class photos =) special thx to kj!

class photos =) special thx to kj!

essay question for week 9

a) ' To be successful, an economy needs to achieve low unemployment, low inflation and stable economic growth' Explain the statement. [12]

b) Discuss whether fiscal policy is the most effective way for Singapore to sustain a successful economy. [13]

Econ essay answers for week 6 (b)

Qn: Discuss which measures, if any, a government should adopt when confronted with a current account deficit. [15]

Interpretation of qn:
Discuss - Give details and explain pros and cons
Measures - Policies
If any - depend on size, cause, duration and exchange rate system

Comment from Cambridge:
- Need to distinguish between expenditure switching and expenditure reducing/dampening policy
- Need to give clear supporting analysis of each measure and evaluation of relative potential success of each measure bearing in mind the original cause of current account deficit

Ans:
Need not worry if current account deficit is not severe.
Severity depend on size, causes, duration and type of exchange rate regime

If small and temporary deficit, it can be financed by ...(copy from lecture note)
No need for government to intervene if freely floating exchange rate system.

In flexible exchange rate system, automatic correction ... (explain how automatic correction work)

When confronted with presistent and large current account deficit, government intervention is only necessary if operating on managed floating/fixed exchange rate system.

Measures can have 2 effects:
- Expenditure switching ( include definition)
- Expenditure reducing ( include definition)

Measures:
(I) Deflationary policies
- Explain
- Both expenditure switching and reducing
- Evaluate
(II) Import control
- Explain
- Expenditure switching
- Mention when use tariff or embargo based on price elasticity
- Evaluation
(III) Depreciation/Devaluation
- Explain
- Evaluation
(IV) Increase home productivity
- Explain
- Evaluation

Current account deficit would require not one but a combination of policies, taking into account their relative effectiveness.

Ans for week 6 essay (a)

Qn: Explain the potential causes of a balance of payments deficit in the current account. [10]

Interpretation of Qn:
Explain - Make clear and give reasons for
Potential - Possible
Current account - Visible and invisible trade

Comment from Cambridge:
- Deficit in current account could be due to deficit in visible trade account (low export earning and high import expenditure) and invisible trade account (service, income flow, transfer of money)
- Must group possible factors under more general themes rather than mere listing of every possible causes.
- Need to explain possible factors and provide analytical explanation based on elasticities (price, income and cross) of demand.

Ans:
- Define Balance of payments
- Define current account of BOP
- Explain current account deficit: If receipts are less than payments, there is a current account deficit.

Deficit in visible trade - Low export earning
(I) Structural changes
> Change in pattern of demand for export
(i) Presence of substitute of greater use and better quality.
E.g Switch from analogue watch by Swiss to digital watch by Japanese
(ii) Economic downturn in major export market
- Demand for export falls.
- If demand for export is income elastic, total revenue for export decrease.
> Loss in comparative advantage
- New producers (more price competitive/efficient/productive) emerge.
E.g. China, India
- technology changes
- pattern of production change as cost of production change due to inefficiency/ low productivity in domestic production.
- Decrease in demand for export
> Changes in terms of trade
- Impact depend on elasticity of demand
- Unfavourable movement in terms of trade, export earning falls, import expenditure increases if demand for export and import are price elastic.
- Current account worsen
E.g Primary produce - coffee and impact on Brazil
> Overvaluation of home currency
- Export less competitive
- Current account deficit
E.g Argentina currency crisis in 1999
(II) Barriers in form of unfair trade
> Imposition of trade barrier in foreign countries
> Price of export more expensive in foreign markets.
> Quantity demanded for export decreases
> If demand for export is price elastic, total export earning decreases.
> Current account deficit
E.g. imposition of tariff on imported steel by US, lasted for a few months and imposition of tariff on Japanese printer by European community.

Deficit in Visible trade - Higher import expenditure
(I) Stuructural changes
> Change in pattern of demand for import
(i) increase in population/ income at home (boom/ expansionary demand management policies)/ change in taste and preference in favour of import
(ii) investment in capital goods (import from abroad)

Deficit in Invisible trade - lower level of invisible earning
(I) Under-development or inefficient service sector
> lack of demand for service provided to foreign countries.
(II) Little investment income flow for developing countries as few sources of investment abroad by residents.
(III) Indulgence in overseas aid/grants (unilateral transfers)
> huge outflow of transfer
> current account deficit E.g US

Conclusion:
There are many potential causes for deficit in current account.

Additional qn on Thailand

Qn: Explain the effect of surging fuel costs on the economy.

Interpretation of qn:
Explain - Make clear and give reasons for
Effect - Internal ( Price, Employment, Economic growth)
External ( Balance of payments, Exchange rate)

Ans:
Internal Effect:
- Prices
> Oil import is basic input for production.
> Surging fuel cost raise cost of production.
> Cost push inflation results, shifting AS curve to the left (or upward) as AS fall and push up general price level
> Inflationary spiral. Fuel cost is the trigger point for further increase in price.

- Unemployment
> Stagflation develop
> High level of unemployment create economic and social burden
> Social unrest will lower confidence of investors.
> Economy trap in vicious cycle of unemployment

- Economic growth and Equity
> Surging fuel cost affect various component of AD.
= Consumption decrease as consumers are cautious about economic outlook
= Investment decrease as business confidence fall

= Export decreases as competitiveness of export fall

= Import increases as imports become relatively cheaper

> Economic growth (real output) falls as AS and AD falls.

> Widening of income disparity

External Effect:

- Balance of payments

> Export less competitive, export earnings falls if demand for export is price elastic.

> Import more competitive, import expenditure increases if demand for import is price elastic.

> Fall in export earning and rise in import expenditure worsen balance of trade.

> Inflation in Thailand results in hot money flowing out of Thailand and decrease in inflow of investment, worsening balance of payments.

> Worsening balance of payments result in decrease in foreigners' demand for Thai baht and increase in Thailand demand for foreign currencies.

> Depreciation of Thai baht.

Evalutation:

- Thailand, an importing country, is highly dependent on fuel and hence is a loser.

- In the short run, producing countries gain from the surging fuel cost while importing countries lose.

- In the long run, all countries are losers with surging fuel cost as demand for oil from the importing countries will fall.