth

3. Public Acceptance
 a. raising taxes tend to reduce household disposable income or lower
companies post tax profit hence usually less acceptable by the public and
may be politically undesirable
Non discretionary fiscal policy
They are built in features of the economy that are designed to offset fluctuations in an
economy's activity without any deliberate government intervention, affecting AD and any
given change in AD will thus have a smaller effect on the equilibrium level of national income
1. Progressive taxation
a. higher income bracket pay more tax
b. when economy booms, rising AD means households earn higher income and
move into higher income tax brackets
c. higher tax payment hence results in a slowdown in the rise of disposable
incomes which slows down the increase in consumption expenditure during a
economic boom
d. extent of increase in real GDP slows down and hence dampened increase in
AD reduces upward pressure on general price level(demand-pull inflation)
2. Transfer payments
a. payments by government to individuals for which no good or services is
provided in return e.g. unemployment benefits, seen to redistribute money
b. helps cushions the fall in disposable income and hence consumption
expenditure, slowing down the fall in AD during a recession
c. as disposable income fall to a smaller extent, households will not cut back
that much on consumption and hence fall in national output is lesser
d. when economy booms, income rises and hence transfer payments reduce to
help dampen the increase in consumption expenditure, preventing economy
from overheating
Supply side policy
1. supply side policy intro
a. increase quality and quantity of factors of production and mobility of factors of
production
b. allow markets to operate more effectively(product or factor wise)
c. give incentives to encourage enterprise
2. Effect on AS curve
a. Rightward shift of SRAS
i. arising from a fall in unit cost of production
b. Rightward shift in increasing LRAS curve
i. arising from increase in quantity and quality of resources or
improvements in technology which leads to an increase in productive
capacity

3. Time Lag
a. time lag involved in policy making can render policy ineffective or even do
harm
b. expansionary fiscal policy that fight recession may lead to demand pull
inflation if policy only takes effect after economy has recovered
c. contractionary fiscal policy to fight inflation may result in a recession if policy
only takes effect after the economy has already slower
 d. 3 main components of time lag
i. Recognition time lag is time between recognising economic problem
and putting the policy into effect. Coincides with the need to gather
information quickly and accumulate in the DM framework
ii. Implementation time lag is time lag when government takes time to
decide on the policies to be implemented .
1. Political acceptability also important as fiscal policy
dependent on the budget position and a parliament discussion
will be required even after the government recognises that
actions need to be taken, its implementation may not always
be immediate.
2. Some countries may even have different political parties and
may have agendas and may adopt a "wait and see" approach
before intervening.
3. Also difficult for government to change tax structure as budget
already decided at start of year and hard to suddenly pull
funding from other places
iii. response time lag is when considerable period may elapse before
policy comes into effect due to time lag of operations of policy
1. building bridges to increase AD , spending is gradual as it
takes a long time to build bridges and hence such periodic
injections into the economy may be very small and thus a
considerable amount of time may pass before any significant
effects are experienced

Policies to improve quantity , quality and mobility of factors of

production
1. Labour
a. increasing labour inflows
i. via immigration and foreign labour laws
ii. generally, developing countries with high population rates have
surplus labour and hence no need to try and raise quantity of labour
iii. however as economy develops, population growth slows down greatly
and this may limit growth in productive capacity hence hampering
potential economic growth
iv. to increase quantity of labour, county can encourage inflow of both
high skilled and low skilled foreign labour by loosening its immigration
policy
v. Unintended consequences
1. From an economic standpoint, an increase in the quantity of
labour is essential to promote potential growth. However if
labour flow is not controlled it may be perceived by citizens
that foreigners are competing with them for jobs and
 livelihoods and hence resentment and fall in social
cohesiveness, hence lower quality of life and lower non-
material SOL of citizens
vi. Benefits
1. increasing inflow of foreign labour, or foreign talent equipped
with relevant skills encourage growth in the industry and hence
growth of other industries resulting in sustained economic
growth
b. Educating workforce/ Training and upgrading skills
i. increase quality of human capital
ii. government can subsidise education or direct provision
iii. can set up tertiary educations focusing on technical education(poly ite)
to train future workforce with necessary skills demanded by industry
iv. hence lead to potential growth as productive capacity of economy
increases , hence more output can be produced per unit of resources
v. price stability can also be achieved as spare capacity ensures that any
increase in AD would not be accompanied by inflationary pressures
vi. reduce extent of structural unemployment as labour force better
equipped with skills in demand by various industries
vii. Benefits and costs
1. it takes many years for education changes to be made and
policy effects to be felt hence benefits may not be seen in the
short run while cost of funding these changes must be borne
over extended periods of time
2. better educated workforce is more productive hence enable
economy to make more structural changes with less increase
in structural unemployment
3. makes singapore attractive to foreign investments and hence
boost actual growth in short term and potential growth in long
run
viii. Cost of upgrading skills of current workers
1. national movement to get singaporeans into spirit of lifelong
learning is a continuous and ongoing process and cost of
providing subsidies can impose a burden on government
budget
2. Great resistance in acquiring new skills especially among older
workers with low education who are reluctant and unable to be
trained. Low education attainment of such people makes it
difficult for them to pick up new skills
3. Left to the free market, private firms may not provide enough
vocational training because of the possibility that workers will
leave and join competitors after being trained. Hence need
government intervention in the form of subsidised trainings
2. Capital Goods
a. Increase domestic and foreign direct investments
i. policies to increase both foreign and domestic direct investments
include reduction of corporate taxes,tax holidays and tax grants. Both
 domestic and foreign firms would find it more attractive to invest in
company as they can retain a larger portion of their profits earned
ii. Leads to
1. short run increase AD
2. long run capital accumulation, increasing both quantity and
quality of capital stock, resulting in increase in productive
capacity
3. hence leads to economy enjoying sustained growth over time
iii. Constraints of supporting foreign firms
1. opportunity costs of supporting investments by foreign firms
2. difficulty in removing tax concessions in the future
iv. Benefits of supporting foreign firms
1. bring in not only foreign capital but also foreign technology and
knowledge
2. allow resource and technology transfer allowing host country to
experience increase in productive capacity at a faster rate as
compared to relying in domestic investments alone
v. Unintended consequences of supporting foreign firms
1. higher structural unemployment for host country in short run
due to adoption of capital intensive methods of production
which workers in host country may not be able to keep up with
2. perceived inequality between foreign and domestic firms,
particularly when foreign firms have advantage of scale of
operations and skilled labour
3. hence government need to consider long run benefits of
transference of knowledge from foreign firm to local labour
force outweighs the short term cost of rising unemployment

b. Building infrastructure
i. one direct way to increase the quantity of capital is through
Government spending.
ii. directly spend on increasing quantity of infrastructure especially if
infrastructure is seen as a public good,
iii. hence increasing capital stock and productive capacity. This leads to
potential economic growth

c. Increasing research and development

i. can advance technology and hence improve quality of resources,
enabling it to be more productive and thus promoting potential
economic growth
ii. government can establish and enforce strong patent laws so firms
don't copy others tech without permission
iii. Costs
1. success of R and D not guaranteed as only a small percentage
of R and D succeed usually despite a lot of money spent
2. even if it does work it might take years for it to be completed
iv. entrepreneurship is also important factor of production for
development of an economy
 1. developed through government assistance and various
government organisations which provide information and
resources for entrepreneurs.
2. startups bring new tech and methods of production which
increase productivity and boost productive capacity of
economy hence enabling economic growth
Policies to increase efficiency and remove barriers to
competition and trade(market oriented supply side policies)
1. privatisation
a. designed to break up state-owned firms and create more competition by
selling state-owned firms to the private sector. Introduction of profit motives
would lead to an effort to be more efficient in production as private firms
would seek to reduce cost of production hence shifting SRAS
downwards/sideways. Thus, controlling increase in GPL
b. Benefits
i. profit motive producers are likely to seek out more cost-efficient
production methods to lower the cost but they may not necessarily
shar cost-saving with consumers in terms of lower price
ii. likelihood of cost-saving transferred to consumer will be dependent on
level of competition that they face within the market
iii. if private firms is the only provider in market after privatisation , firm
may not have incentive to share cost-saving with consumers
c. Unintended consequences
i. privatisation of state-owned monopolies may lead to higher
unemployment as excess workers may be laid off to cut costs to stay
competitive
2. Market deregulation and removing of complex regulations
a. more firms in market, more likely they seek most efficient means of
production to stay competitive and hence allowing LRAS to shift out as
potential economic growth and lower price pressure in the long run
b. less complex rules and regulations involved will let firms be able to reduce
cost of operations, thus resulting in an expected higher return in investments
hence increasing ease of entering marker to compete and hence firms more
motivated to engage in innovation and R and D in more efficient production
methods
c. hence increasing productive capacity of economy as higher output can be
produced given same amount of resources, country LRAS shift outwards
leading to potential economic growth and lower price pressure in the long run
d. Note
i. regulation might not be the only source of barrier to entry into market
ii. predatory pricing, high start up cost and consumer loyalty to existing
firms hinder new potential firms from breaking into market
e. Constraints
i. lower profits hinder firm's ability to engage in R and D in cost-efficient
production methods because they have less accumulated profits to fall
back on as hence extent of increase in productive capacity may be
limited or mitigated
 f.deregulations can happen in labour market where government would reduce
the rules that govern the hiring of workers in economy(reduce levy on foreign
workers and hence lower cost of hiring workers, lower cost of production
hence SRAS increase and LRAS shift out hence lowering GPL
3. Pro competition policy
a. Makes it illegal for firms to engage in anti-competition practices like price
fixing, this allows firms to always compete and innovate new ideas to
challenge the position of incumbents
b. Benefits
i. if barrier of entry is too high due to high start-up costs or stringent
regulation, this can hinder new potential firm's ability to break the
market and hence existing firms may be able to dominate the market
hence competition level might not increase
c. Information
i. government face difficulty in verifying or detecting informal collusion
among firms to fix price due to imperfect information of firm's cost and
production process
d. Constraints
i. Lower profits hinder firm's ability to engage in R and D in cost-efficient
methods as they will have lesser accumulated profits to fall back on.
As such, the extent of increase in production capacity may be limited
or mitigated
4. Remove minimum wage laws and reduce power of trade unions
a. allow labour market to function more efficiently , hence downward pressure
on wages
b. as wage decrease, cost of production of firms decrease hence SRAS shift
right and bring GPL down
c. Constraints
i. reduce power of trade unions can lead to confrontation with trade
unions and political fallouts causing public unrest and reducing
likelihood of policy being passed by government
d. Unintended consequences
i. removal of minimum wage can lead to exploitation of labour hence
worsen income inequality and hence inclusive growth not achieved
5. Improve flow of information
a. such as job fairs, decrease time to match suitable labour with suitable jobs
hence decrease unemployment
b. Benefits
i. depend on preference of job seeker
ii. hence does not guarantee results
c. Costs
i. high opp cost if does not yield significant results

6. Policies to give incentives and incite enterprise

a. grants and tax reliefs
b. shifts LRAS right
c. might be inefficient and making the scene more competitive can be more
effective