2008 A Level Q5

Discuss the relative significance of the multiplier, the price elasticities of

demand for imports and exports and crowding-out in influencing
macroeconomic policy decisions. [25]
Introduction

• Multiplier, PEDm and PEDx, and crowding-out have different impacts on macro policy
decisions
• Macro policy decisions pertain to:
o Choice of policies eg FP, MP, e/r policy and
o How much to change eg extent of increase/decrease in components that affect the
policies eg i/r, e/r, G, T
• The relative significance of k, PEDm and PEDx, and crowding-out can be measured by
comparing their impact and importance:
o Across an economy
o Between 2 economies (for the selected concept)
• Each concept have diff degree of impact and importance in influencing macro policy
decision ie some concepts have greater impact due to its influence on multiple areas of
policies while some other concepts might be limited to only influencing one particular
policy area
Main: Multiplier k

• K is important in influencing the use of DD-mgmt policies and e/r policy since k
affects NY via AD
Definition/how it works:
• K measures the number of times NY will change given a change in the
components of AD
• K=1/(1-MPC)
• The larger the MPC, the larger the size of k, hence the larger the impact on NY
• Use the multiplier table to illustrate the multiplier process
Main: Multiplier k

Implications:
• Economy with small k eg SG: any increase in AD will not have significant impact on
increasing NY due to high leakages
• Explain why k is small in SG
• May need larger fiscal stimulus to reach the intended increase in NY
• Alternatively, design policies to target sectors with less leakage (relatively larger
k) eg lower Y group with higher MPC
• SG: despite limitation of small k, FP still impt policy tool in stimulating economy
esp during recession especially in a severe and prolonged recession
• In contrast, economies with larger k eg US: use of expansionary DD-mgmt
policies more successful, multiplier process can be relied on to hasten ec
recovery
Main: PEDm and PEDx

• PEDm and PEDx are important in influencing the use of exchange rate policy
Definition/how it works:
• Eg depreciation of currency (zero appreciation stance in SG) to stimulate NX
during ec downturn
• Decrease e/r  X cheaper in FC, M more expensive in DC  NX increase if MLC is
satisfied
• Explain why MLC is satisfied in SG (eg why PEDx>1, many close subs)
Implications:
• The sum of PEDx and PEDm will determine resulting impact on NX and hence use
of or type of e/r policy to use (appreciate/depreciate the currency)
• The larger the value of PEDx+PEDm, the smaller the change needed in e/r to
achieve intended effect on AD and AS
Main: Crowding-out

• Important in influencing the use of EFP

Definition/how it works:
• EFP  decrease T/increase G
• If gov does not have sufficient tax rev to finance its spending, may need to
finance through borrowing frm firms/individuals
• Assuming money SS is constant, when gov borrows  increase DD for money 
increase i/r  decrease private borrowings  decrease private C and I
• Hence, private C and I are "crowded out”, and this will offset the increase in G
and dampen AD instead
Main: Crowding-out

Implications:
• For economies in which gov need to resort to borrowing, crowding-out effect
reduces the effectiveness of EFP
• Other policies eg EMP may achieve macro objectives more effectively
• The stronger the ability of the gov to finance EFP on its own (without borrowing),
the more effective the policy would be
• SG: gov funds EFP from reserves accumulated from past budget surpluses,
crowding-out is irrelevant in influencing policy decision
Evaluation

• Among the 3 concepts, multiplier could potentially be the most significant in

influencing policy decision in view of its wide-ranging application and impact on the
most number of policies (DD-mgmt + e/r policy) while crowding-out effect might
have the least significance since it only applies to EFP (irrelevant in the case of CFP)
• The significance of k is further heightened in relatively closed economies with larger k
(eg US) compared to open economies (eg SG), although for the latter, its active use of
e/r policy to affect AD is still dependent on the multiplier process to impact NY
• In contrast, the significance of the concepts of PEDm+PEDx and crowding out depends
on the characteristics of the economy in question eg PEDx and PEDm more relevant
to economies which are relatively externally driven and crowding out will impact
economies which need to resort to borrowings to finance budget deficit
• Other factors also affect macro policy decisions: time lag, characteristics of the
economy eg inactive bond market + openness of the SG economy makes the use of
traditional MP ineffective
 2012 A Level Q2
Internet or online shopping has grown rapidly in recent years. Low barriers to
entry have allowed a wide range of small specialised retail firms to market their
products on the internet. At the same time economies of scale have led to a
smaller number of large internet retail companies dominating the market for
other products.
(a) Explain the existence of these 2 different types of online retailers and which
market structure best explains the market behaviour of each of them. [10]
(b) Increased specialisation and low barriers to entry have an impact on
consumers and existing producers. Discuss how far the traditional analysis of
these economic effects applies to the growth of online shopping. [15]
Question analysis

Features Market Performance

behaviour

• BTE • Pricing • LR profit

• No. of • Output • Efficiency
sellers • Competition (AE, PE,
• Nature of (price vs DE(R&D,
product non-price) innovation))
• Information • Equity
Introduction
• The existence of the 2 diff types of online retailers can be explained
using barriers to entry (BTE)
• The behaviours of these small specialised retail firms and large
internet retail companies are best explained by the following market
structures respectively:
Monopolistic Competition
Oligopoly
Main – BTE
• BTE = any manmade or natural impediments which are strong enough to prevent new firms from
competing with the existing firm
When BTEs are low:
• > firms can enter the industry  large no. of small specialised retailers
• Eg online stores can be set up with relative ease administratively and the FC and VC of operations are
much lower due to no rentals and low wage costs compared to brick-and-mortar stores
When BTEs are high:
• Only few large firms may dominate the business
• BTEs may occur in the form of EOS – cost savings that accrue directly to the firm from the expansion
of its o/p, independent of what is happening to other firms
• Eg Amazon generates high consr traffic and sell to large customer base worldwide  significant IEOS
in retailing: marketing economies from bulk procurement of merchandise and bulk advertising,
technical economies from using technically more superior warehousing and storage facilities or SS
chain management system for its inventories
• As such, large internet retail companies are able to lower their AC and this can become a form of BTE
since potential competitors may not be able to compete in terms of price due to their higher unit
cost incurred
Main – Market structure
• Firms in each of these market structures possess a unique combination of
characteristics which affect their market behaviour such as their pricing and
output decisions and more importantly, how they compete (price vs non-price
competition)
MC best explains mkt behaviour of small specialised online retail firms:
• MC: very low BTE  large no. of small-size firms, each selling slightly
differentiated pdts
• Large number of small specialised online firms  each acts independently of
others in setting own price with limited attempt to take into account the reaction
of all rivals  wide range of prices amongst small online retail firms
• Although these retailers may price compete since they face a price elastic DD
curve, in reality, such firms prefer to engage in non-price competition to make
their stores > preferable than the multitude of competitors vying for the same
mkt share
Main – Market structure
MC best explains mkt behaviour of small specialised online retail firms:
• They differentiate their pdts through pdt promotion eg advertising and/or pdt
development eg sourcing for unique and better qly pdt, maintain good after-sales
services such as ease of shipping, exchange and returns, loyalty programmes
• This is esp critical for small specialist stores as successful attempts at PD in their
respective niche mkts gives them mkt power to control and set their own prices
apart from competition
Main – Market structure
Oli best explains mkt behaviour of large internet retail companies:
• Oli: high BTE  small no of large size firms, each having significant mkt share and selling
differentiated pdts
• Besides ability to tap on significant EOS, large internet retail companies enjoy strong brand
recognition and hv considerable financial resources and expertise to tap on more advanced
internet technologies to carry out targeted marketing strategies  further strengthen BTE as
new entrants are put at a disadvantage and deterred from entering the industry unless they
are prepared for the high risks of losses arising from sustained period of high mkting costs and
low rev  large companies better able to retain supernormal profits in the LR
• Small no. of firms  one firm’s action might hv significant impact on other firms’ sales  each
firm recognises that rivals will notice any action it takes and must take into account how rival
firms might react  mutually interdependent and rival-conscious  limited scope for price
competition (unless ST) and might prefer to engage in non-price competition
• To achieve this end, large internet retail companies also compete thru PD by expending
substantial financial resources on pdt promotion eg advertising and pdt development,
enhancing online security and improving shopping experience thru customer feedback and
review
Question analysis
• Economic effect 1: “Increased specialisation”  specialise in
particular area of trade, niche market selling only one type of good
• Economic effect 2: “Low BTE”  start up costs, EOS, branding
• “Traditional analysis”  economic theory
• Growth of online shopping  1) Increase in demand (online
shoppers) 2) increase in supply (online retailers) 3) Increase in TR/CE
Introduction
• Growth of online shopping is evident from the increased number of online
retailers and buyers, generating higher vol of online transactions across an ever
increasing range of goods offered  increase sales rev
• Online retailers primarily operate under MC and Oli mkt structures (as seen from
a)
• While economic effects of increased specialisation and low BTE can apply to or be
used to explain the growth of online shopping, other factors are also at play in
increasing the demand for and/or supply of online shopping
• How far the above-mentioned ec effects are responsible for the growth of online
shopping then depends on the extent of their impact on consrs and prodrs ie the
DD and SS of online shopping in various mkt structures and which is likely to be
the key driver of growth moving forward
Main
Thesis: The economic effects arising from increased specialisation and low BTE apply
to/account for the growth of online shopping
Economic effects of specialisation
• Specialisation refers to the biz model of online retail stores specialising in a particular area
of trade eg online blog shops which operate in niche mkt and solely concentrate on
retailing fashion apparels
• Increased specialisation has allowed small specialist online firms to concentrate their
limited resources and marketing efforts on a narrower range of merchandise
• Reduces operating costs and risks of biz failure since smaller firms often face liquidity
issues if their CF is tied down by the need to stock up on a wide variety of pdt mix in
anticipation of mkt dd
• Increased specialisation wld allow small online retailers to differentiate and customise
their goods and support services sufficiently to better meet the preferences of their niche
mkt and hence effectively compete with large internet retail companies selling mass
produced fashion goods
Main
Thesis: The economic effects arising from increased specialisation and low BTE apply to/account
for the growth of online shopping
Economic effects of low BTE
• From (a), economic effects of low BTE pertain to the ease with which online retail stores can be
set up given its low set up costs and low legislative/administrative impediments  large no. of
small stores, each competing to earn supernormal profits in the SR and maintain sufficient
economic profit to remain in the industry in the LR
• Hence, these 2 factors apply to the overall growth of online shopping given their significant
impact on the producers ie the supply of online shopping has increased due to the increase in
number of small size sellers
• Furthermore, the increased variety of goods available at competitive prices meant more choices
to consumers and this could change their taste and preferences in favour to online shopping,
thus increasing its demand
• [EV]: it can be argued that the ec effects primarily account for the growth of online shopping
from firms operating under MC and less applicable to growth of online shopping brought about
by the increasing mkt presence of large Oli internet retail companies
Main
Anti-thesis: The economic effects arising from increased specialisation and low BTE cannot adequately
apply to/account for the growth of online shopping ie the ec effects arising from other factors can
better account for growth of online shopping
Economic effects of EOS
• Ec effects of EOS apply to growth of online shopping brought by large internet retailers like Amazon.
From a, internet retail companies which operate on a larger scale can better tap on IEOS in retailing,
lower their AC and potentially pass on the cost savings to consrs  Accounts for growth of online
shopping contributed by Oli
• Many of these large and dominant firms adopt the biz model of providing a one-stop online shopping
experience, retailing a diverse range of consr goods from furniture to books  increase convenience
(taste and preferences)  increase demand for online shopping
• Thrive on building and strengthening BTE made possible by their ability to reap EOS from serving an
international clientele and customer base
• Increase vol of online transaction largely due to increase in demand for online shopping can be better
explained by ec effects of EOS rather than specialisation or low BTE
• [EV]: it might be reasonable to argue that growth of large internet companies is a more significant
contributory factor to the overall growth of online shopping than that of specialist online firms. The
former tends to have greater international appeal and read eg reputable online brands compared to
the latter which tends to serve a largely local-centric clientele in niche markets
Main
Anti-thesis: The economic effects arising from increased specialisation and low BTE
cannot adequately apply to/account for the growth of online shopping ie the ec effects
arising from other factors can better account for growth of online shopping
Economic effects of improvement in technology
• Improvement in technology is a key driver in the growth of online shopping
• Its ec effects range from its role as a “factor input” of online firms to issues pertaining to
online security. Since online firms use the internet as a platform to sell their pdts,
improvement in tech has the effect of lowering COP, and increasing SS of online shopping
• On the DD side, development in internet tech has seen much more online retailers tie up
with reputable firms such as PayPal to facilitate the e-transfers of payment. With this,
online transactions are made more secure and less susceptible to frauds, thus giving
consrs a peace of mind to continue their online shopping.
• Furthermore, many online retailers have leveraged tech to provide value-added services,
enhance the shopping experience of their online customers and reduce their risk of
making erroneous choices
Main
Anti-thesis: The economic effects arising from increased specialisation and low BTE
cannot adequately apply to/account for the growth of online shopping ie the ec effects
arising from other factors can better account for growth of online shopping
Economic effects of improvement in technology
• Eg product specifications and quality are made more transparent through customers’
feedback, ratings and reviews, fitting of clothes can be done virtually through
simulation software, which inputs the measurements of the customer etc
• Hence, the ec effects of tech have increased both DD and SS of online shopping among
internet retailers across all market structures
• [EV]: improvement in online tech will continue to be the catalyst of growth for both
large and small internet retailers. The increased rate of tech adoption eg increased
smartphone penetration rate, will create more platforms for consumers to perform
online transactions with greater convenience and at lower costs. Over time, the
purchasing patterns of consumers may switch away from traditional brick-and-mortar
shops to online shopping
Conclusion
• The traditional analysis of the ec effects of increased specialisation and low BTE
applies to the growth of online shopping to the extent that it increases the no. of
small size retailers and promotes greater choices and consr DD
• Using sales turnover as a yardstick of overall growth, factors affording the
development of large internet retailers such as EOS may play a greater role in the
growth of online shopping
• [EV]: however, this preliminary outcome may not be so conclusive if we consider the
fact that more and more small independent specialist online retailers who have
benefitted from increased specialisation and low BTEs are tapping on the reputation
of online aggregator platforms such as eBay, Taobao marketplace by listing and
retailing their wares on such sites, thus contributing significantly to the growth of
online shopping
• [EV]: in any case, regardless of the type of online retailers and whether they operate
independently or otherwise, improvement in tech and its ensuing ec effects may
potentially be the single most impt driver of the growth of online shopping
2013 A Level CSQ 2
(a) Identify one injection and one leakage shown in the tables that
would change if consumption became the main engine of growth in
China in the future. [2]
• Leakage – Savings
• Injection – Exports
(a) Using a diagram, explain why new technology could increase the goods and
services available to an economy. [2]
• With the use of new technology, more output can be produced with the same amount of
resources (eg labour or raw materials), leading to an increase in productivity.
Diagram – either approach is acceptable
AD/AS PPC
This increases an economy’s LRAS from LRAS0 to This increases an economy’s productive capacity from
LRAS1, which indicates an expansion of its productive PPC0 to PPC1, indicating the economy is capable of
capacity from Yf0 to Yf1. As a result, the real output of producing more g/s, hence more g/s are made
the economy will increase from Y0 to Y1, showing that available. Eg pt X which is previously not attainable
more g/s are made available now becomes attainable
(c) Wrt the data, explain how you would expect the size of
multiplier to differ between the US and China. [4]

• The income multiplier (k) shows the # of times the change in NY is more than the
initial change in aggregate expenditure and its value is given by the reciprocal of
the mpw=mps+mpm+mpt
• Larger mpw signifies the increase in induced consumption due to increased
income in each round of the multiplier process is less significant, leading to a
smaller increase in national income at the end of the multiplier process, hence a
small multiplier
• Wrt Extract 4, it was mentioned that China has high mps, a result of historical
events such as long civil war, Cultural Revolution, famine that have inculcated the
value of being thrifty. An increasingly imp contributor to high mps is the fall in
old-age support given China’s one-child policy. This need to save is esp imp given
that the state does not provide much support in terms of HC and pensions
(c) Wrt the data, explain how you would expect the size of
multiplier to differ between the US and China. [4]

• On the other hand, Extract 5 mentions about consumption-led growth model of

the US. This implies that their economy has high mpc and thus, low mps.
Therefore, the mps of China is likely to be higher than that in the US, and this
indicates that there is a larger mpw for China and a small multiplier for China
• However, the data did not provide any info on the mpm and mpt of the countries,
which are imp determinants of the size of a country’s multiplier. Although Table 6
provides data on import, it is about average propensity to import rather than
marginal propensity to import. As such, the data is not useful
(d) Explain how China’s competitiveness might be maintained if its
exchange rate were allowed to appreciate. [4]
• If Yuan is allowed to appreciate, X become more exp in FC and this could hurt X
competitiveness
(Any 2 reasons below)
• However, China’s competitiveness may not necessarily be eroded. This is because Pm
in Yuan will decrease. Industries in China that rely heavily on imported factor inputs
will benefit in terms of lower COP, thereby helping to maintain their competitiveness
• Moreover, the cheaper M may also lower dom inflation rate. This would help tackle
the need for excessive wage increment, making China a more competitive investment
destination given the rise in labour cost is an imp contributor to the rate of return
• The appreciation of Yuan can force firms to move up the value chain or seek more
productive methods given that the more exp Yuan will make it hard for firms to
compete in goods they are currently producing using the production technique they
currently employ. This moving up the value chain will be more possible if the
government is able to render the necessary support for firms in terms of subsidies
and tax incentives in the initial phase to help them raise productivity and be more
innovative, thereby making China’s goods more competitive
(e) Explain what the author of Extract 5 means by a ‘true price’ and
consider whether an indirect tax is the best way of ensuring that
goods are charged at the true price. [8]
• The ‘true price’ that the author is referring to is the price of the good which the
market should charge, after taking into considering the negative externalities
• When consrs and prodrs decide on the amt to consume and produce, they
consider only PB and PC. As such, the market produces and consumes Qm, where
MPB=MPC, at price P0
• However, the industrial production of goods generate negative externalities. It
results in air and water pollution, which will affect the health of residents living
in the vicinity, who are not compensated for these harmful effects
• As such, the MSC should consist of MPC and MEC, resulting in the socially optimal
output being Qs, given by MSB=MSC. Hence, there is over-consumption, which
can be seen as price in the market is lower than true price P1, leading to higher
quantity demanded.
(e) Explain what the author of Extract 5 means by a ‘true price’ and
consider whether an indirect tax is the best way of ensuring that
goods are charged at the true price. [8]

Indirect tax can ensure that goods are charged at true price
• With the imposition of indirect taxes, the COP for producers will increase,
resulting in leftward shift of MPC. If the indirect tax imposed=MEC, MPC will
coincide with MSC. The producers would have internalized the external costs of
production. Qm moves to Qs, and price increases to P1, leading solving the
problem of the goods being underpriced
(e) Explain what the author of Extract 5 means by a ‘true price’ and
consider whether an indirect tax is the best way of ensuring that
goods are charged at the true price. [8]
Indirect tax may not be the best policy to ensure that goods are charged at true
price
• Difficult to estimate the exact amount of indirect tax to impose on specific firms
given the level of pollutants for diff types of industrial production varies. True
pricing may be difficult to ascertain. As such, it is possible that some goods are
still underpriced while others could now be overpriced. Nonetheless, this
problem applies to all other methods of intervention
• Imposing an indirect tax across the board whether across industries or within an
industry does not take into consideration that it is more difficult to reduce
pollutants in certain industries as compared to others. A better measure could be
to use a tradeable permit system, where the gov issues/sells permits to firms,
allowing them to pollute up to a certain limit. These permits are tradeable so
firms that are relatively clean in their prodn methods can sell their polluting
rights to other firms, whose prodn methods produce greater levels of pollution.
This system provides incentives for firms to adopt the cleaner tech
(e) Explain what the author of Extract 5 means by a ‘true price’ and
consider whether an indirect tax is the best way of ensuring that
goods are charged at the true price. [8]
Synthesis
• Whether indirect tax is the best way depends on a number of factors:
1. The type of country imposing the tax – 1st world country with extensive
research system and proven track record would have no problem imposing the
correct amount of tax which will then ensure that the goods are charged at the
right price, while developing country might have problems executing the tax.
2. Disruption to economy – Indirect tax makes use of the self-adjusting price
mechanism process to ensure an optimal allocation of resources while other
methods like legislation and nationalization would force the production level to
be at a pre-determined level and this might be more disruptive to the
economy than before. Moral suasion on the other hand is more LT and passive
3. Time – Taxes can be considered one of the best ways because the effects are
more immediate and it makes use of the price mechanism
(f) The data provides an explanation of two different policy
approaches to generating economic growth. Discuss which approach
you would recommend for Asian economies. [10]
Consumption-led economic growth policies
• Via wage increment: Chinese gov can try to empower Chinese citizens with
higher levels of skills so they can remain in Nt and seek better job prospects so
their wages can increase
• Appreciation of Yuan: Px in FC will increase while Pm in DC will decrease  Qx
decrease and since PEDx>1 due to many close substitutes around the world, NX
will fall and this will reduce strain on demand for resources. AD will decrease and
assuming the economy is near Yf, GPL will decrease. Consrs can consume more
g/s as their PP increase
• Reforms on tax and social security to reduce the need to save so much: When
Chinese are assured of better pension scheme upon retirement, they will not
need to save so much during their active days, allowing to spend more and
consume more
(f) The data provides an explanation of two different policy
approaches to generating economic growth. Discuss which approach
you would recommend for Asian economies. [10]
Environmentally sustainable economic growth policies
• Right pricing of goods to ensure resources are better allocated to bring abt a
more sustainable growth
• Has resource constraint at the centre of all policy making and hence there must
be limit placed on consumption
• This approach is to limit consumption while the previous is to spur consumption
(f) The data provides an explanation of two different policy
approaches to generating economic growth. Discuss which approach
you would recommend for Asian economies. [10]
Why environmentally sustainable economic growth policies should be pursued
• It is mentioned in Extract 5 that consumption-led EG policies should not be
pursued too aggressively.
• With Asians contributing a higher proportion of the world population, such
pursuit of growth can lead to significant increase in non-renewable commodities
and food. This can hurt level of C and hence is not sustainable
• Moreover, the effort to help satisfy this increase in C can lead to further
catastrophic climate change, massive environment damage and significant
depletion of natural resources
(f) The data provides an explanation of two different policy
approaches to generating economic growth. Discuss which approach
you would recommend for Asian economies. [10]
Recommendation
• Not all Asian economies should focus on C-led growth or sustainable growth
policies. The policies adopted should take into consideration the following
factors:
1. Ability of gov to increase productivity – increasing wages will lead to higher
disposable Y and hence higher C. Nonetheless, it can hurt competitiveness as
firms are forced to pay higher wages and incur higher COP. The higher costs
might force firms to pass the burden on to consrs in terms of higher prices.
However, if the gov is able to raise productivity successfully, this will mitigate
the fall in competitiveness and prevent X and I from falling drastically in the ST
2. Structure of population – economies which have aging population will find it
more diff to depend on C-led EG policies as it is more diff to get people to spend
as the need to save increases with life expectancy
(f) The data provides an explanation of two different policy
approaches to generating economic growth. Discuss which approach
you would recommend for Asian economies. [10]
3. Financial strength of gov – economies which gov has strong financial means to
support HC spending will reduce the need for people to save, hence will be better
able to rely on C-driven growth
4. Size of dom market – C-led model is recommended for economies with larger
dom mkt. This is because economies with small dom market cannot simply depend
on C to sustain country’s EG
5. Distribution of GDP – Economies which are too dependent on other components
of AD like X and I will be better off pursuing C-led EC as it helps the economy to be
less vulnerable to global economic crisis
6. Level of negative ext – economies that use cheap prodn technique which
generate huge amt of negative ext should put more focus on these policies for
sustainable prodn
Additional slide
•Payment Services (PS) Act 28 Jan 2020
• Singapore introduce new payments legislation that offers global
cryptocurrency firms a chance to expand their operations in the country by
applying for operating licenses
• The first comprehensive regulation for companies handling activities
ranging from digital payments to trading of tokens such as Bitcoin and Ether
• Aim: safeguard against money laundering and terrorism financing, and
strengthen consumer protection, cyber security and promote confidence
in use of e-payments
• The Act brings providers of digital payment token services (aka
cryptocurrency dealing/exchange services) into the regulatory fold under
the ambit of MAS