P-Cube Session 1

Objectives of P-cube

• Not a revision of content

• Skills based

• To benefit from the programme

• Students have to be prepared and willing to ask questions

• Independent learning

I don’t know what to write.

I have all/most of the points. Why did my teacher give me L2?

Today’s objectives

1. Crash course on essay writing

2. Understand the 2 practice questions’ requirements

3. Common errors for the 2 practice questions

Essay writing

• Answer the question• Best gauge – can I guess the question by reading

your answer?• Technique – 3Cs• Command, Content, Context• Also helps to paraphrase the question

Essay writing

•Balance

•Recognise assumptions

Applied to real life eg.

•Should I attend P-cube lectures?

Applied to real life eg.

Yes I should No I shouldn’t

Attending P-cube will help me improve my grades

I have other things to do.My girlfriend/boyfriend will leave me if I don’t spend enough time

What assumptions have you made here?What evidence do you have to suppor t this view?

Essay writing

•Your essay must stand out

•Have evaluative comment i.e. smar t comments

Essay writing

•Most impor tantlyContent must be accurate

Syllabus assessment objectives

9732 Economics Syllabus

To do well

• You need content and skills

• Like playing soccer you need the ball and skills. Without either one you will not become a good player.

Essay skills package

•More tips and pointers

•Do read through and practice

2011 Promos essay question 3

In any economy, the right answer to unemployment is to create more jobs.

a) Consider why governments around the world should be concerned with the different types of unemployment. [10]

b) To what extent do you agree with the statement above? [15]

Spot the difference

(a) Consider why governments around the world should be

concerned with the different types of unemployment. [10]

Consider why governments around the world should be

concerned with the problem of unemployment.

Dissecting the question

a) Consider why governments around the world should be concerned with the different types of unemployment. [10]

Dissecting the question

In any economy, the right answer to unemployment is to create more jobs.

b) To what extent do you agree with the statement above? [15]

Schematic plan (3a)

Introduction

BodyCosts of unemployment

Types of unemployment (demand-deficient, structural, frictional)

Comparison of which type of unemployment is more of a concern for

governments.

Common mistakes

Avoid these mistakes

• Reducing unemployment increases productive capacity

• Use ‘increase productivity’ in place of ‘Increase

production’

Schematic plan (3b)

IntroductionBody

Thesis - Creating more jobs will

help reduce unemployment

Explain how this is done using

analysis

Anti-thesis - Creating more jobs will not help reduce unemployment1. Who gets the jobs created?2. What is the cause of unemployment?3. Other policies might provide a better answer to

unemployment

Synthesis & Conclusion – whether creating jobs is the right answer to unemployment depends on the type of unemployment. Even then there are other answers to unemployment

Common mistakes

Avoid these mistakes

•Creating jobs?

•Using SG eg. without recognising the limitation

2011 Promos Question 4

(a)Explain the most significant causes of increase in investment

in Singapore in recent years. [10]

(b) To what extent do you agree that the Singapore

government should continue to encourage this increase in

investment? [15]

Dissecting the question

(a) Explain the most significant causes of increase

in investment in Singapore in recent years. [10]

Dissecting the question

(b) To what extent do you agree that the Singapore

government should continue to encourage this increase in

investment? [15]

Schematic plan (4a)

Introduction

Body

Explain MEI

Explain factors (Singapore) which causes MEI to shift

Schematic plan (4b)

IntroductionBody

Thesis – Benefits of

increasing investment on economy

1. EG

2. Employment

3. BOP

Anti-thesis – Costs of increasing investment on economy1. Inflation (SR)2. Unemployment3. Opp Cost4. Negative impact on environment 5. BOP worsen (LR)

Synthesis & Conclusion – Investment is extremely impor tant for Sg but need to balance and mitigate the negative effects

Common mistakes

Avoid these

• Investment is thought to be on consumer goods and capital

goods

• Because of small multiplier, increase I will have a small impact

on NI and hence it is ineffective

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SECTION B

QUESTION 3

In any economy, the right answer to unemployment is to create more jobs.

(a) Consider why governments around the world should be concerned with the different types of unemployment. [10]

(b) To what extent do you agree with the statement above? [15]

Examiners’ comments

Majority of students attempted this question and did well average of 12.4 (compared to other questions). However there were some students with serious misconceptions and inappropriate approach used by some students. For example a handful of students treat the question as a whole 25-marks question and did not label part a or b. This is inappropriate. Although they are linked, the marks are allocated separately. Please refer to the general breakdown of marks in the Essay Skills package.

(a) Students who explained the costs of unemployment and then justify that unemployment is a concern when it is high and due to cyclical and structural reasons scored well. The best answers also gave appropriate exemplification. Quite a number of students chose to explain some costs of unemployment under the various types of unemployment. Very often this approach gave the impression that those costs only applies to that particular type of unemployment, which is not accurate.

(b) Answers which showed clear explanation of expansionary fiscal / monetary policy and evaluated why it will and will not solve unemployment with exemplification scored well. Many gave one-sided arguments or did not use economic analysis. These answers are awarded only level 1 marks.

SUGGESTED OUTLINE

(a) Suggested outline Common

mistakes/problems Introduction Unemployment refers to a situation where people in an economy who are of legal working age, and are willing and able to work at the current wage rate, are unable to find work. Whether unemployment is a concern depends on the severity of the situation and the type of unemployment.

1. There was no introduction!!!

2. Definition of unemployment was not accurate.

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Body Cyclical unemployment, also known as demand-deficient unemployment, is related to the business cycle, during the downswing (recession or depression), aggregate demand decreases and firms find they cannot sell all their current output, and stocks pile up. Firms will then adjust to the deficiency of demand by cutting back on production and reduce workers, leading to an increase in cyclical unemployment.

Sometimes job vacancies and unemployment coexist. The reason is that unemployed workers often do not have the skills demanded by employers. Structural unemployment arises when changes in technology or international competition change the skills needed to perform jobs or change the location of jobs. People are made redundant in one sector of the economy cannot immediately find jobs elsewhere because they either do not have the necessary skills or unwilling to move to another area/region where prospects are better (occupational and geographical immobility of labour respectively).

Frictional unemployment arises because of imperfect information in the labour market as it takes time for workers to be matched with suitable jobs. It is also known as search unemployment. The unending flow of people into and out of the labour force and the process of job creation and job destruction create the need for people to search for jobs and for firms to find suitable employees. Since both employers and employees spend time searching what they believe will be the best match available, frictional unemployment arises. Policy makers are not that concerned with frictional unemployment. Frictional unemployment usually does not last long. Sometimes this is good for the economy because a better match between workers and jobs after some deliberation would mean the economy becomes more efficient. So to achieve low unemployment rate, the focus is to keep structural unemployment low and cushion the negative impact on employment during business downturn.

1. Completely left out by

some candidates. 2. Or briefly mentioned by

some. 3. Some made serious

errors here by confusing the different types of unemployment.

4. Indiscriminate use of ‘productivity’. When we say there is a fall in productivity it means for the same amount of input there is less output. Many a times students meant fall in production in the economy and used the term ‘productivity’ instead.

5. Similarly, the term ‘productive capacity was used loosely’. Some students associated a decrease in unemployment with an increase in productive capacity.

6. Some students point out this but don’t elaborate why. 7. This is often left out but is important.

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High unemployment imposes significant costs on the economy. (Explaining 3 points is sufficient)

Loss in Production and Income: The loss of jobs brings about reduction in production and income. As a result, purchasing power may be reduced and hence standard of living is lowered. With unemployment, the economy’s actual output may be significantly less than its potential output. Loss in Human Capital: Prolonged unemployment may cause a person to lose touch of the skills and knowledge he once possessed. If they stay out of the job market for too long, they may face increasing competition with the fresh graduates whose human capital are intact and are also cheaper to hire. In addition, workers without regular employment not only lose their financial security, if for long periods, they will suffer from loss of self-esteem, stress, discouraged and demoralised which often result in suicides and mental illness. The loss in human capital hampers the economy’s productive capacity affecting potential growth.

Loss in Tax Revenues: The government loses tax revenues due to the loss in income since the unemployed can no longer pay income tax. They are also more prudent in their spending, so there will be less collection of indirect taxes. Moreover, the government needs to spend on welfare payments. This causes a strain on the government’s reserves. In serious cases like US or Europe, it has implications on government’s expenditure to help the ailing economy.

Loss in Social Stability: Unemployment appears to be linked to a greater incidence of crime, violence on streets, drug abuse, alcoholism and vandalism. This may have adverse impact on investment decisions and hamper economic growth.

8. Some students tried to

use PPC to illustrate this but did not even define PPC. So what is the significance of producing on PPC or within PPC?

Note that while there might be a loss of human capital, it will most definitely not shift the LRAS to the left. That only happens when factors of production are destroyed. Loss in human capital in this case only means that the potential growth rate is slower. 9. Many students point out the loss in tax revenue but fail to elaborate on the implications. 10. Don’t focus on political/social/psychological aspects. Have to link back to the economic costs incurred.

Conclusion

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(b) In any economy, the right answer to unemployment is to create more jobs.

To what extent do you agree with the statement above? [15]

Introduction Low unemployment /full employment is one of the macroeconomic goals of any government. In this essay we will discuss the extent to which creating more jobs helps to achieve low unemployment / full employment. Body Thesis - Creating more jobs will help to improve unemployment situation Creating more jobs can be done with expansionary demand management policies to stimulate the economy. Fiscal and monetary policies are demand management tools. Explain using expansionary Fiscal /monetary policy Fiscal policy is defined as the use of government spending and/or taxation to influence the level of economic activity through the aggregate demand. This has been adopted by various governments the world over during periods of recession and high unemployment. This policy works by increasing government spending as illustrated by the Singapore government’s 2009 budget of S$20.5 billion and the US$800 billion fiscal stimulus in the USA in 2008. As government spending is a component of aggregate expenditure (AE), this increases the level of AE and leads to an unplanned decrease in stocks. As firms increase production to increase their stock levels back to desired levels, they hire more workers (as well as other factors of production), employment and hence national income increases. Through the multiplier effect, the higher income induces an increase in consumption. This leads firms to hire more workers again to meet the rising demand for goods and services and national income rises a second round. This second round increase in national income induces another round of consumption, leading to a third round increase in national income. With each successive round of increase in income, the amount of

Anti-thesis 1– Creating more jobs will not help to improve unemployment If prevalent unemployment is due to structural unemployment, creating jobs will not work to reduce it as the cause of the unemployment is that the unemployed do not possess the required skills. Supply-side policies like providing re-skilling to ensure the unemployed now possess skills which match the requirements of the economy. Evaluation This is assuming jobs created do not match the skills possessed by the unemployed. This is a valid assumption as government will not encourage job creation in areas where the economy has already lost comparative advantage. Anti-thesis 2 - Creating more jobs may even worsen some types of unemployment Frictional unemployment may be worsened as there are more jobs available now, implying that it will take a longer time to pick out jobs which are suitable. Anti-thesis 3 – other solutions? In addition to creating jobs, government can reduce the

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leakages, in terms of savings, taxes and import expenditure, also rises. This process will continue until the leakages have risen by the same amount as the initial increase in investment/autonomous consumption/net exports, by which time, national income would have increased by a multiple and employment would also have risen significantly. Draw diagram and make reference to it. Common mistakes / problems: 1. Creation of jobs is done miraculously and not through the policies of the government. Hence they see FP / MP as alternative policies instead.2. Lacking in economic analysis. Did not draw diagrams or if diagrams are present, did not make reference to it. Evaluation Hence if cyclical unemployment is prevalent, where there is a deficiency in demand leading to the lack of jobs available, creating more jobs through the use of expansionary demand management tools can help the situation. However, we must also note that jobs created do not necessarily mean that they will be taken up. 1. New jobs created may require skills not possessed by the unemployed. 2. These jobs may instead be filled up by foreign workers. 3. Immediately, unemployed may not be able to sieve through and find employment. (also accepted – can help seasonal unemployment if jobs created helps to diversify the economy)

destruction of jobs by lowering the cost of production for firms when the economy is suffering from a recession. During a downswing, workers are retrenched as stocks pile up with the fall in aggregate demand. With the cut in cost of production, firms might be able to avoid retrenching workers to stay profitable. Common mistakes / problems: 1. Although it is heartening to see that students are making the effort to exemplify, the problem is all the examples given are in Singapore context. It is like students are answering a question on Singapore. This is a problem especially when students write “when there is cyclical unemployment the governments can cut employers” CPF contribution…” without even stating that this is an example of what Singapore government can do. Since the question is general, does that mean governments in all countries have this option? 2. Surprisingly, quite a number of candidates did not link measures for reducing structural unemployment to Supply-side policies.

Conclusion Ultimately, whether unemployment can be solved depends on whether there are jobs available hence the government role is definitely to ensure that there is no demand deficiency and sufficient jobs are created for the workforce. However, with increased competition from other countries there is a constant restructuring of the economy and even as jobs are created, the skills required are very different. Hence there is also a need for supply-side policies to ensure the skills of the workforce are up-to-date.

Note: A significant number of students began the essay by stating that governments have 3 macroeconomic goals (Sustained EG, FE, price stability)

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instead of 4 (and favourable BOP). In Timed Assignment 3 it was the case because it is the context given. In general there are 4 macroeconomic goals.

QUESTION 4 (a) Explain the most significant causes of increase in investment in Singapore in recent years. [10]

(b) To what extent do you agree that the Singapore government should continue to encourage this increase in investment? [15]

Examiners’ comments:

Answers generally showed that candidates know the events happening in Singapore and what is causing the increase in investment. However, most candidates did not see the need to use appropriate economic analysis for part a. Many were happy to list all the events which went on in Singapore in recent years and make a statement to link all these to increasing investment. This approach clearly did not demonstrate any form of application of economic analysis.

Answers to part b again demonstrated students do know the benefits and costs investment brings to the economy but often lacked sufficient scope to score level 3 marks.

Suggested outline: Common mistakes/problems

Introduction

Investment spending is expenditure over a given period on the production of capital goods (factories, machinery etc) and on net additions to stocks of goods (raw materials, semi-finished goods). Essentially these are expenditure by firms in the economy. In this essay we will explain the main causes of increase in investment in Singapore using MEI.

1. Did not define investment / did not understand what investment component in the Keynesian model refers to. It is expenditure by firms.

Body

Investment decisions are assumed to be made on the basis of how the capital good can contribute to the firm’s profitability. As such, in considering whether to buy a capital asset such as a machine or tool, the firm would have to consider:

Marginal Efficiency of Investment (MEI)

Marginal Efficiency of Investment (MEI) is a concept used to measure the expected profitability or rate of returns from an additional unit of investment. Thus, for every additional dollar spent on buying capital asset businesses need to know how much yield / returns can be expected from the money spent.

The MEI shows an inverse relationship between investment and current interest rates (cost of borrowing for the firm). Firms will invest up to the point where MEI = r.

The profit maximizing position is illustrated in Fig. 1. As long as the rate of return is greater than the interest rate, the firm should invest more. It should stop when the investment level reaches I1.

Fig. 1: The determination of level of autonomous investment

2. Many referred to capital flows, government expenditure and consumption expenditure as investments!

3. As mentioned in the examiners’ comments, this portion is often ignored. If it is present, it is often not referred to later ie. there is no link between the model and the events/causes explained later.

4. Some students argued that Singapore government lowered interest rates and hence increased level of investment (movement along MEI). This is inaccurate as Singapore controls exchange rate and not interest rate as our part of our monetary policy.

Since the MEI is based on expected profitability and not actual/realized profits from an additional unit of investment business expectations naturally play a key role in determining its value.

The position of the MEI curve is determined by

MEI

%

I1

r = 20%

Investment I2

r > MEI = 15%

r < MEI = 25%

I3

businessmen's expectations of an unknown and possibly uncertain future. The business sentiments / confidence of businessmen are perhaps the key determinant of the level of aggregate demand in the economy. If business sentiment improves, entrepreneurs will immediately revise upwards their expectations of future profits and income streams yielded by the investments they are considering.

Given that the performance of the Singapore economy has surpassed some of the most developed countries in the recent years, producers are more confident in our economy and choose to invest in Singapore.

Firms estimate rates of returns on investments on the basis of expected after-tax profits. If there is a decrease in tax rates, we expect a rightward shift of the MEI. This is an important factor which affects investment decisions considering that it is one of the tool used to attract investments (Singapore has one of the lowest corporate tax rates in the region)

Draw diagram showing rightward shift of MEI and make reference to it.

(Also accepted – low inflation in Singapore which allows firms to better predict their profits)

Conclusion

Information on Corporate Tax changes in Singapore

Changes over the years

1997-00 2001 2002 2003-04 2005-06 2007-09 2010-11

26% 25.5% 24.5% 22% 20% 18% 17%

First Three Years

Taxable Income (S$) Tax Rate0 – 100,000 0% 100,001 – 300,000 8.5% 300,001 – 2,000,000 17%

After First Three Years

Taxable Income (S$) Tax Rate0 – 300,000 8.5% 300,001 – 2,000,000 17%

b) To what extent do you agree that the Singapore government should continue to encourage this increase in investment? [15]

Introduction Body Thesis – Singapore government should encourage increase in investments Benefits of an increase in investments have on Singapore economy 1. Growth and employment Explain using AD/AS model how increase in I helps to increase national income and employment.

An autonomous increase in investment, it will increase the level of AD and leads to an unplanned decrease in stocks. As the firms increase production to increase their stock levels back to desired levels, they hire more workers (as well as other factors of production), employment. This will generate income for households employed by firms in the capital goods industry. The household will tend to spend a proportion of the additional income on consumption, depending on their marginal propensity to consume (MPC). This further creates income for households employed in the consumer goods industry who will further spend their additional income on consumption. This cycle of spending and re-spending on consumption will continue until the increase in income becomes negligible. The eventual increase in national income is several times the initial increase in investment. The multiplier, K, represents how many times the national income increases with respect to the initial change in investment.

Anti-thesis – Should not encourage increase in investment because … 1. SR inflationary pressure Too fast an increase in investment leading to increase in AD faster than the growth of the economy’s capacity will result in overheating of the economy. With the increase in AD, firms increase their production to meet the rising demands, but to do that they will need to acquire more resources (factors of production) which may involve competing with others uses of these resources. Thus, factor prices will be driven up, driving up costs of production (shown by the upward sloping nature of AS0), leading to demand-pull inflation. Evaluation: However, LR – LRAS shift rightwards due to increase in productive capacity. Hence will be able to achieve non-inflationary growth and low unemployment.

2. Employment may not increase Although with the increase in AD and firms will need to hire more workers, this does not necessarily mean that Singaporeans will be employed. It will depend on whether Singaporeans have the necessary skills to take on these jobs and very often these jobs may be filled up by foreign workers instead.

Evaluation: There must be supply-side policies in place to complement the increase in I eg. Appropriate training or reskilling programme to help workers meet

Draw diagram and make reference to it. With economic growth and lower unemployment rates, there is more efficient use of resources which results in a gain in actual output (higher material standard of living). There will also be less drain on government revenues for unemployment benefits, and the government revenue can be used for other purposes such as improving infrastructure development and enhancing the education system. 2. Improve Balance of payment (not expected) With the increase in foreign direct investments, this inflow improves the financial account of the balance of payment, ceteris paribus, balance of payment will also improve. Common mistakes / problems: 1. Did not use economic analysis to explain the impact of increase I on growth and employment. 2. Explanation is wrong because some students mistaken I for consumption and government expenditure. 3. went off track by concentrating solely on the policies which helps to increase investment.

the skills requirement and fill up the jobs created by the influx of I.

3. Opportunity cost of current consumption If more resources are allocated to capital goods less will be available for consumer goods affecting current SOL.

Evaluation: However in the future, more goods and service can be produced with the increase in the productive capacity due to the accumulation of capital goods.

4. Possible negative impact on environment (not expected) 5. Worsen Balance of payment (not expected) Profits of FDI brought back may lead to worsening of current account on balance of payment. Common mistakes / problems: 1. Did not explain why price level increases with increase in AD when economy is near full capacity. 2. Quite a handful did not know that I will have positive effect on LRAS. 3. Some has very strange idea of I on consumer goods vs I on capital goods. Investment has to be expenditure on capital goods isn’t it??? 4. Some students argue that trade is more important to Singapore than Investment hence government should not encourage I and encourage X instead. But doesn’t investment helps to improve competitiveness of goods produced by local firms and hence exports? 5. Many also argued that increase in I will not help NI because of small multiplier effect and hence we should not encourage the increase in I. Going by this argument then there is nothing the government can do then? 6. Sustained growth sustainable growth. Sustained growth – there is increase in both AG and PG.

Sustainable growth – has to include the environment and resource issues.

Conclusion Investment is an important contribution to growth and especially in Singapore’s case where our economy is highly dependent on investment given our small domestic market. Thus it is only right that the government should encourage investments given the positive impact on growth and employment. As to the extent to which the government should encourage the increase, the government should balance the rate of increase with other policies to minimise the negative impact too fast an increase in investment might have on the economy.