AL Economics Notes (Ver 1) by A Karim Lakhani

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MICKOECONOMICS -tt2Ecor{outct
MICROECONOMICS
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Bd<ground Theory - Cost Background Theoty - Rwenue
Ecorcnies of Scole (EoS) ore experimced when unit a# fall as l'llc CostAdvamages
*ab of p rod wti ott fuirreo*s. . targe Firms
. Pricing power
lnternal EOS . Greater market share and market power
. Technical Economies . Non-PriceCompetition
. Specialization and Division of Labour . Greater resources available for non-price competition
. Less training is needed . Small Firms
. Simpler jobs, workers can be more efhcient . Niche Market
- lndivisibility of capitalgoods like machinery - Reach out to consumers who desire individuality and
. ' RnD to develop more efficient methods of production variety
-'ContainerPrinciple' - More personalized services
. For capital equipment for storage purposes, it tends to - i.e. small accounting firms
cost less per unit of output the larger its size . SubcontractingRelationship
-Cost related to Surface Area . Provide infrastructural support for the large firms
.Output related toVolume
. Greater Efficiency of Large Machines Prcfit Maximization
. More output can be gained for a given amount of input, MC= MR
I
more efficient use of raw materials
AN
. i.e. 1 worker needed to operate machine, regardless of lf MC exceeds MR, profit can be increased by cutting back on
whether it is big or small , production.
. Marketing Economies lf MR exceeds MC, revenue will increase more than cost of
. Bulk Purchase for lower price and betterterms production is increased.
. Reduced transportcosts by bulkdistribution
.
.
.
Large scale advertising, lower per unit cost
Financial Economies
. Considered more credit worthy, easier to be awarded large
loans
Enjoy lower interest rates on big loans
KH
Short Run:
Long Run:
Shut Donn Point
Firm will shut down if revenue cannot cover
variable costs, as it can go some way to pay off
the fixed cost
All costs are variable in the long run, hence it
. Risk-BearingEconomies will shut down if AR is lowerthan LRAC
LA
. Larger market share, predict demand accurately
- Diversification of products to minimize potential losses
. Administrative and Managerial Economies Barriersto Entry
. Often, when firms merge, savings can be made by
rationalizing Econonries of Scale (Naunal Monopoly): Not efficient for more
. than one firm to o<ist in the industry due to lower unit cost achieved
IM
Reorganizing of production to cut waste and duplication

. May cause unemployment though. from substantial economies of scale. Hence, average cost will be
. Economies of Scooe lower if industry was under one firm. This is mostly because of high
. Largecompanies produce a range ofproducts fixed or setup costs, especially in industries like transport and public
- lndividual product producd more cheaply than ff it was utilities.
AR
produced by a single-product firm

. Marketing and distribution costs as well as administrative Lwer CosB for Established Flrm, because an established firm is
and financial economies can be shared amongst all the likelyto have developed specialized production and marketing skills,
producs and would be aware or implementing the most efficient methods of
production or the cheapest suppliers.
K
lnGrnaldisEOS
. ManagementDifhculties Control wer l(ey Factors of Ploductlon. lf a firm controls the
. Problems in coordination and communication supply of key inpu6 eg de Beers companyb control over diamond
. PoorWorker Morale producers, it can deny access to potential rivals.
A.
Graph Control overWholesale / Retail Outhts

e/a/c
lcgal Protection: A Monopoly's position may be protected by
patents on essential process and other barriers like tarifts and trade
restrictions to keep out foreign competitors.
Prcduct Difrerentiation and Erand loyalty lf consumers associate

the product to the brand, it would be very difficult for potential
entrants to produce a good of similar quality to attract consumers
who are loyal to the brand.
I{otes:
Turning point of MC is where law of diminishing marginal returns AggressiveTactks by established firm: Price war; Advertising
set in. Campaigns etc.
AFC falls continuously as total fixed cost (constant) are spread over
more and more output
MC cuts AVC and AC at minimum point lf MC < AC, new units cost
less than the aveftlge cost, hence AC must be falling. if MC > AC<
new units cost more than average cost, hence AC must be rising.
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Distributed by A. KARIM LAKHANI (0333-TUTOR 4U) (0333- 888 67 48) (www.tutor4u.com.pk) Page:1
Distributed by A. KARIM LAKHANI (0333-TUTOR 4U) (0333- 888 67 48) (www.tutor4u.com.pk)
H2 Ecolor,ilcs
MrcRoEcoNoMrcs P
Perfect Competition
Large number offirmt such that each produces an insignificantly small portion oftotal industry supply, have has no power on the price ofthe
product. Hence, it is a price taker. and can sell as much as it wants as its output is a negligible portion of market supply.
Homogenous Product, hence there is no branding or nongrice competition like advertising. Considered perfect suhitutes (XED = 1)
No Barriers to Entry leading to complete freedom to entry and exit. This means that if a firm is earning supernormal profit, new firms wi[. be
attracted to the industry. lndustry supply increasel causing price to fall, and hence the firm will only earn normal profits in the long run.
Perfect knowledge of the market exists. Consumerc are perfectly aware of prke, quantity and availability of product, while producers are fully
aware of prices, costs, market opportunitiet and production methods.
Short{un Equilibrium
Price: Determined by the intersection of market demand and supply. Firm faces a horizontal demand (AR) curue at the market price.
Quantit),: Maximize profitat MC=MR YIClA
I
Pl'lP
AN
P= DD. AR
KH t{otrnq\ Pr{t
Long Run Equilibrium

LA
? lclv
SLAL
SBAC
TKAL
IM
P. DD.ltta
AR
0.
ReaSnns for Existence (or Non*xistence)
For PC to exist, EOS for the industry must be very limited. PC requires numerous small firms which cannot reap EOS. lf a firm expands sufhciently
to achieve EOS, it will be able to undercut the market price and gain market power, and PC is destroyed.
Advantages
K
o Allocative€fficiency
o P=MC=MarginalUtility
o Optimal Resource Allocation
o
A.
Productive Efficiency
o Firm producesata pointon LRAC
o Competition amongst firms spurs efhciency
o Less efficient firms will make hss than normal profits and shut down
o More efficient firms get to earn supernormal profits (until other firms copy you)
o LowCosts(LowAC)
o Desire for supernormal profit or to prevent losses supe6 innovation of new and cheaper methods of production
o No advertising costs
o Firm produces at lowest point on LRAC hence it produces at the least-cost output for the given state of technology
o Customer Sovereignty
o Customers. through the market and price signalt determine what and how much is to be produced
o Example, if demand rises, the resulting price increase will lead firms to respond to raise supply (in a bid to earn short-run profit)
o Firmscannot control price ofgoods
Disdvantages
r Dynamic lneftciency
o Firms may not have the incenti\re to develop new technology as their innovations are easily copied by rival firms
o May not have the funds for research and development
o LackofConsumerChoice
o PC lndustries produce undiffierentiated products.
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H2 EcoNoMICs
M[RoECoNoMICS
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Monopoly
Single Firm in the markeu hence market demand is also the firmb demand curve. Firm! supply curve is also the market supply curve. Monopoly is
thus a Price Setter with complete market share, with a downwad sloping demand cunre.
Unique Product, no close substitutes,
High Barrie6 to Entry allow firm to earn supernormal profits in the long run without fear of new entrants into the market.
Combinotionof naturol ond artifrcialobstelesthotdeterorprevantnewfirmsfiom enteing a mo*et
See List of Barriers to Entry
Short Run Equilibriun

Quantity: Maximize Profit at MC =MR
PlLl\
Sq4rnurmo\ lrufits
I
AN
Long Run Equilibriu,m
KH
LA
Advantages
o Productive Efficiency
o Firm producesata pointon LRAC
o Dynamic Efficiency
o Has the funds for research and development due to supernormal profits
IM
o lncenti\re to innovate since techniques will not be copied by any rival firms if therc is good lP Protection
o May be able to supply a good if therc is no single price at which the producing firm can covertotal cost of production if Price Discrimination
is used ilLlA $Cm= SSf( )
F >mL t e\$q1M\
AR
Pm _\
?r, hrqh.rfic, \ou,ru:tP$
I
hc
K
.01)rc
fon'
Lower Price and Higheroutput 0
o lF Monopoly is able to reap substantial interhal EoS
?ll)t7.,lSrc
A.
Pk
P-
Dlsadvantages qK:
lE=DDpc
o Allocativelylnefficient ' oPc &w. u
o Regardless of the level of output at the equilibrium, Monopolist does not achieve allocative efFciency as P>MC
r Higher Price and LouerOutput
o See Diagram
o TransfurofConsumerSurplustoPloducerSurplus
o HigherCosts(X-lnefficiency)
o No Competition, hence no impetus fior monopolist to de\relop more efficient techniques to minimize cost
o LaxCostControlssuchasoverstaffing
r Others
o Can practice price discrimination, which not only benefits the monopolist more, but also cause inequalities as some people have
to pay more
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MICROECONOMICS *
Oligopoly
Few Dominant Firms, each with significant market share.
High barriers to entry.
Can be homogenous or differentiated product.
Mutual lnterdependence of Firms and firms have to consider the reactions of other firms in decision making'
price Stability, hence firms competitive via non-price methds like advertising where the firms aim to increase market share, through:
A. Product De\relopment and lnnovation
Firms must continuously seek out new products to provide it the competitive edge to
increase demand for its products'
B. Marketing, Advertisement and Promotions
demand for the
Attempt to create a consumer perception of product differentiation even when there is noL to increase
product. P/hlL
Disadvantages
I
lCollusive Oligopoly has similar cosVbenefit to Monopolyl ?L
AN
Competitive Oligopoly:
May harre less scope for Economies of Scale than that of monopoly.
Higher costs of Advertising
Advantages
Ha\re the incentive as vrell as the funds for research and innovation.
Greater choice due to product differentiation
Fomal Colkrsion - Cartel

KH Competitive -
ArLFrnk<'\)
Demand Curve
The firms act as a single firm or monopoly, will set a price or quantity at Assumptions:
LA
the intersection of the industry MC and MR curve. No Collusion, Product is Homogenous
Rival Firms will match decrease but not increase
lf the firm raises price, rival firms will not follow hence the original firm
will suffer a fall in revenue. Hence, it is price elastic above current price'
IM
lf the firm lowers price rival firms will follow. Hence, while sales volume
will increase, revenue falls. Hence it is price inelastic below current
price. P/./a
AR
Share of resulting sales depend on either:

Non-price competition
Pre-determined quota given to each firm, often based on current
market share.
K
Each member, under cartel agreemenL produces at an output level for

which individualJMbMC. Hence,each membercan increase its own
discontinuous line.
A.
proftts by producing more output than allocated. Hence. there is a MR curve is a
tendency for members to cheat on allocated quotas.

Evaluatlon:
Explains the phenomenon of price stability, even in the face of minor
TacitCollusion - Price lcadership cost changes. As long as the MC shifu within the vertical section ofthe
MR Curve, price and output is unchanged.
Firms keep to the price set by an established leader, often the most However, it does not o<plain how initial equilibrium price and quantity
dominant firm or the most reliable one. are reached.
Price rigidity can be due to other causes such as high menu costs
(costs
involved in re-printing labels, printing new brochures etc)
ComPetftive - PriceWars
Strategy to eliminate new competitors or to increase market share by

cutting the price temporarily. Firms that are unable to sustain the
losses will be forced to leave the industry. They are often waged when
a firm has significantly lower costs of production than othert so that its
losses would be minimized.
very costly to wage, hence often a last resort strategy.
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MrcRoEcoNoMlcs
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Price Discrimination
proctice of charging different pricesforthe same ptduct or for differmt units of it when such price differences do not resultfrorn differences in cost
Aim: To generate higher revenue and more profit than when a uniform is charged.
Conditions Requircd:
price.
Monopoly power, so that consumers cannot turn to ahemative suppliers. lt must also be able to set its own
geographical boundaries, age group etc. seepage refers

segregation ofthe Market, to prevent seepage between markets through conditions like
to the situation when consumers in the lower-prked market resell the product to the higher-prked marka.
price in the more price inelastic market and a lower

Different pED in Different Markets. Revenue can only be increased if they charge a higher
price in the price elastic market
Mvantages / Dlsadvantages
beneficial if the loweled price is for groups who are unabh to
Sorne consumers will have to pay more, while others pay less. May be socially
afford the servke previously.
I
to slash prices in other'
Monopolies may use price dixrimination to dri\re consumers out of business, using profits from one region
AN
if the profits are spent in research and innovation' it
Raises monopoly profits, whkh may be an undesirable reallocation of income in society, but
may lead to lower costs in the future.
First Degtcc:
euh ansumer for eoclt upitthe maximum price which tltat consumet is willing lo pqy fot that unif-
When o fum charges
KH orips\ i61'6515
LA
Fr(, -----i DD 'AK,= r''ttt
There is a complete loss in total consumer surplus.
Not practical in the real world, as it is impractical to charge every it different price. and 6rms do not know the price each customer is
willingto pay.
IM
There may be increased output and allocative efficiency is reached.
A<-
t[ //* 2 t], ,
monqrtlql rs s\ll 4\a\t I €"1\
AR
totrr\ \tsS 4
n vmo./{.PwroYvnc'\ Pn}rts
K
SecondDegrce:
Whmofirmchorges so manyunitspurdtad,ond odifferent(normally lower) pricefor thenantsomarry uniEputchased.
A.
ThirdDegrce:
priceto consuners in
Whq ofirm divides con*mers inu differentgtoups and charges a different priceto consumers in diflerent grwps, buttlp. mme
FR
-\v
from one market to another'
Note: MR must be the same fota\l markets, otherwise revenue couU Gincrcased by reallocating resources
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.-H2EcoloMtct
MICROECONOMICS
lLr
Regulation of Monopoly / Oligopoly

Ain* ELunpSumTax
lmprorc Consumer Welfarc (aka lower prkes, higher outpttt)
Ensure Monopcilies remain viable Ac.
Reduce albcative ineffi ciency 1
Sotle lneqnlity in income distributiofl by redistributing tax rcvenue
from nonopolbs to the general pubHc Ac
A.Lffiandl4dA.don S$ntrno\ p^fas . rsu.

Presence of laws designed to preveot formation of monopcilies, such
as antitrust laws. Other methods irrclude limiting mergers, breakiqg up
of monopolies, introdrring competition, reducing patent period etc.
ln Singapore, the Singapore Competitive Commission (2006) acts
against the abuse of monopoly povveL
B.ll*ionahatio
For natural monopolhs of strategk national intercsts, they can be Price Output unchanged
Monopoly Profit-per-unit &reased
I
nationalized by ttle state. The state is not profitdrirren, hence will be
able to produce at the allocati\relyeff€ient level of drtput Redistribution of incorne from monopoly to go\rernment
AN
C.tGPrfdng F.SpeciicTax
Settingthe Prkeat P= MC lncreases Variabb Costs (AC, MC Shifs Upwards)
KH
LA
Results:
L*er
M
Pricc Rabe4 outptrt

Prke Lorercd, Output Higher Profit per unit decreased
Allocative Efficient Burden of rax borne partly by monopolist and partly by the consumer.
profis (especiatly for natural
RI
I monopoty mnv suffer fronr subnonnal

[-monopolies with substantial intemal EOS)
* Ihcory of ConhstrHc Msd(ets
ILiCPridng
entry ard o<it from the market tence there are no sunk costs of
KA
SetthrgttE Prkeat P=AC Free

production
The threat of competition rrleans that regardless of the number of

firms in the industry, they will act as if it is a perfectly competiti\re
market This is because ff entnnt firms think they are more efficient
than the cunent firm, they will enter the market forcing the cunent
A.
firm to stayefficbnt
Flence, normal profits are earned in tlre long run as firms are forced to
AC lcwer costs, and firms have the impetus to produce as efficiently as
possible.
ML
Evaluetion
Does not take into accouflt the possible reactions of the established
Price Loryuercd. Output Higher firmtas cunent firms may adopt an aggt€ssive stance and threaten
Reduces Allocative Etrrciency newromers with prke wars, hence becorning an entry deterrent as
Monopoly eams normal profir welL
Ferv markets are perftctly contestable, and hence a monopo$ may

still be abh to make supemorrnal prdts in the long run.
S"lrnuma\ Pd(
Ho,vever, in theory it allour for the achhvement of low costs and
efhciency by still allowing firms to leap economies of scale.
AC
lqc
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H2EcoNoilrcs
J}L
E.CONOMICS MACRoECONOMICS r
Microeconornic Goals Showing Economic Gtowth via PPC

. Equity / Equality X+
'I
. Measured by Gini Coefficient I
. Economic Efficiency
l-
t-:--
. lncludes both allocative and productive efficiency
. Production on a Point on the PPC
l
i
!-
.SMC=SMB
. Goals of Firms \,
. Maximize Profit ftdur,t ,;'
. Goals of Government ,/,
- Maximize Social Welfare
Macroeconomic Goals
. Sustainable Economic Growth
. Both Actual and Potential Growth
. Low lnflation Rates (2%- 5%) Showing Economic Gtowtlr via AD/AS
. Full Employment /i
AD AD'
GrL tt _.> As,'
I
. Zero Cyclical and Structural Unemployment
AN
. Stable Exchange Rate
I
. Healthy Balance of Payments

l
i
ECOilOMICGROWTH i
Actual EG: Annual 96 lncrease in National Output

l
Potential Eg: Annual 96 lncrease in Productive Capacity

Key lndicator: GDP
Singapore:15% in 2008
/ GNP
KH
Determinants
LA
AE=C+ G+ l+ (X-M) > S{rd 0rrPu1
Benefits of High and Sustained Economic Grwth I{ational tncomeAccounting I IilDICATORS I
. lncreased Levels of Consumption GDR Total market value of all final goods and services
.
M
Higher real income produced within the geographical boundaries of a country

. lncrease in Purchasing Power during a specified period
. i
Cwill increase
.
RI
PromotesSocialWelfare GttlR Total market value of all final goods and services
. More Equitable lncome Redistribution produced by factors of production owned by residents,
. Under a progressive tax system, tax revenue will during a specified period.
increase when incorne increase
KA
. Governrnent can spend more on social weffare Market Price Factor Cost
programs
Price purchasers have to PaY Refers to what the factors of
. Reduces Unemployment
for the goods and services production received for the
. lncrease in AD will help reduce ryclical goods and services
sold on the market
unemploynent
. Potential growth due to increase in productivity lncludes indirect tax lncludes subsidies
A.
may reduce structural unemployment

. Environment Benefits GDP (Market Price)
. Environmental consciousnesstendstoincrease + NPIA
with increase in affluence GNP (Market Price)
+ Subsidies / - lndirect Tax
Singaporc's Policies GNP (Factor Cost)
Conducive environment to attract foreign investment, such - Capital Depreciation
as maintaining strong infrastructure and investing heavily in NNPrc (National lncome)
education to train workers.
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MACRoEcoNoMICS : v
SOL: Quality of life, encompassing both material and non material well being. Material well being refers to the quantity and
quality of goods and services available, while non-material well being includes social factors like working hourt stress
and pollution.
C-an weconcludefrom the increase/decrease in GDPthat SOL has risen/fallen?
Factor Elaboration Remark

lncrease in the guantity and quality ofgoods
lncrease/Decrease in GDP and services in the markeL available to the I in GDB t in Materialwell Being, 1 SoL
consumers for consumption
Nominal GDP does not take into account
changes in Price level, and thus may be
misleading.
lf lnflation rates are high, t in Nominal GDP is
Changes in Price Level mainly due to increase in prices and negligible
Real GDP should be used as it measures the
value of output at constant prices. As such, an increase in output and SOL
I
increase in real GDP will indicate a rise in
AN
output, and hence SOL
Populations tend to change over time, and
thus an increase in GDP may not indicate an lf population increases faster than real
increase in an individual's share of national
Changes in Population national income, individua13 share of Nl will
income.
be falling even if GDP t
KH
GDP per capita should be used instead.
lf a large proportion of the increase in GNP is
due to higher spending on deftnse or space
exploration, SOL would not have increased.
LA
GDP measures a country's output, and thus
includes both consumption goods and A rise in Nl that arises from a rise in exports
Composition of GNP/GDP
investment goodt but SOL is onlyaffected by does not correspond to a rise in SOL ff income
consumption goods. generated is not spent on consumer imports
A fall in national income due to increase in

M
consumer
lncrease in GNP may not be equitably
distributed to the people / sectors, thus one
RI
cannot say that the average person is better lf the small majority (the rich) reaps in most of
off. the benefits from the increase in Nl, while the
Distribution of GNP/GDP
majority remain poor, the SOL of the average
lndicators like the Gini Coefficient are needed person would not have increased.
KA
to show whether the increase in Nl also

caused widening of the income disparity
lf a transaction which was previously non-
monetary becomes a monetary one, Nl figures
will see a rise without a corresponding E.9. Voluntary Charity Work contributed to the
Non-Monetary vs Monetary Transactions increase in welfare. total output offinal goods and services in a
A.
country but are not accounted for in Nl

Nl understates the true level of production as
some services do not pass through the market
National income figures are mere estimates
based on samples.
E.g. lncometax may be understated for

Nature and Reliability of Data The country may also lack proper accounting
occupations like hawkerr
systems, where officials lack expertise in data
collection, or where there are many
inaccessible areas
GDP does not measure intangibles which Rising Nl and production leading to higher
affect the quality of life and the general well levels of pollution willcause SOL to fall.
being of the society at large. (non-material
Social Factors
well being) Rising Nl due to increased productivity from
an increase in working hours mayactually
Other indicators like HDI and KlLlare needed cause SOL to fall.
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MACRoECoNOMICS _
v
C.an we conclude that one country has a higher/lower SOLiust because it has a higher/lower GDP?
Factor Elaboration Remark

Different Provision for depreciation because of
different accounting practices and tax laws
Different Accounting Practices
Different methods of valuing inventory/
Exclusion ofchange in inventory in Nl
Developed countries have goods and services
exchanged in an organized market. but barter
Different Size of Non-Monetized Sector
trade (not in Nl) may still be prevalent in low
incomefamilies
Exchange rates ale volatile, does not reflect
actual purchasing power and may be subject PPP must be used to oftset the shortcomings
Different Currencies are lnvolved
to manipulation bythe government orto ofthe omcial exchange rate
huge capitalflows
Real income of some developing countries
I
Differences in Composition of Nl may be lower but production is concentrated
AN
on consumer goods and services
Lower Living standards despite a high GNP
Differences in Distribution of lncome may be due to greater inequality in the
distribution of income
Higher output may be accompanied by higher
Differences in External Costs
Differences in the work hours vs leisure time

of natural resources
KH
levels of pollution, congestion and depletion
A higher GDP may be the result of people

working harder or longer hours
Comparing relatively more accurate estimates
LA
of advanced countries with relatively
Differences in availability, reliability of data
inaccurate figures of more backwatd countries
will yield misleading results
M
RI
KA
A.
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H2 EcoNoMrcs
MACRoEcoNoMtcs
v
-
AE=Y
For use when the question is regording the effect of chonges to C G I X M on nationol income and employment, or to aqloin recession
or the solving of it by increosing AE such thot it diminishes the deflotionary gap as the economy moves towqrds full employment
AE=C+G+l+(X-M)
There is only one level of national income where AE equals the total value of goods and savices prcduced.
Equilib,rium Level of National lncome is the level of Nl which, when reached, will be maintained until further disturbed
Aggregate Expenditurc is the total planned expenditure on goods and services in an economy.
Consumption(C)=a+bY
a:Autonomous Consumption, minimal amount of consumption that households will still spend on even if Y = 0
bY lncome-lnduced Consumption, consumption that increases as income increases (b: MPC)
APC: Proportion of Total lncome that is consumed
MFC: Change in consumption as income changes
I
Represents the gradient of the Consumption Function
AN
DeErminants:
l. Wealth
'....91
i. More Accumulated Wealth, tC
2. General Price Level
,- --'
bruktrr-t pcrrrt
3.
KH
i.
ii.
lncrease Price Level
Erodesthe real valueof income, Cl
ftpectationsaboutFuturelncome
i.
Expect Rising lncomet 1C now
LA
4. Consumer Credit
i. Lower interest rate, lower cost of borrowing, tC
5. Distribution of lncome
6. Taxes
i. lncrease in tax lowers disposable income, thus Cl
M
lnvestment (l): Expenditure over a given period on the production of capital goods and on net additions to stock of goods
RI
I{OTE Changes in I increases Nl by a magnified amount the multiplier, but also inoeases LRAS and Productive Capacity
Firms aim to maximize profits, and thus they will only invest if the expected rate of return is greater than the expected rate of
interest. As such, there is an inverse relationship between interest rate and level of investment, as shown by the MEW curve.
KA
MEI Determinants:
/r 1. BusinessExpectations
l. Business Optimism: Expected rate of return higher, I t
2. BusinessPessimism:MceVersa
I
A.
2.' Cost of new capital goods

1 . lf cost of K suddenly increase, I 1
I
3. ' lnnovation and Technology
i
1. lmprovement in l&T stimulate a demand for additional
capital goods, causing I t
4. ProfitTaxes
l. Firms estimate rate of returns by considering expected
after-tax profits
ft'lrr' 2. Rise in corporate tax thus decreases the expected rate
ofreturn,causing I t
3. It also decreases the amount of money firms have for
investment
Government E<penditurc (G) represents the current spending and capital spending by the government on the provision of
social goods and services. lt is assumed that G is autonomous.
Net Eeorts (X-M) refers to the difference between the value of exports and values of imports, and is dependent on external
factors which are often beyond the control of governments. lt is also assumed to be autonomous.
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Determining Equilibrium National lncomet theAE =Y Diagram

Note: x-axis for the diagram refers to nominal national income, does not take into consideration price levels
AE =Y
*r =t Below Full Employment Deflationary Gap
. Shortfall of AE below Nl at the full employment level
.--- - AE" . Situation of Economic Recession
. Deficient Demand causes unemployment
...-' -''l)"
Above Full Employment lnflationary Gap
Excess of AE over Nl at the full employment level
No spare capacity
Any shift in AE only causes demand pull inflation
Rise in Nominal GDP but no rise in Real GDP
NI
-1er.
Multiplier Effect
A
The rise in AEwill cause o mognified change in Nl based on the multiplier ratio (k),wherek= ANI / AAE = I/MPW = l/ (l-Mrc)
Normal Multiplier:
of this new income of S20 million, while saving another S20

KH
tusuming Singapore has an MPC of 0.5 and a resulting MPS of 0.5, an injection of 540 million will have the following effects. lt
causes Ni to rise initially by 5210 million, and this increases people's income by S40 million.These people, in turn, spend a
million. This in turn generates new income of S20
portion
million for
producerl who will spend half of this new income (Sl0 million), while saving the other half. The cycle continues until
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equilibrium national income is reached, where total injections = total withdrawalt and the total expansion of Nl is S80 million,
where k= 2.
Reverse Multiplier:
Assuming that Singapore has an MPC of 0.5 and a resulting MPS of 0.5, a leakage of 540 million will have the following effects. ln
the first itage of thi multiplier, Nl will contract by an initial amount of S40 million, and this will cause a decrease in income of the
M
people, whowill in tum deqease consumption by S20 million, and another S20 million is lost in savings.The second stage of the
multiplier will cause the Nl to fall by a further S20 million due to the lowered consumption, and this in turn will decrease the
consumption of the people by a further 510 million. The third stage will see the Nl contracting by another 510 million, and the
I
cycle wiil continue until the equilibrium national income is reached again. As such the total contraction of Nl is 580 million, as
AR
themultiplierk=2.
The Singaporc Scenario: Very low multiplier (0.54)

High MPS: Traditional values of thrift Compulsory Savings Scheme (CPF)
Trade volume 30@6 of GDB highly dependent on foreign imports for raw materials as well as consumption
K
Hlgh MPM:
goods as Singapore herself lack natural resources.
A.
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AD/ASAnalysis
For use when the question is regarding the changes in price level as national income dtonget comparing inflationary grovvth and non-
inflotionory growth os well os showing demand pull inflotion ond cost push inflotion.
Factor Aggregate Demand (AD) Aggregate Supply (AS)
Definition Shows the inverse relationship between price lerrel Amount of goods and services all firms in the
and real equilibrium output at which planned economy are willing to supply at different price
expenditure equals actual income leraels over some given time, usually a year
Sraph
I
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Slope of Gmph Downward Sloping Three Ranges
Fall in domestic price levels will Keynesian Range: Excess Capacity
' lncrease PP of S + Ct lntermediate Range: Some Supply bottleneck
Classical Range: No Excess Capacity
' Exports more competitive + Xl
Factors that Shift Curve

'
.
.
Domestic Goods preferred
ChangesinCGlXM
Changes in Economic Outlook
+
Changes in expected inflation rate

MJ
KH SRAS
.
.
Changes in input prices or COP
SupplyShock
.
LA
Government Policy (Fiscal)
. Changes in Money Supply Both LMS and SRAS
. Changes in lnterest Rate . lncentives like Lower MarginalTax Rate
. Change in Exchange Rate . Changes in lnstitutional-Regulatory Env,
. Changes inTrading Panne/s Nl . Capital Stockand Human Capital
. TechnologyandEntrepreneurship
.
M
LabourForce
lnfation
A sustained increose in generol price level
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Type of lnflation Demand Pull lnfiation:tAD exceeds 1A5, economy Cost Push lnfation: Caused by JAS (SMS) due to
with limited/no excess capacity rising Cost of Production
Causes lncrease in C G lX M (See Determinants of AD) Wage Push

KA
Wages rise faster than productivity gain

lncrease in Money Supply *Wage-Price Spiral
Excessive growth ofthe money supply can cause an
increase in AD as people have more money to spend lmport Price Push
on goods and services lncrease in
P of imported raw materials, increase Cost
of Production
A.
Profit Push
Firms use market power to raise prices and extract
more profits
Tax Push
Adds to cost of living
Firms raise prices to ofBet costs
Graph
T,,'
lx '-
rl
t\ \<
rl--++-
'lf -
l- (lrP
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Effects of High Infatlon
Effects on Economic Growth lf mil4 firms may experience higher profits margins Firms who are unable to keep up with rising costs by
as factor costs are unlikely to rise in the short term improving productivity and efhciency will feel a
due to pre€greed contracts, thus investment and significant pinch in profit margint as such
growth is encouraged investment is discouraged
Effects on lncome Redistribution Some segments of the population may experience windfall gains, and others losses:
Fixed lncome Earners suffer, as their real income falls while Variable lncome Earners do not.
Firms benefit during DPI as profits increase. but suffer during CPI as profits diminish
Savers suffer as the real value oftheir savings decrease
Debtors gain because the value of the loan will be less in real terms
Effects on Unemployment Reduces Unemployment lncreases Unemployment
Effects on Allocation Results in Misallocation of Resources due to distortion of price signals in the market. E.g, Producers may be
unable to distinguish normal price increase from real price increase as such they may end up producing
more even though real prices might not have changed.
Renders unneeded administrative cots to keep up with the constant change in nominal values (menu costs)
Effects on Balance ofPayments Px l, causing Qd J as exports lose their competitiveness in the foreign market.
NI
Demand for imports increase as foreign goods are cheaper than domestic goods
Falling Export Revenue, Rising lmport Expenditure (this assumes PED > 'l )
BOP Deteriorates
A
Effects on Currency Value Falling BOP Causes Exchange Rates to weaken
Continuous High lnflation may also erode investorS confidence, and thus are likely to pull their capital out of
Decreased Purchasing Power of currency KH

the country.This causes massive capital flighL and thus currency crisis (sharp devaluation)
Efiects of Low and Stable lnfation

Low and Stable lnflation (2-5%) is a sign of a buoyant and expanding economy with jobs and output growth
LA
Stable hices and Eusiness Optimism causes investors to have a higher expected rate of return. and as such I t
. lncrease in AE + Magnified lncrease in Nl and Y based on the multiplier, k =+ Actual Growth, High Employment
. lncrease in LRAS =+ lncreased Qty of Capital Goods + lncreased Productive Capacity + Potential Growth
. Allow for Non-lnflationary Economic Growth
M
Savings are also encouraged, as lnterest Rate > lnflation Rate. and thus increasing funds for investment i
I
Exports more competitive if inflation rate is lower than that of other countries. Quantity Demanded of Exports increase (more than
AR
proportionately if PED > 1 ), increasing Export Earnings, lmproving BOP and Strengthening the Exchange Rate
The Singapore Scenario
Prices of certain essential items like cooking oil, bread, milk and other diary products have gone up significantly over the past year
. Snowstorm in China disruptsfood supply,causing supplyshocks
Import Price Push lnflation
K
. High Global Prices of food and oil, increasing Cost of Production

Tax Push lnflation
. Rise in GSTfrom 3%to 5%
Rising Values of Property increase in rental and business costs
A.
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Unemployment
Refers to the number of people of working oge who are without worh but willing and oble to toke up employnent
The labour force refers to oll within working age, who are willing and oble to work ond are either employed or seeking employment
llnemployment Rote = No. of Unemployment / Lobour Force x 100%
Full Employnent iswhen the economy hos no qlclical unemployment
Cyclical Unemployment
Cause Demand Deficient, Decrease in AD such as during the downswing
Firms find that they cannot sell at current outpuL so stock pile up
Firms thus cut back on proportion and fire workers
Policy Raise AD through fiscal and monetary policies
Structural Unemployment
Cause Changing structure of the economy causes mismatch between worker's skill and job requirements.
This can be caused by a change in the pattern of demand or methods of production. lt arises when
changes in technology or international competition change the skills needed to perform or change
I
the location ofjobs.
AN
Poliry Provide finance of unemployed workers who wish to acquire new skills that are currently in
demand
Steer the education system towards the needs ofthe economy.
Supply Side Policies (Shift AS)
Seasonal Unemployment
Cause
Policy
countries. KH
Unemployment that varies with the season or weather, predominantly occur in temperate
Usually not a serious problem unless economy is heavily dependent on those industries
Diversifu its industries
LA
Frictional Unemploynrent
Cause It takes time for workers to match with suitable jobs flmperfect lnformation]
Not a cause of concern, may be good as a better match between workers and job after sorne
deliberation would mean the economy becomes more efficient
Policy lmprove Job lnformation services by providing job centers
IM
Effectsof Unemployment
Loss of Production and lncome
Decrease in an economy's actual output, possibly causing deflationary gap
AR
Standard of Living is lowered
loss in Human Capital

Prolonged unemployment may cause to lose touch of the skills and knowledge he once possessed, and may face
increasing competition with the fresh graduates
K
Costtothe Unemployed and their Families

Workers lose their financial security. possibly leading to loss of self esteem, strest and even suicide and mental illness
A.
loss inTax Revenues

Loss in income, thus government loses tax revenues from income tax.
Unemployed do not pay income ta& and spend less thus lowered collection of GST.
There is also increased expenditure on welfare payments
Loss in Social Stability

Leads to greater incidence of crime, violence on streets, drug abusq alcoholism and vandalism
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Fiscal Policy
through Tax or Government Expenditure
The deliberote manipulotion of govemment expenditures andtaxesto promote mocroeconomicgools
Taxation Government Expenditure

Types
ProgressiveTaxTaxtakes a higher proportion of one's Current / Ordinary Expenditure includes the expenditure
income as income increaset more equitable incurred in the day-to-day routine work and is recurrent year
RegressiveTax Percentage of income paid in taxes falls as afteryear
income increaset heavier burden on the poor
ProportionalTax Percentage of income paid out in taxes is Developrnent / Capital Expenditure includes spending on
the same as income rises public investment
DirectTaxes are paid directly by the individual on which the
I
taxfalls. Reduce disposable income of the individual.
AN
lndirectTaxes is one where the incidence of the tax can be
shifted from the seller from the seller to the buyer. lt shifts the
supply curve of goods, and they reduce the real value of
income through the rise in prices
Purpose
Raise Revenue for government to finance its expenditure,
including the provision of goods and services not efficiently
produced bythe market
KH
Provision of Public and Merit Goods
Redistribute lncome and Wealth through benefits and

pensions
Reduce inequalities ofincomg by taxing the rich more
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proportionately than the poor (progressive tax) and using tax Regulate Economic activities and promote economic groMh
revenues to provide essential goods and services to everyone
regardless of income. Pay interest on the National Debt
Correct Market Failure (esp. Negative Externalities)

IM
Promote economic Arowth by giving tax holidays for the initial

years for companies/industries. (S'pore corporate tax is 179o)
AR
lnfl uence Level of total Expenditure

Effects
Distribution of lncome Resource Allocation
lncentive toWork
.
K
lncome Effect Higher taxes force people to work more so lncome and Wealth Distribution
that they have to cut down less on consumption .
Expenditure on health, educational services etc benefit
. Substitution Effect Higher taxes encourage people to mainly the poor, thus reducing extent of the inequalities
work less as an extra hour taken in leisure involve a of income and wealth distribution
A.
smaller sacrifice in consumption

Resource Allocation: favor the untaxed / lower taxed good Economic Growth
Consumption -'
Capital expenditure promotes potential growth
. lndirect Reduce Qd ofgood (shift SS, DD unchanged)
. Direct ReduceYd, discouraging consumer spending Price Stability
Ability & lncentive to Save .
G can be varied to raise / lower AD to reduce inflation or
Ability & lncentive to lnvest to promote economic groMh
. Profits reduced to higher taxation, reducing investment
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Fiscal Policy
limitations & uses
Expansionary Fiscal Policy increase G ond/or decrease tox so os to boost AD, AE ond Nl, reducing cyclical unemployment
Contractionory Fixal Policy entoils o reduction in G ond/or increasing tax so os to reduce AD ond demand-pull inflation
Limitations Uses
Remedyfor:
Crowding-out Effects Unemployment

where does the money for fiscol spending come from? Expansionary Fiscal Policy can increase AD/AE through
lf G was financed through tax, consumers will have less to increasing G, to stimulate corresponding increases in C, I and X
spend, and if it was financed through loans, it will cause so as to shift AE upwardt causing a magnified increase in
interest rates to increase, cutting back on investment.The.-.. . natisnal irrcome and employrnent as there would be the
increased government spending thus will be offset by lowgr creation of demand for labour.
private household consumption ad lower private sector
NI
investment It con anly solve cyclicol unemployment. Structural and ond
fiictionol unemployment would require Supply Side Policies
Limitations of tax cuts
A
May not stimulate consumption if only viewed as temporary lnfation
measures. lnvestment is also dependent on business outlook Contractionary Fiscal Policy can be reduce Demand Pull
as well, and thus tax cuts with a bleak economic outlook may lnflation by causing AD to decrease
not stimulate investment
Relative lnfrexibility
Much of government expenditure is tied down to long term
KH
Cannot solve cost push inflotion, requires SS Policies
SlowGrowth
contracts, and budgets are only drawn up once a year. Expansionary Fiscal Policy can bring about actual economic
LA
gromh byincreasing AD.
Time Lags
For sustoinoble non-inflationarygrov,tth, shifts in AS brought
Sizeof Multiplier obottt bySS policies ore olso needed
Small k means that increasing AE will only cause a small
M
increase in Nl, limiting the effuctiveness of fiscal policy to raise lncome Disparity
output and employment Progressive income tac the provision of merit and public good
and the provision of transfer payments will aid in the
I
achievement of a more equitable distribution of income

K AR
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Supply Side Policy
SS-Side Policies aim to encouroge ond reward individuol enterprise and initiotive, ond to reduce the role of the government; to put
more reliance o morket forces ond competition, ond less on govemment intervention and regulotion.
lf successful, AS curve wi ll shift outymrds.
Remedy for Unemployment Remedyfor lnflation Remedy for Potential Growth
Supply Side Policies aim to increose

thetotol quantity offactors of
production or encouroge grcaW
yo d uaivity of fo cto rsof
production.
Combat Structural Unemployment Sotue Wage-Push/Profit-Prish lnflation
. Restructure Education System . Clamp down on trade unions
. Training Facilities and Grants - Retraining of Labour, investment
Population and Labour Force
I
. Skills Development Fund grants or tax incentives
. lncrease inflow of skilled and
AN
. CosBbecomeaburdenon . lncrease Productivity in tandem
unskilled foreign labour
. Resentmentfrom Local Workerc
government budget with wages
. Resistance in acquiring new skills - Resistonce in acquiring new skills
. lncreaseCompetition ond hence
- (t6n4t, ds$ln on 6rms urlh rrvrqotu{tt efficiency
- Social Problems likeCrime
P(rn'16
KH . Encourage higher fertility via pro-

family stance
- Boby Bonus, Longer Maternity
Leave, Better Chi ld ca re
Enhance Human Capital
LA
Encourage Competition - lnvest Significantly in education via
. Restrict Mergers and Takeovers subsidies or direct provision
. Privatization; Firms have additional .Resentmentfrom Local Worken
incentive to cut costs for profit .lncreoseCompetition and hence
. Have to be followed with efficiency
IM
deregulation to prevent -Sociol Problems like Crime

Combat Frictional Unemployment monopoly formation . Subsidize worker training
. lmprove flow of information . Compromise guolity of goods and .
SDF/ux deductions for firms who
. Labour exchanges, job fairt career seruices send their workers for training
R
guidance . Possibleunemployment .
Education has a high gestation
. Conditional welfare benefits (e.9. period (LongTerm)
recipient must make concerted
KA
Savingsand lnvestment
effort to find employment) Price and lncome Policy
. lmperfect information if employerc do . Short-Term SS-Side Policy . High level of domestic savings
provide funding for lnvestment
not publish full list of requirements - Legislation to block wage rise through CPF and POSB
. Price Controls (e.9. Price Ceiling) . Encourage FDI through tax holidays
- Block Market . Wooing by EDB
.
A.
Wage Freezes
- Distort market forces in the lobour
R&D
morket
. Encourage R&D via subsidies,
- Confrontations with trade union
preferential tax treatment and
grants
contributions. The government can cut

I Variable CPF
Well Established Trade Union contributions to lower the total wages the
I employerd CPF
employer has to pay (20% -> 10% during AFC), but this may
National Wage Council introduced a flexible wage structure, I cause households to be unable to finance house loans and
with a fixed component and a variable bonus component. ln I reduce retirement savings.
a recession, government can cut wages by reducing the
I
variable component I Skills Development Fund (SDF) subsidizes firms who send
their workers for training
Government charges and fees are reduced during recessions, I
to help firms survive the recession I Out of every I 0 workert 4 have no received secondary
education.
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MACROECONOMICS r
Monetarv Policv
lnterest Rate Centere'd Monetary PSlicy
Monetary Policy is the deliberate attempt by the Central Bonk to regulate the money supply or monipulating the rote of interest to
influence economic octivity so os to ochieve the mocroeconomic gools.
Expansionary Monetary Policy Contractionary Monetary Policy
0(y ahn'or*y
I
The Liquidity Preference Curve - Money Supply and Money Demand Diagram
AN
lncrease in Money Supply Decrease in Money Supply
. lnterest Rate Falls .lnterest Rate lncreases
. Cost of Borrowing Decreases . Cost of Borrowing lncreases
. lncrease in Consumption . Decrease in Consumption
. .
KH
lncrease in lnvestment (MEl Curve) Decrease in lnvestment
. Rate of Return > lnterest Rate . Rate of Return > Interest Rate
. lncrease AD . DecreaseAD
. Magnified increase in Nl 'Deutasctn CrPL
Purpose
LA
Reduce Cyclical Unemployment Stimulate Economic Growth Reduce Demand Pull lnflation
Limitations
. Responsiveness of Demand for Money to lnterest Rate
. lnterest Elastic Small change in MS cause significant fall in lR
-People hold money for transactions and precautionary reasons
M
. lnterest lnelastic Large change in MS required to cause significant change in lR

.People hold money for speculative purposes i
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. Responsiveness of lnvestment and Consumfiion to lnterest Rate ****

. land C are lnterest lnelastic:
- C and I unaffected by changes in lnterest Rate
.
KA
Case 1: Economic Recession - Business Pessimism

. Case 2: Economic Boom - lrrational Exuberance, Business Optimism, High Consumer Confidence
. Size of Multiplier
. lncrease in C and I increases AE, and thus Nl will increase in proportion to the multiplier k
A.
. Active Market for Bonds

. Open Market Operations are only effective in reducing MS if the market for bonds is viable and broad based, else
government's selling operations will be hampered
. Liquidity Position for Bank

. lf bank are holding large amounts of liquid assett they might not respond to changes in Liquidity Ratio.
. Degree of Control bythe Central Bank

. ln developed countriet lending activities are carried out by moneylenders who operate beyond the control of the
Central Bank
. LiquidityTrap (See Next Page)
Note: Open Market Operations (OMO): Purchase and sale of government bonds by the Central Bank in the money and capital
market to alter the money supply in the economy. Selling bonds will reduced the money supply, while the buying of bonds will
increase the money supply.
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LiquidityTrap
additional material
0t! "t s
I
Expansion of Money Supply under the Liquidity Trap will not cause the interest rate to fall, and hence it will not lead to
AN
additional expenditure.
Supply of Money increases from Q to Q' but lnterest Rate remains constant at R.
Extract From: http://www.economicshelp.org
KH
A liquidity trap occurs when low / zero interest rates fail to stimulate consumer spending and monetary policy becomes
ineffective. ln this situation, even an increase in the money supply could fail to increase spending because interest rates
can't fall further.
LA
A liquidity trap means consumers' preference for liquid assets (cash) is greater than the rate at which the quantity of money is
growing. So any attempt by policymakers to get individuals to hold non{iquid assets in the form of consumption by
increasing the money supply won't work.
For a long tlme, the ma€ro-economy was managed by changing interest rates. So it is quite a shock for policy makers to
M
experience a situation where their main policy tool was no longer sufficient. Hence the range of unorthodox monetary and
fiscal policies. r
RI
Liquidity Trap 2009 (USA)

Base interest rates were cut to 0.5olo in March 2009. For a considerable time, the economy remained in recession. Technically,
the economy is now creeping back to positive growth, but, the economy remains sluggish. So 2009, has been a good
KA
example of a liquidity trap.
Why do LiquidityTraps Occur?

. Expectations of deflation. lf there is deflation or people expect deflation (fall in prices) then real interest rates can
be quite high even if nominal interest rates are zero. - lf prices are falling2o/o a year, then keeping cash under your
mattress means your money will increase in value. The difficulty is in having a negative nominal interest rates
A.
(banks would be paying you to borrow money). There have been attempts to create a negative interest rates (e.9.
destroy money in circulation but in practice it is rarely implemented.
. Preference for Saving . Liquidity traps occur during periods of recessions and a gloomy economic outlook.
Consumers, firms and bank are pessimistic about the future, so they look to increase their precautionary savings
and it is difficult to get them to spend. This rise in the savings ratio means spending falls. Alsc in recessions banks
are much more reluctant to lend. Also, cutting the base rate to 0olo may not translate into lower commercial bank
lending rates as banks just don't want to lend.
. Credit Crunch. Banks lost significant sums of money in buying subprime debt which defaulted. Therefore, they are
seeking to improve their balance sheets. They are reluctant to lend so even if firms and consumers want to take
advantage of low interest rates, banks won't lend them the money.
. Unwillingness to hold bonds. lf interest rates are zero, investors will expect interest rates to rise sometime. lf
interest rates rise, the price of bonds falls (due to inverse relationship between bond yields and bond prices)
Therefore, investors would rather keep cash savings than hold bonds.
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Excha n ge Rate.S;l:ffif,":$,M oneta ry Pol i cy
Reasons Features
I . Small Size Limited Resourcet Openness to Trade l. Managed using a Basket of Curtencies
a. l,leed to import daity necessities and raw materials
b. Small Dornestic Market 2. Managed Float Regime
c. (X+M)=4xGDP a. Exchange Rateallowed tofluctuatewithin an
d. Need to maintain stable exchange rate to keep out cost- undisclosed band
push inflation and maintain reasonable cost of living
e. Adjusting interest rate would result in a volatile o<change 3. Reviewed Periodically
rate and thus might affect trade and investor confidence
4. Relinquish control over interest rate and money supply as
2. Openness to Capital Flow wlren MAS inten enes to buy or sel] domestic currency in
I
a. lnternational Financial Centre the forex markeL money supply witl fall or rise respectively.
AN
b.Small changes in domestic interest ratewill cause large
capital movement
c. EG lf interest rate falb investon will withdraw money
and save in bank of another country with higher interest
rates => Capital Outflow
3. lnactirie Secondary Bond

a. OMO is ineffective
Market
techanism
KH
LA
Combatlnflation CombatRecession
Gradual Appreciation of SGD during Economic Boom Depreciah against the USD
. Exports beconre relatively cheaper
Cheaper lmports . lf PED of Exports > 1 (Price Elastic)
Reduce lmport Price hrsh lnflation .Fall in Pwill cause a morethan proportionate
M
increase in QD
Expensirte Exports .Export Revenue lncreases
Reduce Dx -> AD Falls -> Reduce DD Pull lnflation . lmpors become relativeli more expensive
.
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lf PED of lmports > I

. lmport Expenditure Falls
. (X-M) lmproves
. lncrease in AD
KA
. lmprovement in Current Accountl BOP
OR
lf Marshall-Lerner Condition is satisfied, (X-M) will improve

A.
when exchange rate depreciates.

ML Condition: PEDx + PEDw > 1
uimitatinns
Elasticity of Export Dernand and lmport Demand
. DOUBLECHECKWITHTUTORIAL
Transrnission lags
. Takes time for changes in exchange rate to work
. Short Run: Temporary worsening of BOP
. Demand for Exports and lmports not price sensitive
Maintenance of a large Foreign Reserve

.To support the exchange rate policy and to build investor confidence in the strength of the SGD
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Excharg3"*?le Policy
l(ef €oncepts regdding E Ghange Rate Fastors Affecting Echange Rate
a. The o<change rate of the dornestic currency shows the l. Changes in demand for exports and imports
price of domestic currency in terms of foreign currency 2. Capital Flows,short run and long run
b. One country's currency is only legal tender in that country 3. Changres in domestic prices relativeto pricesabroad
c. Determined by intersection of demand and supply of 4. Relative economic perforrnance of the country
curency i. lmportsdependonYED
a. Demand for currency is a derived demand 5. Changes in the relative interest rate
b. EErived form foreigner's demand for our goods and i. lf domestic interest rates rise
services and financial assets a. Attract furds for abroad, hence DD increases
c. Supply deriried from local3 demand for imported goods b. Locals discouraged from transftrring their funds
o\rerseas
6. Anticipation in exchange rate movements
I
AN
::.:,.:;,:;,,:;iff :i.*iffi .iljiiffi
Govem ment sr;ts an upryr and bwer limit
Th e gwm nent rate
m ai ntafuv th e fi xed Rate of exchonge of one country's cunency
toexchange ratefor the currency and
by buying or selling ifscunentin thefora< is determind frely @ mo*et forces of
allows the cunency to fluctuote within
ma*et using reseles to o<aaly oM the
dtanges in ma*et demand ond supply.
Ad\rantages:
KH
demand ond supply intheforeign
exchange market.
l. Automatic correction of BOP

these limih, butwill intervene once it
Advantages:
npves bepnd the bond.
1. Some degrce of exchange rate

LA
Adnantages: disequilibrium
stability
1. Confidence and Certainty 2. No need to hold foreign exchange
2. Some degree offreedom to pursue
2. Absence of Speculative Aaivity reserves
Domestic Policy, as it is not restricted
3. Freedom to pursue dornestic by BOP situation
economic policies
IM
Disadvantages:
1. No Automatic BOP adjustment to
correct disequilibrium Disadvantages:
Disadvaritages:
2. Need to maintain foreign reserves 1. Lack of confidence due to volatility
1. Need to maintain foreign exchange
2. lncreased Speculative Activity
AR
3. Vulnerabh to currency crisis

reserves
4. No freedom to pursue own domestic 3.
goals due to conflicL such as between
BOPand EconomicGrow*r
K
Brdrange Rah Folky and Macroacmmic Obiectives

l. Achierae High Growth 3. Correct Balance of Payments Problems
1. ! t . Depreciation, assuming Marshall-Lemer condition is
Depreciation cause trade surplus to irrcrease, irrcreasing
A.
AD and hence allorrring growth I satisfied, will cause import expenditure to fall and export
2. Stable Exchange Rate encourages more investrnent I revenue to rise, reducing deficit
3. Low exchange rate may attract long term investments I
due to lourcr costs of setting up operations | 4. Manage lnflation
4. Expectation ofapp reaction can attract inffow ofhot l. ln economies which are open to trade they are highly
money susceptible to import-price push inflation
2. Appre{iation of currency keeps import price low
2. Reduce Unemployment preventing imported infl ation
Ccf NFTDENTTA.L DoEUMENTS oF BEN.JAMTN Nc TzE WEE

On owlcove.sg
H2 Ecot{oMlcs
MACRoECONOMICS P
lnternational Trade
The rationale is to speciolize is producing goods and services that one is best suited
or most skillful at ond using these to trade for other
around the world'
goodsond services that one needs. Setf iufficiency is impossible as FOP ore unequolty distibuted
. Wder Consumer Choice and GreaterVariety FreeTrade: Exchange of goods and services between
. Higher SOL countries without any artificial restrictions.
. Efficiency in production and LowWorld Prices
. Economies of Scale (LRAC Falls) Specialization and trade will lead to an efficient allocation of
. lmport Cheapest Raw Materials => COP falls world resources, and nations will be able to consume at
. Factor Price Equalization points beyond the countrY's PPC
. E.g. Demand for labour in will rise in labour-abundant
countries like lndia if they specialize in labour intensive Higher OutpuL Efficiency, Lower Costs and lmproved Welfare
goods, pushing up wage rates, closing the wage gap
I
between them and those of the developed world Note: Benefits of Trade still aPPlY.
AN
. lncreased Competition and Prevention of Monopolies
. Promote Economic EfficiencY
. lnnovation and Transfer ofTechnology
. Competition encourages entrepreneurship to improve
competitiveness
-
.
. Tech transfer from Advanced to Developing nations
"Engine of Growth"
Political, Social, Cultural Advantages
KH
LA
A country has Abslute A&nntuge if she can produce more of A country hos Compomtive Mvanfuge if she con produce the
thegoodthon the other countries using the some amount of good at a lower opportunity cost thon another country
rcsources
ffigestate5thattradecanbenefitallcountriesiftheyspecializeinthegoodsinwhichthey
have a comparative advantage.
M
Limitations: i
. Law of lncreasing Opportunity Costs
RI
. Complete Specialization is not possible

. Not all resources are equally suited for all types of production
. A country will lose her CA as she specializes further in the production of a good
. Factor lmmobility between onetype of production and another
KA
. TransportCosts
- Protectionism, Protecting domestic industries which do not have CA\
A.
I Export Price lndex/ lmport Price lndex ] x 100 Export Revenue (X) - lmport Expenditure (M)
note: TOT = 'l 00 in base year
lmprovement ofTOT: A given unit of exports can now PoSitive Trade Balance SurPlus
exchange for more imPorts Negative: Trade Balance Defi cit
Relationship betnreen TOT and BOT Relationship betweenToT and SOL
Depends on PEDx and PEDm Depends on PED"

lF Export Prices lncrease (PEDX > 1) lF TOT improves and PED of Exports < 1, it means there is a
. TOTlmproves greater Gpacity to import and hence a higher SOL
. Qd of exports fall more than proportionately
. Export Revenue falls -> BOT falls
CoNFtDENTI.A.L DotruMENTsi t3F BENJAMIN NG TzE WEE

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H2 EcoNoMICs
MACRoEcoNoMrcs
.E
v
Protectionism
I nternational Trade Part Two
Arguments Evaluation
lnaccurate identification of lnfant lndustries
Protection of lnfant lndustry lnfant lndustries may fail to develop CA
lnfant industriel having potentialCA cannot survive Duration of Protection - lnfant industries might become
competition from abroad. Protectionism will thus allow the complacent or inefficient due to lack of exposure to
industryto develop competition.
Consumer Suffert Domestic Resources tied up
Protecting against dumping

. Difficult to accurately identifr dumping
Foreign exports may be subsidized by the state using huge
. Foreign firms may be more efficient and thus able to sell at
lower prices
profits at home, to reap EOS and drive out local producers,
leading to creation of Monopolies with the ability to raise
. Excuse for countries to keep out imported goods
- Cost of Protectionism borne by domestic consumert who
I
prices and make consumers worse off.
have to pay higher prices
AN
- Monopoly Argument unsupported (only a hypothesis)
. Protection may be difficult to remove once introduced
Protection of Sunset lndustries . Slow down the restructuring process
Protect industries who have lost their CA to create a buffer for . Prolong inefficient use of resources
.
workers and prevent massive structural unemployment.
Protection against Domestic Unemployment

Claim that important foreign goods diverts demand away
. KH
Removal of protection can allow for economic restructuring
and development of new sectors
Other countries likely to retaliate with their own trade
barriers, sparking trade wars and causing rapid contraction
from domestic Aoodt causing domestic unemployment in world output and income
LA
Protection of Strateg:c lndustries
Existence of political or strategic reasons to protect a . Protective tariffs and quotas justified.
domestic industry such as to be be sufficient in times of war. - No-tariff policy might not apply to all goods within the Fl-A
E.g. Rice lndustry Defense
.
IM
Stop-gap measure, other countries likelyto retaliate

Protection to (orrect BOP Disequilibrium
Use trade barriers to reduce import expenditure, improve BOT
. Persistent trade deficit points to other fundamental
weakness in a country's abillty to export
Protection aoainst "Badf
AR
Protection against import of harmful goods e.g. Drugs
Protection to improve TOT . Unlikely to work unless country has buying power
Restriction of imports mayforce foreign producers to lower
prices, improvingTOT
- Probable retaliation by trading partners
K
Protection aoainst Low Waoe Countries

. Protectionism perpetuate the exploitation and workers
cannot earn enough to rise above poverty
Poorer countries operate on low wage structure, and thus
able to compete on an'unfair'basis
. Prevent equalization of factor prices and wage rates
.
A.
Work against welfare of consumers

Protection to achieve Political Objectives
Note Try to use the bolded arguments and not the unclCflineel ones.
EENFIDENTIAL DDcUMENTS BF BENJAMIN NE TzE \A/EE

On owlcove.sg
H2 EcoiloMlcs
MACRoECoNoMrcs
v
-
Tariffs
Tox on lmports, con be Specific or Ad Volorem
Redistribution Effect - Transfer of consumer surplus to
domestic producer surPlus
Protective Effect - Unnecessary higher MC incurred in
producing and not importing the extra goods
Revenue Effect - Government Revenue
Consumption Effect - Decrease in Consumption
Deadweight Loss = PE + CE
';. l trv'tl' Effectiveness
. Causes loss to society
f '.* - Consumers worse off (Loss of Consumer Surplus)
Dd
. Other Policies more Effective
. Depends on PED of lmPorts
63 q4 E . EarnsGovernmentRevenue
Hidden Export Subsidies and lmport Restrictions
I
Quotas
AN
Legal timit on the quontity of imports over a given period of time lndirect form of protection given domestic producers to lower
the actual cost of production allowing them to become more
Limit the amount of imports to a quantity that is less than that competitive.
under free trade and prices of imports will also rise.
lmport restrictions include complex import regulations,
Does not earn revenue, effectiveness does not depend on
PED but foreigners may gain by raising prices.
Voluntary Restraint Agreements

KH
technical and administrative regulations etc. Although not
intended to restrict trade, they have the effect of doing so
Exchange Controls
Regulation of imports and exports via controlling availability
Agreement to reduce the volume of trade in o specific good.
of currencyvia goW buying and selling of foreign exchange
LA
lnformal type of quota, often including provisions for increase Embargoes
in sales at some later date. Total Bans on certain importt often used as diplomatic tool.
IM
Economic lntegration
lnternational Trade Part Three
AR
FreeTrade Area Customs Union

Agreement to remove tariff and non-tariff barriers among Remove alltrade barriers, adopt a common external tarifffor
themselves, maintain restrictions for non-member countries non-member countries.
Common Market Economic Union

K
Operate as a single market, lifted restrictions on trade in all Harmonizing monetary and fiscal policy of member countries.
servicet capital and labour movement. May have common Common currency and Exchange Rate
laws government production, employment and trade.
A.
Advantages Disadvantages
. Trade Diversion
:Trade diverted from a more efficient non-member
producer to a less efficient but tariff-free member of the
Trade Creation, lncreasing Welfare economic unit
Greater Output Levels and Extended Market . Loss ofTariffRevenue
. Free movement of FOP allow FOP to move from areas of . No net increase inTrade
abundance to scarcity - TradeDeflection
. trlew ideat technology and skills flourish . lmports enter the FTA via the country with lowest
. Larger Market - Allow firms to grow and gain EOS external tariff and is then sold to other countries within
lmprovement of TOT the FfA
. a CU, through common external tariffs, has greater . Loss of tariffrevenue
economic power for a reduction in tariffs by non-member . Countered by complex rules of origin which ensure that
nations only goods produced within the FfA are tariff free
. Loss of Economic lndePendence
. Each member must consider policies of the Union
limiting thefreedom of economic policies
EoNFTDENTT.A.L DtrcuMENTS EF BEN.J.a.vtN Ne TzE WEE

On owlcove.sg
H2 ECoNoMIcs
MAcRoECoNoMrcs 'E
v
Globalization
lnternational Trade Part Four
The growing economic interdependence of countries worldwide through inoeosing volume ond voriety of cross-border transoctions in
goods, services and free intemationalcopital and lobour flows.
Equalization of COP
- Take resourcesand goodsfrom
where they are cheap to where they
Realization of a global common market:
. Worldwide and broader access to
.
are expensive
Faster Catchup by the developing
Erode differences in
range of foreign products countries due to the speed of
. Movement of Resources
and living standard
technology transfer and information
. Firms have access to resources not Contagion Effects
- Transmission of shock from one Stronger and Faster Contagion Effects
only within their country
country to another
lncrease in information flow between
I
geographically remote locations
AN
Policy lmplications
lnterest Rate Centered Monehry Poliry Exchange Rate Centered Monetary Policy
. NotSoEffective
.
-
.
LostControl overCapital Flow
Lost of independency of use of lnterest Rate
lnflation less sensitive to domestic demand, more
.
KH
Effective
.
.
lncreased shares of imports made CPI more responsive
to changes in world prices
Higher risk of lmport-Price Push lnflation, makes policy
LA
sensitive to global demand conditions more effective
Fiscal Policy SupplySide Policy
. NotSo Effective
. LowerTaxes on imports and corporate Profit
. Might be able to gain higher tax revenue in economic Effuctive
IM
boom . lncreased need for government to help business to

. Wdening income gap, increased need for Government identiff new niche areas and advances in technology
Expenditure to solve it (Social Safety Net etc) . Greater need to climb up technology ladder to gain
. Higher change for increase in Public Debt Comparative Advantage
AR
. Weaken fiscal discipline due to easier access to global

fundsfor borrowing
Trade Policy
. Signings of more FTfu, increased pressure for countries to lower import tariffs
K
. lncreased Competition for Domestic Producers

. May cause increased protectionism as countries try to protect employment and output
A.
Benefi* Costs
. Growing lncome Gap
Economics of Scale
. Wages of lowly skilled labour will generally grow
slower than that of highly skilled labour
Greater Competition
. Erosion of Monopoly Power
. Contagion Effeets
. Promotes Efficiency
- Crisis in one country will affect all other countries.
. Prevents Exploitation
. Companies outsourcing to locations with lower labour
costs
lncreased access to Resources like Foreign Talent and
Labour, which complement Singapore3 small domestic
. Stiff Competition from other countries who have greater
resources etc.
worKorce (low birth rate)
Other Benefits of Free Trade / Economic lntegration
. Need to increase budget for R&D in order to stay
competitive
. More Susceptible to import-price-push inflation
. Singapore stands most to gain from Globalization due to our heavy reliance on FDI and Trade but Globalization also makes
us most Vulnerable to the the ups and downs of Trade Cycles and the World Economy.
EENFTDENTTAL DotrUMENTE oF BEN.JAMTN NG TzE WEE

On owlcove.sg
H2 EcoNoMlcs
MACROECONOMICS
g
Ba I ojr,f"ay$"e nt s
?.nce
betvveen the residents of the
The Bolance of payments is o summory statement of the money value of oll economic transactions
countrywith thi restof theworld during a specified period of time, usuollyoneyeor
The Current Account

I. Trade in Goods Account (X-M) - lmport and Export of Tangible Goods
2. Trade in Services Account - lmport and Export of Services
3. lncome Flows/lnvestment lncome Account - NPIA etc
4. Current Transfers - UnilateralTransfers e.g. Contribution to lnternational Organizations
The Capitil Account - NOT IMPORITANT
Records debt forgiveness, migrant transfels, acquisition and
disposal of non-financial assets
The Financial Account

l. Direct lnvestment (Net) - Purchase and Sale of Real Assets to earn profit or rental
I
e.g. MNCs build plants in Singapore
AN
interest
2. portfolio lnvestment (Net) - Plurchase or sale of Company Shares and Government Bonds to earn
rate (bonds) or earn dividends (shares)
of
3. other lnvestment (Net) - shortTerm lnvestments or Monetary Flow' Normally used to take advantage
differences in interest rates or expected trends in Exchange Rate
KH
Note: Financial Account Surplus may cause Current Account Deficit'
Official Reserves Account - (-) Favorable, (+) Not Favorable

LA
Equilibrium means that trade and capital flows into and out of th" to'ntry
ut" *'u n"k*t
BOP "q'ul
IM
. Accommodated by reduction in foreign reserves or by

borrowing in the fficial Reserves Account . Unstable Situation, Surplus in one country implies a deficit
. Depletion of Countryt Reserves in another
. lf loans are used, it needs to be repaid with lnterest . lnflationarY Pressures
AR
. Deflationary lmpact on EconomY . Appreciation of CurrencY

. Contraction of Nl, UnemploymenL Falting SOL
. Currency Depreciation, Loss of lnvestor Confidence
- Causes of Long Term BOP Disequilibrium

K
. Freely Floating Exchange Rates . Dlfferent Rate of lnflation between Countries

. BOP Corrected automatically by Exchange Rate . Exports become less and less competitive if a country
. BOP Deficit - Earns Less Foreign Currency than it spends has higher inflation rate
A.
. Sell Domestic Currencyto buy Foreign Currencies . Diffurent Rate of Growth between Countries
. Depreciationof ExchangeRate . Faster Economic Growth, lmports will rise faster than
. Exports Cheaper - More Competitive ' Exports as lmports depend on lncome
. lmPorts ExPensive - Qd Decreases . LongTerm Structural Changes
. BOP lmProves . Emergence of Trading Block, Development of
. Exchange rate will continue to depreciate until BOP Substitutes, Moving up the value chain towards
Equilibrium is reached exports of new growth industries
Consequences of BOP Deficit
Fall in Equilibrium National lncome

. Fall in (X-M) cause AE to fall, Nl falts by magnified amount
lncrease Liabilities to Foreigners
. Finance curr"n, through borrowing, aka at the expens€ of future spending
. CA Deficit might "..orn,ieficit
not be bad, if it i, dr-" to purchase of Capital Goods for production in the future
Less Employment Opportunities for Domestic Economy
. will causedomesticemploymenttofall
FDI providesEmployment,andRedirectionof FDI inioforeigncountries
. ln the long term, suth FDI will bring in profit and improve the
current Account
ETNFtDENTIAL DBtrUMENTE EF BEN.IAMIN NE TZE WEE

On owlcove.sg
H2 EcoiloMrcs
MAcRoEcoNoMtcs
v
-
Policiee to Correct Persistent BOP Def,cits
Expenditure Reducing Policies Expenditure Switching Polkies SupplySide Policies
Switching domestic expenditure awoy Long term Policy to increose its
Use ofContractionory Monetory or Fiscol
from imports while switching foreign productivity ond sharpen i* export
Policies to reduce AD and Nl in the country
expen d iture towards the country's exports competitiveness
Protectionism Supply Side Policy

. Trade Restrictions
. lnvesting in Education
. lmports expensive, demand falls
. Encourage lnvestment
. Switch to cheaper domestic . Takes time to work
substitutes
. lmplemented simultaneously with
. Domestic Production lncreases, expenditure reducing and
expenditure switching policies
Unemployment Falls
. Export Subsidies
. Stimulate Nl
Other Policies
I
. ExchangeControls
AN
. Restrict lmportand Capital . Special Assistanceto Exporters
Outflow . Provide information and assistance
De{ationary Policies . Disadvantages to develop new export markets
. Tight Monetary Policy . Forgoes benefits offreetrade . ExpertAssistanceto hasten the
. . Shelters domestic producers, documentation needed for exports
.
Contractionary Fiscal Policy
ReduceADand Nl
. lncome Falls
.
.
Demand forlmports Reduced
Demand for Domestically
.
. KH
breed ineffi ciency, complacency
Retaliation from other countries
PEDm>1
. Export Guarantee Scheme
. Fora small premium,the
government pays the exporters
for goods sold abroad should the
rorergn rmponers oeray paymenrs
LA
Produced Goods fall
.
Exports Encouraged Denaluation of Domestic Currency
. Advantages . For Fixed Exchange Rate Regimes
. Causes Domestic lnflation Rateto . Lowered Exchange Rate
Fall, increasing price . Exports Cheaper, Qd lncreases
competitiveness and demand for . lmports Expensivg Qd Falls
IM
exports . Conditions
. Rise in lnterest Rates (MP) attracts . Marshall-Lerner Condition must
funds for portfolio investment be satisfied
purposet increasing levels of . Country must have spare capacity
AR
capital inflow to increase exports and produce

- Disadvantages import substitutes
- Economic Growth Compromised - Disadvantages
. Conflict betrreen domestic . Potential lmport-Price Push
goals of FE and E Grourth and
K
lnflation
external goals of BOP Balance . J-Curve Effuct
. Best used to combat lnflation and - Demand for X and M may not
BOP defi cit simultaneously be price sensitive
.
A.
Decrease in M based onYED and . Takestimefor Consumersto

MPM adjust spending habits
. Note: Effects on Exports
Currenta/c mayworsen in the
short-run, improve in the long and lmports are affected
run
flrr
by PEDx and PEDrvr
respectively, but lmports
are also affected by YED.
*----"-"---r trtrt'(
J-Curve
EoNFTDENTTA.L DotruMENTr oF BEN.JAMTN NG TzE wEE

On owlcove.sg
H2 EcoiloMrcs
MAcRoEcoNoMKs
v
-
Small MarketSize-Too small to influenceworld prices Export Partners:
Malaysia, Hong Kong, lndonesia, China, US (in that order)
Small QuantiS of Resources - Price taker in Global Market,
follow prices dictated by global 5S and DD Other Features
World Class lnfrastructure supporting manufacturing and
Open toTrade - Every Sl spent in Singaporg 51c leak out tertiary sector
as imports (High lmport Content of Goods)
Skilled and Educated Work Force
lnternational Financial Centre - Open to capital flow
Difficult to target MS, hence Monetary Policy is lneffective Eleorts have very high lmport Content
Rise inimport prices might drive up our Export Prices
Aging Population Vulnerable to lmport-Price Push lnflation
Surge in demand for goods and services for the elderly lmportant to have a low inflation rate
Resources have to be diverted to such needs
I
Exports PED <
AN
1
Erain Drain (Problem of Globalization) High Value Added, Low Substitutes
Sinsapore losins zr-5 its population
T:ffi::130%of lmports PED <1
We import everything, so no substitutes xD
Major Government Eteenditure
20 billion in Circle Llne
8 billion North South Expressway
Major lnvestments
KH
5 billion lntegrated Resorts
LA
1.2 Billion Worlds Largest Biodiesel Plant - Finland3 Neste Oil
BOP
Not external debt since 1 995
M
Heavily Reliance on Trade

(X+M) 3.5Times of GDP
Exports 2.5Times of GDP
RI
Heavily Relianton FDI

70% oftotal FDI
KA
=> Stands most to gain from Globalization
FTAs - Enhance trade and investment flows due to lower

tariffs, hassle free customs proceduret improved market
accest easier entry for businessmen, better terms for
A.
investment in foreign countries
ElgortGoods:
Contributes >3096 of theWorld's HDD Output
Seagate has also put its Factory of the Future and future R&D
of its U-series HDD in Singapore
Leading Semiconductor wafer fabrication with 14 Fabs
Third Largest Oil Refining Centre in the World
largest Manufacturer of Jack-up Oil Rigs
Second largest aviation maintenance repair and overhaul
centre in fuia
Tourism
l& MICE (Meetingg lncentive Travel, Convention, Exhibitions)
Tourism lndustry
Regional Education Hub and Health Care Centre
CENFTDENTTAL DBtrUMENTsi oF ElENJAMTN Nc TzE WEE

On owlcove.sg

AL Economics Notes (Ver 1) by A Karim Lakhani

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Bd<ground Theory - Cost Background Theoty - Rwenue

Reorganizing of production to cut waste and duplication

produced by a single-product firm

Graph Control overWholesale / Retail Outhts

Prcduct Difrerentiation and Erand loyalty lf consumers associate

EcTNFTDENTTAL DtrruMENTS t]F BEN.JAMTN NG TzE wEE

Long Run Equilibrium

EENFTDEN?|AL r).]cuMENTS EF BEN.raMrN Na TzE WEE

Unique Product, no close substitutes,

See List of Barriers to Entry

Short Run Equilibriun

coNF|DENT|A.L [)t]truMENTS oF BEN.J.AMTN NG TzE wEE

High barriers to entry.

Can be homogenous or differentiated product.

Fomal Colkrsion - Cartel

Share of resulting sales depend on either:

Each member, under cartel agreemenL produces at an output level for

proftts by producing more output than allocated. Hence. there is a MR curve is a

tendency for members to cheat on allocated quotas.

Strategy to eliminate new competitors or to increase market share by

very costly to wage, hence often a last resort strategy.

EtrNFIDENTIAL DtrtrUMENTS OF EIEN.JAMIN NG TZE WEE

geographical boundaries, age group etc. seepage refers

price in the more price inelastic market and a lower

There may be increased output and allocative efficiency is reached.

Er]NFTDENT|.AL DasuMENT5 oF BEN.raMlN NE TzE \^/EE

Regulation of Monopoly / Oligopoly

A.Lffiandl4dA.don S$ntrno\ p^fas . rsu.

Pricc Rabe4 outptrt

I monopoty mnv suffer fronr subnonnal

SetthrgttE Prkeat P=AC Free

The threat of competition rrleans that regardless of the number of

Ferv markets are perftctly contestable, and hence a monopo$ may

0.r EoNFTDENTTAL DBtruMENTS oF BEN.JAMTN NE TzE WEE

Microeconornic Goals Showing Economic Gtowth via PPC

. Healthy Balance of Payments

Actual EG: Annual 96 lncrease in National Output

Potential Eg: Annual 96 lncrease in Productive Capacity

Benefits of High and Sustained Economic Grwth I{ational tncomeAccounting I IilDICATORS I

Higher real income produced within the geographical boundaries of a country

may reduce structural unemployment

EI]NFTDENTTAL DotruMENTs oF BEN.J.a.vtH Ne TzE WEE

C-an weconcludefrom the increase/decrease in GDPthat SOL has risen/fallen?

Factor Elaboration Remark

A fall in national income due to increase in

to show whether the increase in Nl also

country but are not accounted for in Nl

E.g. lncometax may be understated for

EoNFTDENTTAL DEtrUMENTS oF BEN.JAMIN Nc TzE WEE

Factor Elaboration Remark

Differences in the work hours vs leisure time

A higher GDP may be the result of people

cDNFTDENTTAL DotruMENTS BF BEN.JAMIN NE TzE wEE

APC: Proportion of Total lncome that is consumed

MFC: Change in consumption as income changes

2.' Cost of new capital goods

EoNFTDENTTAL Dt]CUMENTS oF BEN.JAMTN NG TzE WEE

Determining Equilibrium National lncomet theAE =Y Diagram

of this new income of S20 million, while saving another S20

The Singaporc Scenario: Very low multiplier (0.54)

CtrNFTDENTTA.L DEcuMENTE oF BEN.JAMtN NG TzE \A/EE

Factor Aggregate Demand (AD) Aggregate Supply (AS)

Factors that Shift Curve