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Economics Ablaze! 

Message from the editors Dear readers, Welcome to the inaugural issue of Economics Ablaze! brought to you by Ne2twork – Entrepreneurship & Economics Society. A highlight of our bulletin is undoubtedly the exemplary Economics essays, complete with tutors’ comments, that will complement your revision for the subject. Through snippets of some of Ne2twork’s most exciting activities held over the past few months and the upcoming ones, we hope to spark your interest in Entrepreneurship and Economics. Alright, enough said! Do explore this bulletin on your own and we look forward to your suggestions and feedback for our next issue!!

The Editorial Team

From left to right: The Editorial Team (Adrian Chia, Lee Kok Wei, Wong Zhi Kai)

NAVIGATING THE BULLETIN

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Economics Ablaze!  

Ne2twork Activities Mastermind: Economics Mastermind Economics 2007 took off on April 17 with the preliminary round. We received an overwhelming response from many enthusiastic Year 2 students. Within 80 minutes, these participants had to tackle 40 challenging Economics-related MCQs. Eventually, the top 4 CTs with the highest scores proceeded to the final round of the inter-CT quiz.

The four teams from 06S6K, 06S71, 06S7D and 06S7E pitted their wits, reflexes and knowledge against one another as they plowed through the

Team Round and the Buzzer Round. Of the two, the Buzzer Round was the real challenge. Teams had to be on their toes all the time and attempt to provide an answer as quickly as possible to gain an additional two points for their teams. Yet, they had to be cautious at the same time as there was a one-mark penalty for every question answered wrongly. Most teams took a safer approach by carefully considering the question before pressing the buzzer. This was with the exception of one team—06S7D who attempted to answer as many questions as they could and albeit losing the most number of points in the buzzer round, they managed to correctly solve a lot more questions to emerge as the winners of Mastermind Economics 2007!

Interview with the champion CT - 06S7D

Q:What are your feelings about A: We generally read the emerging as champions? newspapers on a daily basis. We also flipped through the A: Of course, we do feel happy Sloman textbook. To gain better because we have put in a lot of insights on the topic, we looked effort to get ourselves prepared up online sites such as Wikipedia for this quiz. Now that we have to gain better insights on certain won the quiz, we are also Economics topics. That’s all. encouraged to study harder! Q: Do all of you think that Q: How did your group prepare Mastermind Economics should yourselves for the quiz?

be carried out again in the following years? A: Most certainly! Mastermind Economics was a fun experience and it spiced up our school life. It also spurs greater interest in the study of Economics.

Valentine’s Day Retail Stall YOU SCREAM ICE CREAM! The Valentine’s Day Retail Stall was held from 7th February to 15th February 2007, in conjunction with our school’s Friendship Day. An ice cream stall selling Cremo icecream was set up in the canteen for a week and students could pick from 10 flavours that were made available to them. Saga seed bottles with exquisite decorations were also sold at the booth.

In line with our society’s spirit of Social Entrepreneurship, part of the profits was donated to the school’s Needy Student Fund. This event was both a fruitful and memorable experience for the Ne2twork members involved, as they learned how to make proper sized ‘earthquakes’, how to run a stall, and how to serve customers. Of course, they had lots of fun enjoying the leftover ice cream too!

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Economics Ablaze! 

Ne2twork Activities Sports Meet Retail Stall For some of our members, this year’s Sports Meet was more than just sports or cheering. It presented a great business opportunity for them to put their entrepreneurial and marketing skills to test. Indeed, after a whole morning of hard work and effort, the Sports Meet Retail Stall was a huge success for us!

when our mobile salespersons were swarmed by customers trying to get hold of a bun, and we were greatly motivated by that. In the end, we managed to sell most of the buns, and of course, gained invaluable experience in running a retail stall, making money and donating part of the proceeds to the school’s Needy Student Fund.

Selling those buns to the crowd on the actual day was perhaps the best part of the whole project. Sales started very slowly in the morning, and our salespersons had to stretch their marketing skills and persuasive power to the maximum to get business going. Our classmates and teachers became our first targets (thanks to those who supported!). As time passed, sales got better and better. There were a few times

Old Textbook Sale The sale of the old textbooks was held from 28th March to 4th April 2007. The sale was held to benefit those who need to purchase the books at a reduced price. The proceeds from the sales were donated to the school’s Needy Student Fund. It was indeed a meaningful and enjoyable experience for all those involved.

Talentime Day Retail Stall A stall selling flowers was set up on the night of Talentime, for students to show some encouragement to their friends who were taking part in the performance.

Launch of Entrepreneurship Challenge We are also organising the annual HCI-EDB Entrepreneurship Challenge in conjunction with the Economic Development Board of Singapore. This competition consists of Best Business Idea, an intra-college business plan writing competition, and the Virtual Business Challenge, an

inter-school simulated online business game, where students become car sellers. Currently ongoing, the finals of the VBC will be on the 28th to 30th May (secondary schools) and 1st to 2nd and 4th to 5th June (junior colleges). Stay tuned for the results!

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HCI C2 BLOCK TEST 1 2007 ECONOMICS PAPER 1 DATA RESPONSE QUESTION Using Table 1 and Table 2: (a) Identify the country that enjoyed a higher standard of living in 2006. (i) Germany (ii)

State and explain your choice of the most appropriate economic indicator used in a(i).

[1]

[3]

GDP per capita based on PPP, USD (1m) Reason (2m): • Per capita GDP reflects well being of the average person. • PPP exchange rate reflects value of common basket of g/s between countries, so GDP per capita based on PPP reflects the purchasing power of income in terms of real goods & services that can be purchased per person in which cost of living of the country is taken in to consideration. Note: No mark for students who ONLY explained why per capita is important and left out PPP completely. Reason: PPP is the focus and not per capita because if it is per capita, students can always use the second indicator: GDP per capita, current prices, USD. Also, if students explained PPP as in the NIA notes – ‘the PPP tells us how much goods and services can be bought by a unit of currency at home compared with the purchasing power of other countries’ currency’. Award ONLY 1 mark. Students MUST bring in cost of living to get full 2 marks. If not, their answer is considered unclear. They are expected to be able to do it as this is discussed during tutorials. Bringing in cost of living is different from inflation rate. China may have higher inflation rate than Germany but the prices of good are still much lower. Also, saying that exchange rate is being manipulated or huge fluctuation is not the focus since Yuan is pegged to USD and Euro is usually rather stable. Also, as discussed during the standardisation, no mark will be awarded for students who attempted to explain why other indicators are not ‘good enough’. They have to learn that they need to JUSTIFY the indicator they have chosen and not why the others are inappropriate. (iii)

Compare the economic growth rates between Germany and China from 2003 to 2006. [2] China economy has been growing at a much higher and stable rate (around 10%) compared to Germany. Note: Award one mark if students ONLY describe and not compare.

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Economics Ablaze!  Account for the factors contributing to China’s inflationary pressure.

[2]

‘Expanding investment and rising costs of inputs such as steel, aluminium and cement’. The former leads to demand-pull inflation while the latter, cost-push inflation. OR Expanding investment in China need to high demand for raw material such as steel, aluminium and cement. With supply bottlenecks (tight capacity) in the economy, demand-pull inflation occurs as a result. Note: Point to students the difference between cost-push inflation and demand-induced rising cost – tight capacity in China economy and thus drives up factor cost. There are no such terms – demand-pulled, cost-pushed, demand-push, cost-pull, etc. (c) (i)

With reference to Extract 1, identify and explain the main type of unemployment found in Germany. [2] Structural unemployment (1m) caused by the outsourcing/export of jobs to lower cost countries eg China & India. (1m) Note: No mark will be given if students identified the main unemployment to be cyclical and yet could cite that it is due to outsourcing. However, if students identified REAL-WAGE unemployment (productivity lagging behind wages) and thus led to outsourcing – award 2 full marks. It is mentioned that ‘trade unions are making unprecedented compromises to keep jobs at home’ and this does lead to a conclusion there is real-wage unemployment. Be very careful when identifying the ‘right type’ of unemployment (the very FIRST reason why one is unemployed) and don’t end up confusing. E.g. I am unemployed as my productivity is lagging behind my wages and my firm outsourced their production to other cheaper alternatives and people called it real-wage unemployment. As I am a lowskilled worker, I’ve no skills to fit into jobs that require higher skills and I became structural unemployed. I started actively looking for a job but still could not find one and I am frictional unemployed. Due to outsourcing, investment in the country falls and there is recession and thus I am cyclical unemployed! THERE WILL BE NO END TO SUCH STORY!!!

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(ii)

With the aid of an income-expenditure diagram, explain how a negative output gap arose in Germany from 2003 - 2006. [4] A correctly drawn & well-labelled diagram to show (2m): • deflationary gap illustrating the shortfall of current AE as compared to AE at FE level • output gap illustrating the shortfall between current equilibrium income & income at full employment level. Explanation (2m): • Output gap depicts the difference between a country’s actual national income in relation to its potential national income at full employment level. • A negative output gap shows that Germany’s equilibrium national income is below its full employment level due to a lack of aggregate demand Y=E AE

AEfe AE DG

Y

Yf

National Income

Output Gap

Note: Output gap is not deflationary gap. Also, students should not label it as unemployment. (d)

To what extent is fiscal policy relevant in managing the unemployment problems faced by Germany between the period 2003 to 2006? [6] Expansionary discretionary fiscal policy of deliberate increase in G or/and decrease T would be effective in closing the deflationary & output gaps in Germany caused by a lack of AE. It is a cure for cyclical unemployment. However, this type of unemployment was not the major problem in Germany. Evidence: relatively insignificant output gaps of - 1.2% or below. The main unemployment problem faced by Germany is: Structural unemployment due to outsourcing to cheaper cost countries eg China & India. Fiscal policy would not be relevance in dealing with this type of unemployment. However, fiscal policy does have supply side effects if government spending is on education and training of skills that equip people to the jobs available. The more appropriate policy to tackle structural unemployment will be: Re-gaining Germany’s competitive edge via SS side policy eg • no guaranteed job security & lifelong employment but rather lifelong training, learning & retraining/learning, education reform, increase productivity, emphasis on innovation, R&D, job restructuring etc • lower & flexible wage rate through labour market reform (reduce power of militant trade union) – esp. if identified to be real-wage unemployment. • performance related promotion rather than based on seniority

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Economics Ablaze! 

HCI C2 BLOCK TEST 1 2007 ECONOMICS PAPER 2 ESSAY

QUESTION ONE

The September 11 attacks caused the US to plunge into a recession. This had severely dented the confidence of the US consumers; any government hopes that the US$40 billion in income tax rebates could kick-start the economy may have been left unfulfilled. (Extracted from BBC News, 19 Sep & 26 Nov 2001) (a) Using the concept of the multiplier, explain why the income tax rebates may have limited impact on raising national income in the US. [12] (b) Discuss whether the decline in national income necessarily meant that the standard of living for the average American has also declined. [13] To give you a better picture of the economic shock that US suffered following the Sept 11 attacks, here is some background information:  On Sept 17, the first day the New York Stock Exchange (NYSE) reopened after the attacks, the Dow Jones Industrial Average fell by 684 points, to 8,920. It was its biggest point drop ever in US history. By the end of the week, the index had fallen 1,369.7 points. US stocks lost $1.2 trillion in value for the week.  One week after the attacks, several major airlines announced drastic job cuts – American and United Airlines planned to lay off 20,000 employees each. The terrorist attack was described as a ‘tsunami’ to the aviation industry which was already ailing prior to the attacks.  Tourism industry in New York City plummeted right after the attacks, with hotel occupancy rate falling below 40%, and 3,000 employees laid off.  According to the Labor Department, the unemployment rate jumped to 5.4% in October 2001, a 5-year high. Some 415,000 jobs were cut in that month alone.  The high unemployment rate coincided with the lowest consumer spending in nearly 15 years.  After the 911 incident, the Federal Reserve cut key interest rate several times to a historical lowest rate of 1% in December 2001, in an aggressive attempt to rejuvenate the economy.  The Bush administration quickly delivered $40 billion worth of tax rebates for households and $15 billion bailout for the airline industry, in a bid to prevent the recession from worsening. Sources: PBS – http://www.pbs.org/newshour/terrorism/ata/economics/ US Labor Department

Tutor’s Comments and Feedback This question explicitly asked for an explanation using the concept of the ‘k’. So, scripts that did not give sufficient emphasis/weight to the ‘k’ scored badly. To provide sufficient depth, it is best to illustrate with a table and graph. K process: Many scripts did not illustrate the ‘k’ process in line with the context i.e. tax rebates. Instead many illustrated with a table showing an increase in G. A tax rebate is broadly a tax cut and will result in a fall in W. This form of fiscal measure is intended to stimulate C via an increase in DISPOSABLE INCOME. The big question as to whether it will work must surely hinge on whether the taxpayers are willing to spend their extra tax dollars saved. However, as Keynes had pointed out, they are unlikely to do so in a recession due to lack of consumer confidence. Indeed, consumer confidence was at a low point in the US in the aftermath of 9/11 attack cum recession. Thus, not only are they unlikely to spend a big proportion of their additional disposable income (related to the tax rebates), they are likely to pull back overall consumption. Technical Point Will the ‘k’ value fall? Likely but the reason cannot be attributed to a fall in MPT since there was no revision of the tax rates. Some students mistakenly thought that a tax rebate would necessarily reduce the MPT. MPT is the tax paid out of additional income earned. In this instance, there is no change in income earned except that the government is returning (rebating) some of the tax payable. In the context a fall in MPC or rise in MPS linked to a lack of consumer confidence to spend is probably the reason for bringing down the ‘k’ value. The principle or point to remember is that ‘k’ value is influenced by MPW of which MPT is just one component. To sum up, not only is the K value weakened (but whether it is really that weak is debatable since some has pointed out that Americans are famous for spending freely) but autonomous consumption (and indeed even investments) are likely to be hit. So, this introduced the possibility of a reverse (or downward) ‘k’ effect. Under these circumstances, the interplay of these effects explains why the tax rebates will likely have only LIMITED impact on NI.

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MODEL ESSAY 1

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Khon Yu Hao 06S74

(a) Using the concept of the multiplier, explain why the income tax rebates may have limited impact on raising national income in the US. [12] National income (NI) is defined as the total market value of all final goods and services newly produced within the economy in a period of usually a year, before the provision for capital consumption. Good to start off an essay with an accurate definition of NI In actuality, income tax rebates basically mean that there will be a corresponding increase in consumption in the economy, if all other factors are held constant. This is because as income tax rebates are in place, the disposable income level of people is likely to increase, prompting them to spend more on goods and services. Here, income tax refers to personal tax, or a fraction contribution of a household’s income to the government. As such, as AE=C+I+G+X-M where C=consumption, a rise in C will shift AE curve upwards and close the deflationary gap (DG) as seen in Fig 1. 450 AE

45 0 AE1 d g

AE2 AE

Y* Y2 Fig 1

YFE

NI

As seen in the figure, this causes the equilibrium level of national income to increase from Y* to YFE a rise of AE to AE1. The rise in the NI is in stages due to a multiplier effect. Student should explain why a DG arose – why C, I and X fell due to the terrorist attack. A multiplier effect is basically a change in the level of national income in stages such that total changes in NI are a multiple of the input in government expenditure. The multiplier of k is stated as k=Δ in NI/ Δ in autonomous expenditure – the student is able to point out that it is due to a change in a autonomous expenditure which includes change in C; most students take it as a change in injection that excludes C, i.e. C is not an injection. In this case, as the government input $40 billion in terms of tax rebates as a form of injection (ERROR) – it is not an injection; rather less withdrawal and when the households spent the money, it will be a rise in C (autonomous), assuming marginal propensity to tax and marginal propensity to import remain the same, when NI increase it is likely that the change in NI will be a multiple, based on the marginal propensity to consume (MPC) of the US citizens. However, in this case, MPC is likely to be low for the US consumers as the September 11 attacks have severely damage the confidence of the US consumers in the economy. As a result MPC is likely to be low. The formula to calculate k=1/(1-MPC). Hence if MPC is low, the k value should be very low as a result, meaning that when k X expenditure (autonomous), the effect on NI is likely to be small. For example if the MPC of the USA is at a low level of say 0.1, if we calculate the NI:

First round Second round Third round Total

ΔAE / bn 40

ΔY / bn 40

ΔC / bn 4

ΔW / bn 36

4

0.4

3.6

0.4 ‘’ ‘’ 44.44

0.04 ‘’ ‘’ 4.44

0.36 ‘’ ‘’ 40

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Economics Ablaze! 

In the first round as expenditure of government as an injection (ERROR) - A tax rebate is broadly a tax cut and will result in a fall in W. This form of fiscal measure is intended to stimulate C via an increase in DISPOSABLE INCOME of $40 billion, it was that for the first and consumers will have $40 billion in income – in fact, households will not spend the total US$40 billion as they will save part of it. However, as MPC is 0.1, only $4 billion will go into consumption, which is the income for the producers and households (in the form of salary/profits or wages). In the second round of multiplier, of the $4 billion, they only spend 0.1X$4 billion which is $0.4 billion of which $0.4 billion goes on to the third round such that the second round of producers or households who collect $0.4 billion as income of profit, spend $0.04 billion in consumption. At then end of the day, NI increase by nearly 1.11X$40 billion as k=1/(1-0.9)=1.11. Clear explanation of the k process; the student is very sharp to point out that MPC is very small due to low confidence and demonstrated how NI will only rise by a small amount. BUT, the multiplier process is not infinite! It will stop when the change in withdrawal equals to the initial change in the autonomous expenditure. Hence a $40 billion increase in government expenditure, the actual change in NI is very small. Also the excerpt fails to give information with regard to the marginal propensity to tax and import (MPT and MPM respectively). These contribute to MPW=MPS+MPT+MPM=1-MPC. In this case, this will affect the size of the multiplier and as such affect the effectiveness of the tax rebates in affecting NI. In this case, MPM for USA might be high due to the meteoric rise of China and its low exchange rates, China’s exports are very competitive so the US which is a major trading partner will find itself having a high MPM after the 011 attacks. As MPM rises, the k becomes smaller than say 0.1, so multiplier is in effect 10. Change in NI is very little. – though sounds logical, it is still unlikely. Also the issue here is about tax rebates not tax rate drops. Tax rebates are only the refund of tax contributions to the households. Consumers view their consumption based on not just current income but also future income levels so this means that a high tax rebates might not mean a huge consumption rise in the first place. Fig 1’s AE might not rise to AE1 to close the DG but only to AE2 so increase in NI is only to Y2 which is small – good point; however student failed to point out that the overall AE might even fall – the fall in AE due to a fall in C, I and X after the terrorist attack is so overwhelming that it outweighs the effect of the tax rebates. Tax rates do not change means MPT might still be high leading to even smaller multiplier in this case. As 1-MPC=MPW, this also means MPC is smaller so gentler slope of AE so there is smaller change in NI.

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MODEL ESSAY 2

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Jason Lau How Leong 06S69

(a) Using the concept of the multiplier, explain why the income tax rebates may have limited impact on raising national income in the US. [12] National income measures the total output of final goods and services newly produced of a country. It is a good measure of the level of production and employment trend of a country. National income equilibrium is the level of income once achieved will be sustained unless disturbed and it is achieved when aggregate expenditure = income and when injection = withdrawal. In Keynesian theory, national income (NI) is determined by aggregate expenditure (AE). A rise in AE will thus cause a rise in NI through the factor of multiplier ‘k’. Good to start off an essay with an accurate definition and demonstration of a clear understanding of the income-expenditure model. 0

AE

45

AE2 dg

Y1

Y2

AE1

NI

Income tax rebates gives back some money to tax payers hence increase their disposable income. This will increase consumption expenditure of the AE and causes the AE1 curve to shift upward to AE2. As a result, NI will also shift from Y1 to Y2. The extent of increase is determined by the multiplier ‘k’ value. Multiplier measures the number of times an increase in NI exceeds the rise in injection (increase in consumption expenditure) that causes it (ERROR) – C not an injection but change in autonomous AE. Take for example the MPC=0.5 (MPW=1-MPC=0.5) and the initial injection due to tax rebate is $40 bn (ERROR) – it is not an injection; rather less withdrawal and when the households spent the money, it will be a rise in C.

First round Second round Third round Total

ΔAE / bn 40

ΔY / bn 40 20

ΔC / bn 20 10

ΔW / bn 20 10

10 ‘’ ‘’ 80

5 ‘’ ‘’ 40

5 ‘’ ‘’ 40

Referring to the table above, when there is an increase in NI by $40 bn, it means consumers are spending more on goods and services. As a result, income of those who produces goods and services will increase by $40 bn. When this extra income is passed on to household as wages, interest, tend and profit, half will be spent on goods and services by domestic firms and half will be used to pay taxes, saving and buying imports. As a result, firms producing goods and services will enjoy additional $20 bn incomes other than the initial $40 bn income received.

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Economics Ablaze! 

When the extra $20 bn income is passed on to household, again half will be withdrawn and half will be spent on domestic goods and services. Income of those who produce them will further increase by $10 bn. Hence each time we go around the circular flow of income, NI will rises but by only half as much as previous time. This chain effect of multiplier will only stop when Δinjection = Δwithdrawal. – Yes have to point out when the k process stops as it will not go on infinitely. Hence, an initial injection caused by increase in consumption (ERROR) – C is not injection will lead to multiple spending by those who receive the income, leading to the multiple increases in NI. As k = 1 / (1-MPC) = 2, NI will increase by $80 bn. **It is always important to refer to the table for the illustration of the multiplier process; whenever, there is a figure or a table, explanation has to be followed. Due to terrorist attack, that caused the recession, consumers are going to have bleak prospect about the future economic growth and tend to save more to prepare for the worst. As k = 1 / (MPS+MPT+MPM), a rise in MPS causes k to be small, reducing the effect of tax rebates may have in recovering the economy. Possible assumption as people do start to save more for rainy days after a crisis. Also draw out of foreign investment may also counter increase in consumption expenditure. As a result, AE curve may not rise substantially or even fall. Good to point out that there are other factors that will offset the rise in C due to the tax rebates.

(b) Discuss whether the decline in national income necessarily meant that the standard of living for the average American has also declined. [13] Tutor’s Comments and Feedback The most obvious weakness found in your scripts was the failure to apply or incorporate the conceptual framework to the given context. Thus, answers given though theoretically sound were too generic i.e. unrelated to the context of American recession post 9/11. Actually, the context suggests two important applications - recession in relation to well-being as well as fear of terrorism in relation to well-being. A good answer should attempt to incorporate both into your discussion. Deflation? Some students brought up the possibility of prices falling (i.e. deflation) and therefore real GDP might be rising even when nominal GDP is falling. But, clearly this conjecture does not square up with the given context. First, the context clearly assumes a recession in US economy. This means real output should be contracting. Second, there was no mention at all of the US suffering a deflation. So, falling prices can be ruled out. PPP? There was also the confusion amongst some that it is important to consider PPP. Remember PPP is applicable to international (space) comparison or comparison of SOL involving different countries using different currencies to measure GDP. For time comparison GPL is relevant, NOT PPP.

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Students’ version

Tutor’s version- possible points of Evaluation

Accuracy of Data  A ↓ in nominal NI due to ↓ AD  ↓ general price level  In the context of post 9/11, the rate of growth in the migrant population (esp. those from Islamic states) probably slowed and ↓ output. SOL will be negatively affected if ↓ output down because of stricter US immigration regulation as > ↓ price. However, if ↓ price > ↓ output  real NI and well as discrimination. hence SOL may not decline.  If NI ↓ but the US population ↓ at a faster rate  NI per  In the context, ‘The September 11 attacks caused the US to plunge into a recession’  means negative growth capita may have risen and SOL may not decline. rate  that the SOL indeed has fallen if there is massive unemployment. A recession by definition means GDP has contracted. There is thus no necessity to quibble about whether the data is nominal or real. Composition of GDP per capita  A ↓ in NI would only affect welfare if it results in a fall in  But in the context provided above, ↓ consumer confidence consumption goods produced.  ↓ expenditure on consumption goods  firms will in turn produce less  SOL will be adversely affected.  If NI ↓ as a result of a ↓ in the production of investment goods, this will not lead to a fall in the current living  Expenditure on security (anti-terrorist measures) have standards. However, this may affect production of future increased significantly. Such expenditures add to GDP but consumption goods. might not necessarily increase welfare (e.g inconvenience of security screening; increased policing). In fact, these expenditures are sometimes called “regrettables” i.e . expenditure that have to be made in order to remove a “disutility”. Also, as all of us know, the 9/11 sparked the Iraq war and America end up spending billions in defence to finance the war efforts. This is a classic example of increased defence expenditure which swelled the country’s GDP but not necessarily the well-being of its people. Distribution of GDP  If NI ↓ but there is more equal distribution of income, SOL  However, it is likely that the lower wage earners would be of the majority may not decline. For instance, a reduction in worst hit in a recession, given the low-level skills possessed the income of the top 5% income earners > that of middle and they will be retrenched and thus income disparity may and low income earners be worsen.  Note: Some students may argue that the highly paid managers may be the worst hit as firms undergo restructuring during recession.  There is also the possibility of redistribution through government benefits for the lower income and higher taxes on incomes of the rich. Other Intangibles - Non-marketed items/ Amount of leisure hours / Stress level  NI statistics may not be a true reflection of a country’s  The recession put some people out of work. Some took on welfare because the output of non-marketed items is temporary/part-time jobs which are not officially captured unrecorded. For instance, the exclusion of the contributions in the data. of housewives, “do-it-yourself” and other home-based activities means that NI statistics understate the true level  Also, people who are retrenched have more time to pursue of production and welfare in the economy. This is especially their hobbies or spend quality time with their families. true during declining NI when workers are dismissed and Women who are previously in employment may become they end up contributing much to the families full-time housewives thus contributing to the well-being of the family. need.  A declining NI may mean people have more time for leisure which could be used to rebuild family bonds, pursue one’s own interests / hobbies or upgrade one’s skills.

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Economics Ablaze! 

MODEL ESSAY 3

Lim Mei Yee Elaine 06S71

(b) Discuss whether the decline in national income necessarily meant that the standard of living for the average American has also declined. [13] Standard of living (SOL) consists of the economic and social well-being of the country and includes both material and nonmaterial aspects. Material aspects include the quality and quantity of goods and services for consumption while non-material aspects consist of the quality of the environment, level of stress, number of working hours etc. Good to start off an essay with an accurate definition The economic well-being of the Americans is measured in terms of GDP, or National Income (NI). A decline in the NI of US may be due to the decrease in the production of goods and services for consumption and investment. If consumption goods’ output falls, then consumers would have a smaller variety and amount of consumer goods that they can enjoy, especially if a fall in NI leads to retrenchment and pay cuts for consumers. As such, it can be said that the SOL of Americans have declined. It is especially true for sectors of the industry which have been badly hit by the 9-11 attacks, namely the finance and business sectors, and employees in those sectors would experience n even greater fall in SOL since number of retrenched workers in those sectors are particularly high and economic outlook is especially poor for them. Well-explained why SOL falls when NI declines If the fall in NI is largely due to investors being deterred from putting capital into US economy, in areas such as infrastructure – roads, telecommunications, there would also be a fall in the production of capital goods which lead to fall in the potential productivity of the economy. If fewer jobs are created due to decreasing investment, it can also be said that the SOL of Americans have fallen due to fewer job opportunities. Although a fall in capital goods does not affect the current SOL, the students has cleverly linked to loss of jobs which indeed implies loss of income and thus lower SOL If the fall in NI however is not due to a fall in consumption and investment expenditure, but due to a fall in government expenditure on example defence, then consumers in the US may still enjoy a higher standard of living. However, this is highly unlikely since the US government would put a tighter rein on its defense and military after the terrorist attacks and hence, we can conclude that NI declines due to a fall in investment, consumption and a fall in net exports. The fall in net exports is due to a lower demand for US exports since the economy is deemed to be gloomy and in recession by foreign countries. Together, these will result in a fall in the SOL. Yes a rise in G in terms of military spending will swell NI but does not have a direct impact on the current SOL Furthermore, due to the 9-11 attacks, homes are destroyed and many have lost their loved ones, which leads to a lower SOL due to a lower state of emotional happiness and social well-being. The economy is in recession and Americans who want to keep their jobs may resort to working overtime to help salvage the company’s profits, causing them higher levels of stress and longer working hours with fewer breaks. Good analysis on the intangibles – should suggest alternative indicators However, the 9-11 attacks occurred in New York, and it is important to note that the states in US apart of New York may not be so badly hit by the attacks, for example the agricultural and cattle ranching sector in Texas. Thus their SOL may not have declined. Strengths: left out nominal vs real and per capita as these two points are less important for this essay – need to save time under exam constraint like time and strong application to context. Area for improvements: Can elaborate more on the distribution of income.

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MODEL ESSAY 4

15

Seow Kai Hui 06S6C

(b) Discuss whether the decline in national income necessarily meant that the standard of living for the average American has also declined. [13] A decline in National Income (NI) only indicates a lower level of economic well-being and not overall standard of living (SOL) of the Americans. To more accurately gauge the SOL of the average American, we have to take into account net economic welfare and physical quality of life index too to consider non-economic factors affecting their overall SOL. Very concise introduction and clever to bring in alternative indicators here Even if we consider economic welfare alone as an indicator of SOL, NI may not be accurate. We have to consider real NI per capita to get a better idea. Real NI is obtained by dividing NI over GNP deflator before multiplying by 100. The figure then divided over the US population to get the real NI per capita to estimate the average SOL of the Americans. However, there may be inequitable income distribution among the Americans. For example, a general decrease in the SOL may not mean that the SOL of the average Americans has decreased. A substantial decrease in the SOL of the higher-income group, for example, may offset an increase in the SOL of the middle and lower income groups. The higher-income group may have been more severely hit in the incident because of companies closing down due to the recession. The retrenched workers may suffer, but the boss is expected to bear even greater losses. Good analysis on distribution of income; however, the rich most likely still have huge savings to maintain certain life style but once the ‘poor’ lost their jobs, they may not have means to buy goods and services and thus may be worse off. In a developed country like the US, the hectic daily life may induce immense stress in the people. However, during a recession like this, other than the financial trauma, the people may gain the sense that they can now enjoy more time with their families even if they got retrenched. This may be a break for them to take a rest while the economy recovers. This may in turn raise their SOL. True to certain extent but it is emotionally strained when one is retrenched and thus such time spent with family members is involuntary We also have to consider that certain sectors of the economy may be more severely hit than others. The tourism and F&B industries, for example may be especially so and the people involved in these sectors may experience a more substantial decrease in SOL than others. There might still be some people whose SOL has increased but the increase was offset by a more substantial decrease in SOL of others, and so a decline in NI may not mean a decline in the SOL of the average American. The government may also start spending more on defence and less of the NI will be made up by consumer goods. In this case, even if NI increases due to increased spending on defence, the SOL of the people has declined too due to a lower output of consumer goods. Concise analysis Then again, considering the social conditions in this case, a decline in NI will probably be accompanied by a decline in SOL of the average American. Strengths: Very good explanation on distribution of income be it rich vs poor or different sectors and strong application to context. Area for improvements: Should place the analysis on the intangibles after the discussion on composition of income.

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QUESTION TWO

A study has shown that a bird flu pandemic would adversely affect economic production and consumption in Singapore. Similarly to what SARS experience brought to light, fear and a lack of confidence may have as much an impact on the economy as the direct toll of sickness and loss of lives. (Adapted from The Straits Times, 10 December 2005) (a) (b)

Explain how a bird flu pandemic may affect national income in Singapore.

[12]

Does a fall in national income necessarily mean a lower standard of living for Singaporeans? Discuss

[13]

The estimated economic impact of a bird flu pandemic hitting Singapore:  Economic impact of a bird flu pandemic would be minimal considering the small size of poultry industry in Singapore, provided that the virus does not mutate into a strain that can be transmitted among people.  If the virus mutates into a form transmissible among humans, economic impact will be severe.  According to the Asian Development Bank (ADB), a bird flu pandemic that spreads among humans can potentially cost Asia up to US$282.7 billion in lost consumption, trade and investment.  Citigroup estimates that an outbreak would shave 5% off GDP in Asia.  In Singapore, a serious bird flu pandemic will cause 1,900 people to die, another 11,000 people to be hospitalised and 550,000 people to be infected in Singapore.  Some organisations estimate that up to 25% of their staff may be absent from work, presenting a huge man-hour loss.  Tourism, restaurant, hotel and retail sectors are expected to be worst hit as people stay at home and spend less.  Investor sentiment would be adversely affected, causing a drop in FDI. Sources: IMF, WHO, BBC News, ADB Tutor’s Comments and Feedback Use of AD/AS framework? The most obvious weakness was the inability to incorporate both demand and supply-side analysis using an AD/AS framework. The analysis was mostly on the demand-side (using the income-expenditure approach) and thus appeared lop-sided and incomplete. Good and sometimes very imaginative Ideas that were presented without a clear conceptual framework earn very little credit. Indeed, students’ analysis was commonly rather fragmented and disorganised -without a proper AD/AS framework to hold all the strands and pieces together. There was also the tendency to switch between using an income-expenditure approach and an AD/AS approach. It is best to stick to one the AD/AS in this instance. Must learn to make use of diagrams! Students tend to “throw in” diagrams just for the sake of it. There was no attempt to “make good use” of those nicely drawn diagrams. Their only function seems to be just “cosmetic”. You must learn to always make “use” of the diagrams by clearly referring to them in your explanation and analysis e.g. With reference to figure 1….. AS? Supply-side impact was generally glossed over or even ignored. Multiplier? There was also the tendency to skip the multiplier idea (ie reverse K effect). Many did not delve into the possibility of the devastating effects of a reverse K triggered by the sharp drop in consumption, investment and export spending, esp by tourists. Wishy washy Conclusion? Conclusion sometimes appear “wishy washy” ie. no definitive stand. Not many scripts actually conclude unequivocally and decisively that going by the analysis the forecasted impact (a triple whammy hitting expenditure, business costs and productive capacity) is likely to be catastrophic on the economy should the bird flu pandemic hit Singapore. This explains why our government is worried about its potential adverse impact and has been working very hard to prevent its occurrence. The question is set against the hypothetical context of a bird flu pandemic hitting Singapore. You are required to use economic concepts/ tools to analyse its likely impact on our NI. The first thing is to break down the impact systematically in terms of: (1) Short run : Demand-side (AD) impact and Supply-side (AS) impact (2) long-run: supply or productive capacity impact on the LRAS. The most appropriate framework to use for analysis is the AD/AS framework

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MODEL ESSAY 5

17

Wong Wei Guang Andrew 06S74

(a) Explain how a bird flu pandemic may affect national income in Singapore. [12] Bird flu would adversely affect the economy as it is expected to cause a decrease in production and also consumption in Singapore and this could be illustrated by the Keynesian Model. According to the Keynesian Model, equilibrium in the economy is achieved when planned aggregate expenditure (AE) is equal to actual output. AE is defined as the total planned spending on domestic goods and services and is the sum of consumption, government expenditure, investment and net exports. When bird flu pandemic occurs, Singaporeans would experience fear to go out to the malls and shop and a lack of confidence in the economy, and would spend less on goods and services as a result, this would cause a downward shift in the AE. Furthermore, bird flu would also cause investment to decrease as business expectation is affected. Businesses would tend to have a poor outlook of the economy, as a result they would think that the demand for their goods would be low and thus rate of return is low, this would cause them to lower their level of investment which is a fall in the marginal efficiency of investment curve. Can comment on how drastic will the fall in C and I would depend on the duration and severity of the pandemic. Exports might also decrease because foreign companies might not dare to import from Singapore due to lack of business confidence and as a result a fall in AE is expected. Give a concrete example on exports: e.g. Moreover, once news reached the outside world, foreigners would be reluctant to buy goods from us or visit Singapore as tourists, i.e our exports will be hit. The fall in exports might be compounded by a possible world-wide recession which lowers the income of our major trading partners and hence their demand for our exports. As shown in Fig 1, a fall in AE curve from AE1 to AE2 as shown in Fig 1 due to decrease in consumption, investment and exports would cause the national income to decrease from Y1 to Y2 via a reverse multiplier effect. Very sharp to point out it is a reverse k effect on NI Fig 1

AE

Y2

Y1

0

45

NI

The multiplier, k, is calculated using the formula k=1/(MPS+MPM+MPT) where MPS is marginal propensity to save, MPT is marginal propensity to tax and MPM is marginal propensity to import. For simplicity, a two sector economy would be assumed here and there is no change in tax level and there are idle resources in the economy. Marginal propensity to consume (MPC) is assumed to be 0.5. The reverse multiplier effect is shown in Table 1

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Table 1 First round Second round Third round

ΔI -10 -

Total

-10

ΔY -10 -5 -1.25 ‘ ‘ -20

ΔC -5 -2.5 -1.25 ‘ ‘ -10

ΔS -5 -2.5 -1.25 ‘ ‘ -10

According to Table 1, a withdrawal at $10 bn – not a withdrawal; rather a fall in injection would cause consumption and savings to decrease by $5 bn dollars. In the second round of the multiplier, the withdrawal from the economy is $5 bn and a corresponding, decrease of $2.5 bn in consumption and savings is observed. This would occur until ΔY is $20 bn and a new equilibrium is reached. K process explanation can be improved The happening of a bird flu pandemic would definitely cause a decrease in NI. However, the reverse multiplier effect would be useful in highlighting the magnitude of fall in NI. This is because Singapore imports a lot from other country due to our open economy and also a lot of savings due to CPF. Thus, we have a high MPM and MPS and hence be considered insignificant and can limit the fall in NI in Singapore. Good to bring in the small k of Singapore but if we are really hit by a pandemic, the absolute a fall of AE will be huge and despite a small k, the impact on NI will be horrendous However, this model does not show the decrease in aggregate supply thus a AD/AS model is needed. Figure 2

GPL

AD1

AS2

AD2

AS1 Y2 Y1

Real GDP

As shown in Fig 2, bird flu would disrupt business confidence and result in increase in input prices, causing AS to shirt from AS1 to AS2 and AD to shift from AD1 to AD2 and NI would fall from Y1 to Y2. Strengths and area for improvements: Great to bring in the AD-AS model but need to elaborate more on the fall in AS – loss of productivity and lives; also the student has left out the analysis on government spending during the pandemic.

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MODEL ESSAY 6 (a)

19

Li Rao 06S6E

Explain how a bird flu pandemic may affect national income in Singapore.

[12]

A bird flu pandemic can cause an overall decrease in the aggregate demand (AD) of Singapore. Aggregate demand is the amount of goods and services demanded at each general price level (GPL). It is determined by consumption C, investment I and government expenditure G and net export (X-M). The bird flu pandemic would cause health and safety concerns and people would consume less (especially meat). This will reduce C. Due to fear of sickness people will tend to save more, increasing marginal propensity to save (MPS) (the increase amount of savings per unit increase in income = change in S over change in Y). Consumption will also decrease due to expectations of lower income; AD will decrease. Business expectations of the businessman will also drop, decreasing the rate of return expected for all investment projects. This will lower the amount of investment that is a fall in marginal efficiency investment curve. This decrease in investment will decrease AD at all price levels. The bird flu pandemic also discourages travelling and since Singapore’s tourism industry is a major sector of the economy, the economy will be much affected with fewer tourists demanding our tourism goods and services goods. Our export has dropped and if there is a need to import medicines from other countries, our import will also increase. The decrease in net export results in decrease in AD. Although government spending on public healthcare may increase, this is not enough to offset the decrease in AD. As a result, AD curve will most likely shift left. Good explanation on how C, I and X will be adversely affected due to bird flu pandemic and how even a rise in G can’t offset the fall in these 3 other components But G can be better elaborated. E.g. The only component whose expenditure might rise is Government spending on controlling and eradicating the bird flu pandemic e.g. expenditure on vaccines; quarantine; disinfecting; drugs; culling infected fowls etc However, this does not automatically mean G goes up as the government may cut down its expenditure elsewhere e.g building infrastructure. Even if govt spending did increase, it is unlikely to offset the fall in private sector spending. Hence there will be a severe net fall in AD. The AS, aggregate supply (amount of goods firms are willing to supply at different price levels) will also shift left as well as both LRAS and SRAS. In the short run, the rising costs due to more health care benefits to be given to employees will shift the SRAS left and the loss of lives and work time, and thus productivity will decrease the FE output level shifting the LRAS left (reduce potential output).

Figure 2

GPL

AD1 AD2

AS2 AS1 Y2 Y1

Real GDP

The result is a decrease in National Income from Y1 to Y2. Strengths: Good use of the AD and AS model and strong application to context. Area for improvements: Left out k process entirely and the explanation on the effect on SRAS and LRAS can still be improved and a strong conclusion is needed.

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Tutor’s version SRAS Since Singapore imports almost all her supply of poultry, the ban on imported poultry and the culling of chickens would likely lead to shortages of poultry and other essential foodstuffs and raw materials, resulting in higher prices. Firms will also incur higher production cost due to lower worker productivity from absenteeism & sickness, higher medical spending on employees & other spending to reduce risk of infection at the workplace. People may also be afraid or unable to go out to work due to sickness & risk of infection. This dwindling workforce may exert upward pressure on wages. All these means higher unit cost as reflected by a leftward shift of the SRAS, further exacerbating the contraction in output, income and employment. LRAS In the long run, the pandemic could also severely damage our potential supply capacity e.g. population wipe out by the disease; loss in productivity and loss in potential investments both from local and foreign investors. This would stunt our future economic growth severely. The LRAS shifts inwards as potential output falls (or alternatively this can be illustrated by shifting the PPC frontier inwards). Conclusion: The negative impact on AD (current spending), AS (business costs) and LRAS (productive capacity) combined to bring about a catastrophic contraction in the national income that could severely stunt our future economic growth potential. It is indeed, a doomsday or nightmare scenario that our government has been vigilant and working hard to prevent its occurrence.

(b)

Does a fall in national income necessarily mean a lower standard of living for Singaporeans? Discuss.

[13]

Tutor’s comments and common mistakes by students Too generic The main weakness is to give a generically correct answer without reference to the context. It is clear from this exercise that you u need to learn how to adapt and apply the generic ideas to specific contexts to demonstrate your depth of understanding. To guide you some examples are provided above to help you polished up application skills. PPP again? There was also the confusion amongst some that it is important to consider PPP. Remember PPP is applicable to international (space) comparison or comparison of SOL involving different countries using different currencies to measure GDP. For time comparison PPP is irrelevant. Instead the key concept for comparison of SOL over time is real per capita income and this concept was not clearly explained, esp the distinction between a fall in real and nominal NI . Given the question, a response or conclusion is expected with regards to whether SOL will rise or fall. Students must therefore learn to take a stand and arrive at some judgement or conclusion as a response to the question based on their arguments. Bird flu context: Intangibles: People are thrown out of work. Economy is paralysed. Fear griped the nation - fear of being infected and dying of the incurable disease. Stay at home, can’t go out to shop, can’t enjoy their leisure time. Stressful environment to live in such circumstances? SOL also depend on the quality of the environment which is likely to worsen due to the high risk of infection & death. This negative effect on SOL is unlikely to be compensated by whatever improvements in negative externalities in the form of reduced pollution from lower production & shorter working hours due to sick leave or quarantines. Government spends more on controlling the spread of the disease. Is this welfare-enhancing or welfare-reducing? Debatable? It parallels the situation where government needs to employ more policeman, judges etc to combat rising crimes; juvenile delinquency and divorces. Such spending are sometimes known as “regrettables” (In the NEW concept of welfare such expenses are excluded). Conclusion: Intangible factors that affect SOL are not easily quantifiable. Hence it is normally difficult to conclude whether SOL has improved or worsen when changes in income lead to opposing changes in intangible factors, e.g rising income is usually accompanied by worsening pollution. However, during a pandemic, the possible sharp fall in income and material satisfaction is likely to be aggravated by a rapidly deteriorating environment with widespread disease and death. Hence SOL can be expected to fall sharply.

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MODEL ESSAY 7 (b)

21

Teo Yao Yang 06S7

Does a fall in national income necessarily mean a lower standard of living for Singaporeans? Discuss.

[13]

The question is trying to discuss if a fall in national income can be equated to lower SOL or are there other factors involved. Standard of living is broadly categorised into two main areas material aspects and non-material aspects. Material aspects refer to their output of the quantity and quality of goods and services produced while non-material aspects refer to intangibles such as disamenities and externalities. A fall in national income would mean that there is a drop in output of goods and services, which implies that the material SOL is dropping. However, we have to examine the composition of the drop in national income too. SOL is affected only by consumption goods such as cars and not affected by investment goods such as weapons or satellites. Hence in Singapore’s case, we have to examine whether or not the fall in output is mainly a fall in consumption goods or investment goods. In this case, the fall is mainly due to consumption goods and services as schools have to close down and factories have to stop producing good and hawkers may not be able to work for the time being. Hence, output of consumption goods will drop, leading to a lower material SOL. The fall in national income is definitely due to output decreases and not deflation, as Singapore is experiencing steady rates of inflation for the past years. Hence, we can conclude that the fall in national income is due to fall in output and hence fall in material SOL. Now we shall examine the non-material aspects of SOL. These includes externalities, in this case, the outburst of a pandemic definitely has high negative externalities as the damage to the society’s welfare is high. Every Singaporean would be afraid and fearful as long as they stay in Singapore and the presence of a pandemic will definitely threaten the well-being of a Singaporean. Also, Singaporeans may also experience disamenities like stress and fear. Those that are working will be fearful of their surroundings while those affected by the pandemic or have relatives that are victims will definitely face emotional trauma and stress. Hence there will be a high level of disamenities. Hence when bird flu hits Singapore, it will reduce national income and output of goods and services, and a decreased output could mean that there are too few goods for too many people, leading to a fall in material SOL. Also, there will be negative externalities and disamenities as the pandemic causes sickness, loss of lives and many other negative spill over effects, hence non-material SOL will fall too. To conclude, in the case of a pandemic, a fall in national income will mean a lower SOL, both material and non-material for citizens. However, just national income alone may not be reliable enough as an indicator to determine SOL. To effectively measure SOL, we have to use a package of complementary indicators such as Net Economic Welfare (NEW) which minus off negative externalities and disamenities and adds positive externalities such as leisure, and PQLI (Physical quality of Life) which takes into account life expectancy, infant mortality and literacy rate too, to show a better picture of the SOL. Strengths: Very good explanation on how a fall in C will mean a fall in SOL; analysis on the intangibles is strong in context. Area for improvements: Left out distribution of income.

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MODEL ESSAY 8 (b)

Wong Yun Sheng Calvin 06S61

Does a fall in national income necessarily mean a lower standard of living for Singaporeans? Discuss.

[13]

The fall in national income would not necessarily imply that standard of living has fallen as well. Make the link to using Real GNP per Capita as the yardstick for SOL. Firstly, if the bird flu pandemic was to result in a decrease in price levels for most products, households would benefit economically as they would have a higher level of disposable income. Secondly, if production in Singapore was directed towards more consumption goods with less capital goods, such as increased production of medicine, face masks, sage foodstuff etc, and consumers would also benefit. Nonetheless, one must keep in mind that the drop in national income brought about the bird flu pandemic is likely to be accompanied by retrenchment of workers as investors lose confidence, loss of lives in various families and many other effects that would no doubt lower the standard of living in Singapore. Thus, though the national income itself is insufficient to show drop in standard of living, the accompanying effects of the bird flu can show that for many in Singapore, standards of living will be lower. However, it is also possible that with the bird flu will come along an increase in non-monetised activities. Although these are not reflected in the national income and thereby do not improve economic welfare, they do contribute to standards of living in a positive manner. For example, housewives who choose to work as volunteer nurses, or retrenched workers who choose to help out in the civil defence force would help to facilitate Singapore across the bird flu period and improve standards of living by making the bird flu period an easier one for all Singaporeans, Such work was acknowledged to be crucial for recovery during the SARS period by SM Goh Chok Tong. It is of course true that there will be negative externalities brought about by bird flu, such as when public areas have to be quarantined. However, it is also possible that families could make use of the time at home to develop greater bonds with each other, and interact more, when before they did not have the chance to do so. These situations are not reflected in the drop in national income, though they improve living standards. In conclusion, the drop in national income itself is insufficient to show a drop in living standards. While Singaporeans may lose out economically during a bird flu pandemic, they may also find their standards of living improved in the other intangible areas. Strengths: Balance argument how a fall in NI may or may not lead to a fall in SOL; analysis on the non-monetised activities and intangibles is strong in context. Area for improvements: Left out distribution of income

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TYS Questions on National Income Determination (Usually linked to other topics) TYS N2004 (NID, FISCAL POLICY AND MACROECONOMIC GOALS CONFLICTS – will be covered in Term 3) (a) Explain what determines the size of the national income multiplier.

[10]

(b) To what extent might other macroeconomic problems result from the use of fiscal policy that is designed to reduce unemployment in an economy. [15] TYS N2003 (NIA (SOL) & NID) It was reported in October 2001 that industry in Singapore was facing a sharp recession. GDP grew by 10% in 2000, but in 2001 it was predicted to decline. The Singapore Chamber of Commerce petitioned the government for reductions in personal and corporate tax rates. (a) Explain what might happen to national income if a government were to reduce personal and corporate tax rates. [10] (b) Discuss whether the decline in GDP mentioned above necessarily meant that the standard of living for the average person in Singapore also sharply declined. [15] TYS N2002 (NID – Such ‘technical’ questions without context is less common nowadays) (a) Assume there is an open economy with a government sector. Explain the conditions for equilibrium in the circular flow in such an economy. [10] (b) Discuss how an increase in injections may affect the equilibrium level of national income. TYS N2001 (Cross Topics – NID, UNEMPLOYMENT AND POLICIES)

[15]

Keynes’s solution to unemployment was higher public spending which through the multiplier process would generate income and more jobs. (a) Explain how this solution works.

[12]

(b) Are there any other solutions to the problem of unemployment? NOTE: NID concepts are tested in the Case Study in 2005 and DRQ in 2006.

[13]

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COOL BUSINESS IDEAS

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It's not enough to have your customers' eyes and ears--now you need to attract their noses too. In April 2007, 100 gas stations in California will be trying technology that wafts coffee aroma at the pump in a bid to tempt its pay-and-go customers into the store for some shopping. Clear Channel, meanwhile, is experimenting with scented billboards. USA Today and the Wall Street Journal are set to offer "rub and sniff" newspaper ads. And some retailers are also preparing products with added smell. Wal-Mart is rolling out experimental DVDs with "smell-o-vision," electronic scent wafers that release the odour of a burning building, say, or a freshly fired gun, at precisely timed moments during the movie.

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Interactive Column CROSSWORD PUZZLE

D N O I T A L F G A T S P Y

H O N E V I T A V I R E D R

B I I E D G J E Z N E I E A

J T F N T O J W A I L G V N

O A E N D R S Q J D A N A O

P X A K S I E E S N N I L I

R E N O L E F X R I R O U T

O D S Z J D R F S K E R A A

T N D S Z S A B E D T A T L

E I A Y H W O Y I R X G I F

C A F D S G N U N P E E O N

T L U C K E Y Y O T I N N I

D O O G S T O T M S A W C H

Z P R O C Y C L I C A L A E

1. A/an _________ curve in microeconomic theory shows various combinations of two goods or services that yield equal satisfaction or utility to an individual.

7. Fiscal policy is widely advocated by John Maynard _____________.

2.Commodity ____________ are physical commodities that have equivalent monetary and non-monetary values.

8. A _________gap, in economics, is the amount by which the aggregate expenditures schedule must shift upward to increase the real GDP to its full-employment, non-inflationary level.

3. _________is the lowering the value of currency. 4._________ is the net revenue derived from the issuing of currency. It arises from the difference between the face value of a coin or bank note and the cost of producing, distributing and eventually retiring it from circulation. 5._________is used to adjust income payments by means of a price index to keep up the purchasing power of the public after inflation. 6._________is a term in use within modern macroeconomics to describe a period of out-of-control price inflation combined with slow-to-no output growth, rising unemployment, and eventually recession.

9.______ionism is the use of national policies to restrict imports of goods and services to improve the prospects of domestic industries that produce those goods or services. 10. _________ good or service experience greater activity/values when the economy grows and less activity when it stagnates or shrinks. 11._______ities are said to exist when the actions of producers or consumers affect not only themselves but also third parties, other than through the normal workings of the price mechanism. 12. A ________is a financial contract whose value derives from the value of underlying stocks, bonds, currencies, commodities.

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s ie it iv t c a k r o w t Upcoming ne 2

1. EntFinal rep s of ren HC eur I-E shi DB pC hal le

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Economics Ablaze! issue 1