JC Economics Notes

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 Economics Tuition – Bishan Centre –  Economics Definitions

Microeconomics

Chapter 1 – Central Problem of Economics
Chapter 2a – Demand and Supply
Chapter 2b – Elasticity of Demand and Supply
Chapter 3a – Cost of Production
Chapter 3b – Market Structures
Chapter 4 – Market Failures

Macroeconomics

Chapter 1 – National Income Accounting
Chapter 2a – Economic Growth
Chapter 2b – Unemployment
Chapter 2c – Inflation
Chapter 3 – Aims of Government & Macroeconomic Policies
Chapter 4a – International Trade
Chapter 4b – Globalization
Chapter 5a – Foreign Exchange
Chapter 5b – Balance of Payment


Microeconomics

Economics Tuition Bishan – Economics Definitions – Chapter 1 – Central Problem of Economics

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Q1. What is scarcity?

Scarcity is the fundamental economic problem of having unlimited human wants and needs in a world of limited resources.

Q2. What causes the problem of scarcity? The fact that there are insufficient productive resources to fulfill all human needs and wants is the problem with scarcity.

Q3. Why scarcity cannot be eradicated?

There is a limited amount of resources in the world eg. Coal. Hence it is impossible to eradicate scarcity due to the shortage of resources which requires effective allocation.

Q4. How to address the problem of scarcity?

To address the problem of scarcity, the government can allocate resources, like land, raw materials etc, productively through management policies.

Q5. What is opportunity cost?

In Microeconomic theory, the opportunity cost of a choice is the value of the next best alternative forgone, in a situation in which a choice needs to be made between several mutually exclusive alternatives given limited resources.

Q6. Why is there opportunity cost?

Because of scarcity, every time we do one thing we necessarily have to forgo doing something else desirable. So there is an opportunity cost to everything we do, and that cost is expressed in terms of the most valuable alternative that is sacrificed.

Q7. What is utility?

Utility is a representation of preferences over some set of goods and services.

Q8. What does marginal utility mean?

The marginal utility of a good or service is the gain (or loss) from an increase (or decrease) in the consumption of that good or service.

Q9. What is a capital good?

A capital good (sometimes simply capital in economics) is a durable good that is used in production of goods or services

Q10. What are the factors of production?

Factors of production are the inputs that are wounded to the production process. For example, land, capital, labour are all factors of production.

Q11. What is the Production Possibility Curve (PPC)?

A PPC is a graph that shows the maximum attainable combinations of output that can be produced in an economy within a specified period of time, when all the available resources are fully and efficiently employed, at a given state of technology.

Q12. What is increasing opportunity cost?

Increasing opportunity cost is reflected in a concave PPC to the origin. This means that as more of a good is produced, larger and larger quantities of the alternative good must be sacrificed.

Q13. What is constant opportunity cost? This happens when factors of production are perfectly suitable in the production of both goods. Constant opportunity cost is reflected in a straight line PPC.

Q14. What is decreasing opportunity cost? This means that as more of a good is produced, smaller and smaller quantities of the alternative good is sacrificed.

Q15. What causes the production possibility curves to shift outward?

-increase in quantity/quality of resources -technological improvement

Q16. What causes the production possibility curves to shift inward?

-decrease in quantity/quality of resources


Economics Tuition Bishan – Economics Definitions – Chapter 2a – Demand and Supply

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Q1. What is demand?

Demand refers to the consumer’s desire and willingness to purchase based on consumer satisfaction and the ability of the consumers’ purchasing power to purchase goods and/or services at a particular period of time and the maximum level of price.

Q2. What is supply?

Supply refers to the amount of goods and service producers are willing to produce based on profit motives and ability to produce based on production capacity to offer up for sales at particular price over a certain period of time.

Q3. What is market equilibrium?

This condition of market equilibrium is attained when the market demand is equal to market supply. At equilibrium, the market clearing price and quantity is determined

Q4. Why is the supply curve upward sloping?

The supply curve shows the relationship between the price of good and the quantity of goods supplied by all the producers in the industry. It represents minimum price that all producers are willing to accept and able to produce. Supply curve is upward sloping because producers always aim to maximise profits by selling more at a higher price.

Q5. What is a “change in quantity demanded”?

A change in quantity demanded is the change in consumption of the goods due to a change in the price of the good concerned. This is represented by a movement along the demand curve

Q6. What is a “change in quantity supplied”?

A change in quantity supply means that the change in production capacity is due to the change in the price of the good concerned.  This is represented by a movement along the supply curve

Q7. What is a “change in demand”?

A change in demand is a change in the consumption of the goods due to factors other than the change in price of the good concerned. This represented by the shift of the demand curve

Q8. What is a “change in supply”?

A change in supply means that the change in production capacity is due to some other factors beside the price of the goods concerned. It is represented by the shift of the supply curve

Q9. What is the meaning of excess demand condition?

Consumer surplus is the difference between the maximum amount that consumers are willing to pay for a given quantity of good and what they actually pay (equilibrium price).

Q10. What is producer surplus?

Producer surplus is the difference between the amount received by producers and the minimum amount that they are willing and able to accept for supplying the good.

Q11. What is price ceiling?

-A maximum price set artificially by the government of firms so that goods are bought and sold at that price level which is below the market equilibrium price level.

-When the price is set at PC, there is a fall in quantity supplied from Q0 to Q1 and an increase in quantity demanded from Q0 to Q2, creating an excess demand condition. The government will have to replenish the shortage from the buffer stock, failing to do so, it will have to conduct rationing to solve the disequilibrium condition. The rationing will be done through several system of distribution like the first-come-first serve, social aims or meritocratic system

-Black market condition will evolve for the quantity set at PC which will contribute a rise in the price from PC to PBM if the quantity supplied at Q1 can be re-sold

-Consumer surplus can only be attained for those who can buy the goods at the price level at PC but consumers will have to buy at PBM, there will be a loss of consumer surplus for these consumers

Q12. What is floor price?

-Minimum price set artificially so that goods are bought and sold at that price level which is above the market equilibrium price level

-When the price is set at PF, there will be an increase in quantity supplied from Q0 to Q2, and a reduction in quantity demanded from Q0 to Q1. Consequently, there will be an excess supply condition

-For the labour market, the excess supply of labour will contribute to unemployment and thus, the minimum wage scheme is not favoured by trade union

-For the resource market, the excess supply condition will be a loss to the producer if goods are perishable as the government cannot buy up excess stock. The floor price will not work for the producers if there is a reduction in supply which means the government’s subsidy will be lesser and the total revenue for producers will be reduced.

Q13. What is direct tax?

Direct tax is directly levied by the authorities on the consumers

Q14. What is indirect tax?

Indirect tax is tax levied by the authorities on producers. The producers can then pass on the burden of the tax to the consumers.

a) Specific tax, or per unit tax, is a constant tax amount levied on per unit of goods sold. It causes a parallel shift of the supply curve up and to the left.

b) Ad valorem tax, a percentage tax, takes a percentage of the price of good concerned. It changes as the price of good changes. It changes the slope of the curve as the curve pivots anti-clockwise upwards.

c) Lump sum tax is a fixed amount of tax regardless of the amount of quantity.

Q15. What is tax incidence?

Tax incidence refers to the distribution of tax burden between the consumers and producers

Q16. What is consumer tax burden?

Tax incidence that falls on the consumers

Q17. What is producer tax burden?

Tax incidence that falls on the producers

Tax burden falls entirely on producers when supply is perfectly inelastic and when demand is perfectly elastic.

Q18. What is glut?

Glut is a term describing a disparity between the amount demanded for a product or service and the amount supplied in a market. Glut occurs when supply exceeds demand for a certain product.

Q19. What is shortage?

Shortage is a term describing a disparity between the amount demanded for a product or service and the amount supplied in a market. Shortage occurs when demand exceeds supply for a certain product.

Q20. What is a black market?

A black market or underground economy is the market in which illegal goods are traded.

Q21. What is specific tax?

Specific tax, is a tax that is defined as a fixed amount for each unit of a good or service sold, such as cents per kilogram. It is thus proportional to the particular quantity of a product sold, regardless of its price.

Q22. What is subsidy?

Subsidy is a payment to the producers by the government. It lowers the cost of production and shifting supply curve down and to the right. Specific subsidy causes a parallel shift downwards and to the left. Ad valorem subsidy causes a pivoted shift in the clockwise direction

Q23. What is an inferior good?

An inferior good is a good that decreases in demand when consumer income rises, unlike normal goods, for which the opposite is observed.

Q24. What is a normal good?

Normal goods are any goods for which demand increases when income increases and falls when income decreases but price remains constant

Q25. What is a luxury good?

Luxury goods are products and services that are not considered essential and are associated with affluence. Demand for luxury goods increases as income increases.

Q26. What is competitive demand?

Goods are in competitive demand when they are close substitutes of one another. If two goods are close substitutes, a fall in price of one will reduce the demand for the other and vice versa.

Q27. What is joint demand?

Goods that are jointly demanded, for example car and petrol, are complements to each other. The use of one commodity requires the use of the other commodity in order to generate satisfaction. Change in quantity demanded for one commodity is likely to affect the demand for the other.

Q28. What is derived demand?

Some goods are demanded not for their own sake but because they are used in the production of other commodities. Eg. The demand for factors of production is a derived demand.

Q29. What is joint supply?

Goods produced together from the same source are in joint supply. The increase in quantity supplied of one commodity leads to an increase in supply of the other good. Eg. Beef and leather

Q30. What is competitive supply?

Competitive supply occurs when increase in the quantity supplied of one good results in a decrease in the supply of the other. This is because the production of goods requires the use of same resources hence the two goods compete for the same factors of production.

Q31. What is consumer surplus?

Consumers’ surplus is the difference between the maximum amount that consumers are willing to pay for a given quantity of a good and what they actually pay

Q32. Why do prices rise when there is a shortage? (Excess Demand condition)

A shortage means that demand for a good exceeds the supply. Hence price naturally increases as consumers are willing to pay more to obtain the good.

Q33. What is the meaning of excess supply condition?

It occurs when there is glut which means that supply of a good exceeds the demand for the same good.

Q34. What is market equilibrium?

A situation in which buyers and sellers are on aggregate satisfaction with the current combination of price and quantity if a good bought or sold, and are under no incentive to change their present economic actions. Hence, it is a position of balance which there is no inherent  tendency for change.

Q35. What are the non-price determinants of demand?

-Taste and preferences -Real disposable income -Population -Government policies -Interest rates -Exchange rates -Expectations of the future -Seasonal changes

Q36. What are the non-price determinants of supply?

-Costs of production -Price of related goods -Innovation/State of technology -Natural factors -Government policies -Expectations of future price changes

Q37. Why is the demand curve downward sloping?

The demand curve in downward sloping as in reflects the inverse relationship between price and quantity demanded. As price increases, less consumers are willing to pay the higher price for the same good, hence quantity demanded decreases.

Q38. What is the substitution effect?

The effect of a change in price on quantity demanded arising from the consumer switching to, or from, alternative products.

Q39. What is the income effect?

The effect of a change in real income resulting from a change in the price of the good or service, ceteris paribus.

Q40. How does the government set minimum price?

The minimum price is set above the market equilibrium and producers are prohibited from selling below that stipulated price.

Q41. Why do government impose floor price?

-protect the income of producers from falling -create surplus which can be stored in preparation for future shortages -prevent workers income from falling below a satisfactory level

Q42. What are the factors that will affect the effectiveness of floor price? Elasticity of demand and supply of the good

Q43. What are the problems with floor price? -With the surpluses, government will have to sell them abroad, buy up the surpluses or destroy them. Surpluses reflect serious misallocation of resources in the country. -Financing surpluses will impose heavy burden on taxpayers -High prices may induce inefficiency. Producers are less motivated to look for cheaper and more efficient methods of production.

Q44. How does the government set maximum price? A maximum price is set below the market equilibrium price and producers are prohibited from selling above that stipulated price.

Q45. Why do government impose price ceiling? A price ceiling is usually imposed with the aim of achieving some form of equity or to protect consumers in times of crisis.

Q46. What are the factors that will affect the effectiveness of price ceiling? Elasticity of demand and supply of the good

Q47. What are the problems with price ceiling? Occurrence of black market

Q48. What is ad valorem tax? A tax based on the assessed value of real estate or personal property. Ad valorem taxes can be property tax or even duty on imported items.

Q49. What is the deadweight loss? Deadweight loss is a loss of economic efficiency that can occur when equilibrium for a good or service is not optimal. Consumers would have more marginal benefit than marginal cost are not buying the product, or consumers who have more marginal cost than marginal benefit are buying the product.

Q50. What is composite demand?

Q51. What is fixed supply?

Q52. Why do prices fall when there is a glut? (Excess Supply Condition)

Q53. Explain the concept of law of diminishing marginal utility.

Q54. What is consumer benefit?

Q55. What is producer benefit?


Economics Tuition Bishan – Economics Definitions – Chapter 2b – Elasticity of Demand and Supply

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Q1. What is Price Elasticity of Demand?

Price elasticity of demand measures the responsiveness of change in quantity demanded as a result of change in its price. It is NOT equivalent to the slope of the demand curve

Q2. What is Income Elasticity of Demand?

Income elasticity of demand measures the responsiveness of change in quantity demanded due to a change in the income of the consumer.

Q3. What is Cross-Elasticity of Demand?

Cross elasticity of demand measures the responsiveness of change in quantity demanded as a result of change of price of other good.

Q4. What is Price Elasticity of Supply?

Price elasticity of supply measures the responsiveness of the change in quantity supplied due to a change in the price of the good concerned.

Q5. What do the various magnitudes of price elasticity of demand represent?

1 : Demand is price elastic – a change in price leads to a more than proportional change in quantity demanded

< 1 : Demand is price inelastic – a change in price leads to a less than proportional change in quantity demanded

= 0 : Demand is perfectly price inelastic – no change in quantity demanded in response to a change in price

Q6. What do the various magnitudes of elasticity of supply represent?

1 : Supply is price elastic – a change in price leads to a more than proportional change in quantity supplied

< 1 : Supply is price inelastic – a change in price leads to a less than proportional change in quantity supplied

= 0 : Supply is perfectly price inelastic – no change in quantity supplied in response to a change in price

Q7. What are the determinants of Price elasticity of supply?

-Determinants of Price Elasticity of Supply

-Capacity of Production/ Stock of Products

-Time Period for Production Capacity

-Cost of Resources

-Number of Firms in Industry

Q8. What are the determinants of income elasticity of demand?

-The Proportion of Income Spent on the Good

-The Price of the Good and the Level of Consumer Income

Q9. What are the determinants of cross elasticity of demand? -Relationship of the Goods

-Market Classification

Q10. What are the determinants of Price elasticity of demand?

-Degree of Necessity

-Availability of Substitutes

-Proportion of Income Spent on the Good

-Time Period for Consideration of Purchase

-The Number of Possible Substitutes’ Uses

Q11. How to use the concept of price elasticity of demand to maximize total revenue?

-When demand for good is price inelastic, a firm selling the good should increase price to maximize total revenue.

-When demand for good is price elastic, a firm selling the good should lower price (therefore increase quantity sold) to maximize total revenue.

Q12. Why are firms unable to keep prices low in the long run?

In the long run, prices of factors of production will increase (due to inflation). Hence the cost for producing a good will increase and thus firms are unable to keep prices low.

Q13. How are elasticity concepts useful for government policymaking?

Elasticity concepts can help the government in implementing appropriate policies. Eg raise revenue through taxation, implement subsidies for certain goods, encourage/discourage consumption of certain goods.

Q14. What are the uses of price elasticity of demand?

-To Determine the Relationship of Goods

-To Help to Determine the Degree of Competition and Develop Nature of Competition

Q15. What are the uses of income elasticity of demand?

-Provide information on how the firm can respond in relation to the change in economic growth of the country

-Provide information about the consumer’s degree of price sensitivity and thus help to determine the price strategy

Q16. What are the uses of cross elasticity of demand?

-To Determine the Relationship of Goods

-To Help to Determine the Degree of Competition and Develop Nature of Competition

Q17. What are the uses of price elasticity of supply?

It depicts the extent of change in quantity demanded and change in price of the good itself when there is a change in demand for the good. When there is an increase in demand for the good, the rise in price will be sharp and the reduction in quantity will be less than proportional than the rise in price if the supply is price-inelastic

Q18. What are the limitations of elasticity of demand and supply?

-Magnitude of the value of PED and PES will vary as time span is longer.

-Ceteris paribus condition is not possible in reality, and thus, the complexity of the economic environment will affect the value PED and PES simultaneously.

-Social variables will distort the implication of the value of PED as the consumer with similar proportion of income spent on a good will have different response to change in quantity demanded because of their family background

Q19. How do the concept of price elasticity of demand and supply affect the consumer tax burden?

If good to be taxed is low in PED and high in PES, the tax incidence is skewed towards the consumers and this will affect the consumer tax burden

Q20. How do the concept of price elasticity of demand and supply affect the producer tax burden?

If goods have high PED and low PES, the tax incidence falls more on producers

Q21. Why price will rise sharply due to the magnitude of price elasticity of demand and supply?

Q22. How the concept of price elasticity of demand and supply affect the trade balance? What is Marshal-Lerner condition?

Q23. How do the concept of price elasticity of demand and supply affect consumer benefit?

Q24. How do the concept of price elasticity of demand and supply affect the producer benefit?

Q25. How do the concept of price elasticity of demand and supply affect consumer surplus?

Q26. How do elasticity concepts affect market equilibrium?

Q27. What are the advantages for keeping price low?

Q28. What are the disadvantages for keeping price low?

Q29. What are the advantages for keeping price high?

Q30. What are the disadvantages for keeping price low?

Q31. How do the concept of price elasticity of demand and supply affect producer surplus?

Q32. How do the concept of price elasticity of demand and supply affect the price and output level? (market equilibrium)?


Economics Tuition Bishan – Economics Definitions – Chapter 3a – Cost of Production

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Q1. What is short run?

The firm is constrained by a fixed maximum capacity, which means that it can only increases the variable factors of production to increase its production while one of its factors of production is held fixed

Q2. What is long run?

All the factors of production used by the firms can be changed to increase production

Q3. What are the variable factors of production?

These are factors of production which can be valued during short-run to increase production

Q4. What are the fixed factors of production?

These are factors of production which cannot be varied during short run to increase production

Q5. What is variable cost?

Cost that incurred due to the use of variable factors and the cost will vary with the level of output. Example: Wages

Q6. What is fixed cost?

Cost of production that is incurred due to the use of fixed factors and they do not vary with the level of output of the firm. Example: interest payment of borrowing to finance business operation

Q7. What is average variable cost?

It is the total variable cost per output.

Q8. What is average fixed cost?

It is the amount of fixed cost per unit of output

Q9. What is the average total cost?

Q10. What is marginal product?

MP is the additional change in output as a result of additional increase in the variable factor of production

Q11. What is marginal revenue?

Q12. What is average product?

AP is derived from the total number of products produced divided by the total number of variable factor of production

Q13. What are economies of scale?

Cost savings accrued to a firm in the production of output as a result of a large scale production due to the expansion of the firm or the industry. For the advantages gained by the firm, it is known as internal EOS while for the advantages gained by the industry, it is known as external EOS

Q14. What are the types of internal economies of scale?

-Technical EOS

-Managerial EOS

-Financial EOS

-Commercial EOS

-Risk-bearing EOS

Q.15 What are the types of external economies of scale?

-Economies of concentration

-Economies of disintegration

-Economies of information

Q16. What are the types of internal diseconomies of scale?

-Administrative DEOS

-Managerial DEOS

-Hierarchy Alienation

Q17. What are the types of external diseconomies of scale?

-Concentration of resources and facilities

-Concentration of information

-Integration of production

Q18. Why firms need to reap economies of scale? What are the benefits of economies of scale?

Economies of scale are closely linked to increasing returns to scale. Reaping economies of scale will mean that the firm is producing at a lower cost per unit output in the long run. Hence, this will help the firm to maximize total revenue and profits.

Q19. Why the firms cannot increase the scale of production excessively?

The long run average cost curve is usually U-shaped. This means that when output rises above the minimum efficient scale, diseconomies of scale sets in. Hence firms should not increase scale of production above the MES level.

Q20. What is increasing returns to scale?

Output increases more than proportionately to the increase in all its inputs.

Q21. What is constant return to scale?

Output increases proportionately to the increase in all its inputs.

Q22. What is decreasing returns to scale?

Output increases less than proportionately to the increase in all its inputs.

Q23. What is bureaucratic red-tape?

Red tape is excessive regulation or rigid conformity to formal rules that is considered redundant or bureaucratic, and hinders or prevents action or decision-making.

Q24. What is low-labor morale?

Low labour morale refers to little incentive or motivation among workers to work hard or contribute to the firm.

Q25. What is division of labour?

Division of Labour is the specialisation of individuals who perform specific tasks and roles. Division of labour usually leads to increase in productivity and efficiency.

Q26. What are the advantages of large firms?

-Able to reap internal economies of scale

-Gain greater share of market power

-Achieve greater security by extending the range of products and markets

-Greater market valuation

-Reduce take-over by other firms

Q27. What are the disadvantages of large firms?

-Complexity of management

-Less innovation

Q28. What is law of diminishing returns/ law of variable proportion?

It states that as more units of a variable factor are applied to a given quantity of a fixed factor, there comes a point beyond which the extra output from additional units of the variable factor will eventually diminish.

Q29. How do the internal economies of scale affect average cost of production?

Internal economies of scale are the cost savings that occur to a firm in the long run as a result of the firm’s expansion. The firm’s long run average cost will fall as the size of firm increases.

Q30. How do external economies of scale affect the average cost of production?

External economies of scale are the cost savings that occur to all firms in the industry in the long run as a result of expansion in the industry or concentration of firms in a certain location. The firm’s long run average cost will fall as the industry expands.

Q31. What is acquisition?

Acquisition refers to a company completely taking over another company and becomes the sole new owner of the company that has been acquired.

Q32. What is merger?

When two firms merge, a completely new enterprise may be formed or the two firms become one with equal stakes at decision making.

Q33. What are the impacts of acquisition?

Q34. What are the impacts of merger?

Q35. How can small firms survive?

Through strategies like:

-banding

-targeting niche markets

-providing customized/personalized services

Q36. What is a niche market?

It is a subset of the market on which a firm carves out for itself.

Q37. What is horizontal integration?

It occurs when firm takes over a similar firm at the same stage of production in the same industry.

Q38. What is vertical integration?

It occurs when a merger takes place between firms engaged in different stages of a productive process.

Q39. How does the implementation of research and development affect cost condition?

R&D increases the cost of production greatly as it is capital-intensive.

Q40. How does rise in productivity affect cost condition?

Rise in productivity decreases the cost of production.

Q41. What are positive impacts of small firms on consumers and society?

-Convenience for consumers as small firms are usually located near its market

-Provide specialized products for consumers (niche markets)

-Provide personalized/customized services for consumers which lead to consumer satisfaction

Q42. What are negative impacts of small firms on consumers and society?

-Higher price of obtaining goods as small firms are unable to reap economies of scale, hence cannot lower prices for consumers

-Less variety of goods as small firms do not have the capacity to diversify

-Little or no improvement in product quality due to the lack of capital to engage in R&D

Q43. What are the positive impacts of merger on firms?

-Able to reap internal economies of scale

-Gain greater market share

-Increase consumer base

-Able to invest in R&D

Q44. What are the negative impacts of merger on firms?

-Complexity in management

-Time lag in implementation of policies

Q45. What are the negative impacts of merger on consumers?

-Higher prices for consumers as merger means greater market power and ability to set price.

-Little or no improvement in product quality due to the greater market power (no need for constant innovation)

Q46. What are the positive impacts of merger on consumers?

-Cost savings which are passed on to consumers as firm gains economies of scale and lower cost of production

-Improvement in quality of products as firm has greater ability to conduct R&D

-Increase in variety of products as firm has the capacity to diversify

Q47. How does source of efficiency influence the law of production in the short run?

Q48. How does source of efficiency influence the law of production in long run?

Q49. What is specialisaton of production?

Q50. What is the production law?

Q51. What are factors of production?

Q52. What is production condition?


Economics Tuition Bishan – Economics Definitions – Chapter 3b – Market Structures

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Q1. What is a perfect market structure?

In the perfect market structure, there is perfect market information and mobility of factors of production. There are many, firms and the product is homogeneous. The firms are also price-takers as no firms can control the production level and thus cannot set the price level.

Q2. What is an imperfect market structure?

Q3. What is Perfect Competition?

Q4. What is a Monopoly?

In the monopoly form of market structure, there is imperfect market information and mobility of factors of production. There is only one firm and the product is homogeneous. The firm has strong market control as it can impose strong barriers to entry, either naturally or artificial. The firm in this industry is price-setter whereby the firm can set the price or the quantity level.

Q5. What is an Oligopoly?

In the oligopolistic form of market structure, there is imperfect market information and mobility of factors of production. There are a few firms and the product is differentiated. The firms have strong market power as they can create barriers-to-entry but the firms are mutually interdependent. The firm in this industry is price-setter whereby the firm can set the price or the quantity level.

Q6. What is Monopolistic Competition?

In the monopolistic form of market structure, there is imperfect market information and mobility of factors of production. There are many firms and the product is highly differentiated. The firm also possesses slight market power as it can create its own market share through product differentiation but the control of the market is limited. The firm in this industry is price-setter whereby the firm can set the price or the quantity level but has a high degree of substitution, contributing to the presence of a price-elastic demand curve.

Q7. What is perfect market information?

Every seller knows the prices his rivals charge, the market costs, its cost of production and the available production technology. Buyers also have complete information about each and every seller’s price, the higher quality and availability of the products. Thus, they will not purchase at a higher price than the prevailing market equilibrium price.

Q8. What is market concentration ratio?

Market concentration ratio is the reflection of market share a company has as compared to its rivals in the same industry.

Q9. What are the characteristics of a perfect competitive firm?

-large number of buyers and sellers

-homogenous product

-perfect knowledge

-no barriers to entry

Q10. What are the characteristics of a monopoly?

-single producer

-no close substitutes for the product

-imperfect knowledge of product

-high barriers to entry

Q11. What are the characteristics of an oligopolistic firm?

-small numbers of large firms relative to market size

-products can be homogenous or differentiated

-imperfect knowledge

-existence of substantial barriers to entry

Q12. What are the characteristics of a monopolistic competitive firm?

-large numbers of buyers and sellers

-differentiated products

-no/low barriers to entry

-imperfect knowledge

Q13. What is subnormal profit?

Cost is greater than profit hence the firm is making a loss.

Q14. What is normal profit?

Cost is equal to profit hence the firm breaks even.

Q15. What is supernormal profit?

Profit is greater than cost

Q16. What profits can be reaped in a perfect competition in the short run?

Normal profit

Q17. What profits can be reaped by a monopoly in the short run?

Supernormal profit

Q18. What profits can be reaped in an oligopoly short run?

Supernormal profit

Q19. What profits can be reaped in a monopolistic competition short run?

Supernormal profit

Q20. Why firms in monopolistic competition will reap normal profit in long run?

Firms in monopolistic competition reap supernormal profits in the short run. Due to low barriers to entry, more firms enter the industry to reap the supernormal profits. Assuming total market demand for the product remains the same, the entry of new firms will cause demand for each firm to fall. At the same time demand also becomes more price elastic. Hence firms in monopolistic competition can only reap normal profit in the long run.

Q21. What profits can be reaped in a perfect competition in the long run?

Normal profits

Q22. What profits can be reaped by a monopoly in the long run?

Supernormal profits

Q23. What profits can be reaped in an oligopoly long run?

Supernormal or normal profits

Q24. What profits can be reaped in a monopolistic competition long run?

Normal profits

Q25. What is market power?

Market power refers to the ability to set price or output and to price discriminate

Q26. Explain how market power affects the price and output level.

The greater market power a firm has, the greater its ability to set price or output level.

Q27. Explain how market power affects the production equilibrium.

The greater the market power a firm has, the greater its ability to produce at a higher output level

Q28. What are barriers to entry?

They are conditions that prevent or impede the entry of new firms into an industry. These barriers can limit the amount of competition faced by existing firms in the industry.

Q29. What are artificial barriers to entry?

Artificial barriers to entry are those set up by the firms to prevent entry of new firms. Eg legal barriers like patent rights, collusion/mergers, non-price competition like product differentiation

Q30. What are natural barriers to entry?

They are natural conditions that prevent a firm from entering the industry. Eg significant cost reduction arising from economies of large scale production, control over supplies of input

Q31. What barriers of entry can the firms in monopolistic competition has?

Artificial barriers to entry set up through aggressive advertising and product differentiation.

Q32. How do barriers to entry affect production equilibrium?

Barriers to entry affect market power which indirectly affects production equilibrium. The greater the barriers to entry, the greater market power a firm has and is able to produce at a higher output level.

Q33. How do barriers to entry affect profit levels?

Usually firms in an industry with greater barriers to entry (seen in oligopoly and monopoly) earn greater profits as there are fewer firms in the industry and each firm has greater market share.

Q34. What is price discrimination?

-Price discrimination: the practice of charging different prices to different groups of customers for the exact same product. (3rd degree)

-Price discrimination occurs when a producer sells different quantities of a specific product at two or more prices, for reasons not associated with cost differences. (2nd degree)

-Price difference rest merely on different buyers’ valuation of the same product, they are discriminatory. (1st degree)

-Price discrimination, if successful, will increase the firm’s total profits.

Q35. What are contrived barriers?

Q36. What is 1st degree price discrimination?

This happens when a firm charges each consumer the highest price he would pay for the good. The firm is able to capture all of consumer surplus. Eg auctions

Q37. What is 2nd degree price discrimination?

The firm chargers different prices for different blocks of th same good according to how much the customer purchases. Eg electricity and water

Q38. What is 3rd degree price discrimination?

The firm sells the same product at different prices to different consumers.

Q39. What are the negative impacts of price discrimination?

-It may be a form of consumer exploitation. ( Some consumers will pay at a higher price and there is allocative inefficiency)

-It may also increase the cost of production.

(cost in engaging in the change of product imagery – inform the consumers about the change)

Q40. What are the positive impacts of price discrimination?

-Price discrimination makes it possible to supply a good which otherwise could not have been produced. For example, the services of a surgeon. (allow the surgeon to charge high price to sustain the provision of services – ensure that the loss from the lower price market is covered by the high price market)

-Price discrimination makes it possible for a greater number of consumers to benefit from the product/services.

-May be used to cultivate customer loyalty. (encourage greater consumption)

-Can allow the firm to produce above a larger quantity so as to reap EOS.

(lower AC – raise profitability)

Q41. What are the conditions for price discrimination?

-Two or more prices being charged

-The good in all situation must be exactly the same good

-Price differences must not arise out of cost differences

-The seller must be able to control the supply of the good and thus prevent the resale of the good from one market to another

-Ability of the monopolist to separate markets:

i.geographically

ii. by type of demand

iii. by time

iv. by nature of product

Q42. What is price competition?

It occurs when firms in an industry use pricing policies to compete for market share.

Q43. What are the benefits of price competition?

It can successfully rule out competitors which lead to greater market shares for the remaining firms.

Q44. What are the limitations of price competition?

It might take a long time for a competitor to finally give up participating in the price war. And in the mean time, huge losses are made by all the firms engaged in the price war.

Q45. What is predatory pricing?

Q46. What is non-price price competition?

It occurs when firms compete using strategies not involving alteration of prices.

Q47. What are the types of non-price competition?

-product differentiation

-advertising

-research and development

-branding

Q48. What is product differentiation?

It involves making artificial changes to a product in order to make it seem different or special as compared to the competitor’s goods. One example would be difference in packaging.

Q49. What is a kinked-demand curve?

This model explains why once a price-output combination has been decided upon and the oligopolistic firms will not want to experiment with further price changes.

Q50. Why is there a kinked-demand curve?

When the firm increases price, the rival firm will not increase price as the rival firm can gain as the customers will switch the consumption from the firm to the rival firm. This will lead to a large reduction in quantity demanded since the degree of substitution is large, contributing to the demand curve for this portion to be price-elastic. However, when the firm decreases the price, the rival firms will follow suit as they will lose out if the customers of the rival firms may switch the demand to the firm. This means a smaller degree of substitution which will lead to a less than proportional increase in quantity demanded, contributing to the demand curve for this portion to be price-inelastic. It also implies that there is price rigidity as the firm is unlikely to change price as there is little to gain from price changes unless there is large percentage change in cost condition. This reflects that there is high degree of mutual interdependency which contributes to the condition of price rigidity.

Q51. What is allocative efficiency?

Allocative efficiency is a type of economic efficiency in which economy/producers produce only those types of goods and services that are more desirable in the society and also in high demand. Allocative efficiency is a point where marginal benefit is equal to marginal cost (MB=MC)

Q52. What is production efficiency?

Productive efficiency occurs when the economy is utilizing all of its resources efficiently. The concept is illustrated on a production possibility curve where all points on the curve are points of maximum productive efficiency.

Q53. What are the aims of firms?

Main aims of firms will be to maximize profits and reduce costs

Q54. What is X-efficiency?

Q55. Why imperfect market structures cannot attain allocative efficiency in the short run?

Q56. Why imperfect market structures cannot attain production efficiency in the short run?

Q56. Why are firms profit-motivated?

Q58. What is profit maximization?

Profit maximization is the process by which firms determine the price and output level which brings in the greatest profits. Profit maximization occurs when MC=MR with MC rising (on the graph).

Q59. What is cost minimization?

All firms will try to minimize costs in order to maximize profits. Cost minimization occurs when the firm find means to cut down on overhead and variable costs.

Q60. What is two-tier charge?

Two tier charge refers to charging the same good or service two different prices to two different group of consumers.

Q61. What is marginal cost (MC) pricing?

MC pricing is a price regulation method at which the government requires monopolies to set price at marginal costs.

Q62. What is a natural monopoly?

A natural monopoly is a condition of an industry whereby it is most efficient (involving the lowest long-run average cost) for production to be concentrated in a single firm.

Q63. Why does natural monopoly exist?

Capital intensive industries, like the utilities industries, have huge overhead costs and hence set the condition for natural monopoly to exist so as to prevent expensive duplication of services.

Q64. What is the most common market structure?

Monopolist competition

Q65. What is the most inefficient market structure?

Monopoly

Q66. How should the government regulate monopolies?

-MC pricing

-Two tier charge

-taxes

-licensing and quotas

Q67. Under what circumstances should the government regulate monopolies?

Where there is market dominance, firms have the capacity to distort the market price and quantity to their advantage. When there is market distortion which results in deadweight loss and unequal distribution of income, the government should regulate monopolies.

Q68. What is consumer exploitation?

Firms with market power can distort the market price and fix high prices which result in unequal distribution of income between consumers and producers, hence resulting in consumer exploitation.

Q69. What is nationalization?

It refers to the public ownership of the entire industry.

Q70. What is legalization?

It is the process of removing a legal prohibition or regulation against something which is currently not legal.

Q71. What is price regulation?

Price regulation refers to government intervention in monopoly price when there is market distortion of prices. This is to ensure that there is allocative efficiency and equal distribution of income between producers and consumers.

Q72. What is anti-trust law?

Competition law, known in the United States as antitrust law, is law that promotes or maintains market competition by regulating anti-competitive conduct by companies.

Q73. What is Free Competition Act?

Free Competition Act is a law that promotes or maintains market competition by regulating anti-competitive conduct by companies in Singapore.

Q74. What is rival firm?

A firm which competes with another firm in the same industry

Q75. What is a collusive activity?

An agreement made between rival firms to lessen competitiveness between them

Q76. What is a dominant firm?

A firm that has the greatest market share and price/output setting ability

Q77. What is a collusive oligopoly?

-Firms in the industry make agreements to set price or output at a certain level to reduce competitiveness and market uncertainty

-Firms in the industry does not make agreements on setting price or output level of the good which usually leads to greater competitiveness and market uncertainty.

Q78. What is barometric price leader?

Q79. What is low-cost price leader?

Q80. What is patent right?

When firms have a new innovation or idea, they can gain rights to use that idea solely (preventing other firms from copying their idea). This right is named patent right and is a form of barrier to entry.

Q81. How does patent right affect market power?

Patent rights are a form of barrier to entry. Hence this prevents new firms from entering the market. The few firms in the industry share the market, resulting in high market power.

Q82. How does patent right affect production equilibrium?

Patent rights are a form of barrier to entry. Hence this prevents new firms from entering the market. Demand of the market is then shared between one or few firms, hence output for each firm increases. (production equilibrium increases)

Q83. What are the impacts of patent right on consumers?

-Patent rights increases firms’ ability to set price and output. Hence it usually translates to high prices for consumers.

-Patent rights are also an incentive for larger firms to do R&D as it ensures that their ideas cannot be duplicated. Hence consumers benefit from higher quality or wider variety of products due to R&D of the firms.

Q84. What are the impacts of patent right on the firm?

Patent rights are a form of barrier to entry. Hence this prevents new firms from entering the market. The few firms in the industry share the market, resulting in high market power.

Q85. What is licensing?

Licensing is the process of leasing a legally protected (that is, trademarked or copyrighted) entity. The entity, known as the property or intellectual property, is then used in conjunction with a product.

Q86. What are the impacts of licensing on the firm?

Q87. What is intellectual property right?

A work or invention that is the result of creativity to which one has for a patent, copyright, or trademark

Q88. What are the impacts of intellectual property right on the firm?

Intellectual property rights are a form of barrier to entry. Hence this prevents new firms from entering the market. The few firms in the industry share the market, resulting in high market power.

Q89. What are the necessary conditions for successful collusion?

-The price or output level initiated by any firm is reasonable and agreeable

-All the firms in the industry agree to the initiated price or output level and does not go against it by lowering price further

-No action taken by any firm in the industry to create market uncertainty (by lowering price or adjusting output level)

Q90. What is growth maximization?

Growth depends on the volume of investment. Hence growth maximization simply refers to making the best use of the available investments (by cutting costs) to allow the firm to grow in size or expertise.

Q91. How to eradicate welfare loss?

Welfare loss can be eradicated by a firm through policies which increase allocative and productive efficiency. Welfare loss can also be eradicated through government intervention (policies to reduce market power)

Q92. How to eradicate supernormal profit?

Through government intervention, policies like MC and AC pricing can be implemented to reduce supernormal profits of monopolies. Taxes can also be introduced.

Q93. What is liberalization of market?

Liberalisation of market refers to removal of laws and regulations to create a free market whereby firms have lesser restrictions when it comes to policy implementation and expansion plans. Liberalisation of market also brings about greater competition.

Q94. What is mutual interdependency?

It is a situation (usually in oligopolies) whereby firms in the industry are affected by prices and output level of rival firms.

Q95. What is price rigidity?

Price rigidity is a situation whereby firms follow a decrease in price and not a increase in price (of rival firms). Price rigidity happens as firms are able to match prices with rival firms and result in a kinked demand curve.

Q96. How is welfare loss incurred under imperfect market structures?

Q97. What is perfect mobility of factors of production?

Q98. How does a perfect competitive firm attain production equilibrium? How does the firms in perfect competition set price and output level?

Q99. How does a monopoly attain production equilibrium? How does the monopoly set price and output level

Q100. How does an oligopolistic firm attain production equilibrium? How does the firms in oligopoly set price and output level?

Q101. How does a monopolistic competitive firm attain production equilibrium? Q. How does the firms in monopolistic competition set price and output level?

Q102. What is cost condition?

Q103. What are the impacts of licensing on the society?

Q104. What are the impacts of intellectual property right on the society?


Economics Tuition Bishan – Economics Definitions – Chapter 4 – Market Failures

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Q1. What is cost-benefit analysis?

Cost-benefit analysis (CBA) is a systematic process for comparing costs and benefits of a policy or initiative. CBA will determine if the work is justifiable or feasible.

Q2. What is market mechanism?

It focuses on the use of the market forces of demand and supply to allocate resources so to attain social optimization where there is maximization of net social benefit gain without incurring any deadweight loss. While the market demand reflects the consumers’ willingness and ability to purchase, the market supply reflects the producers’ willingness and ability to produce. In this price mechanism, the equilibrium price and output level is attained whereby the market demand is equal to the market supply when the demand curve intersects the supply curve.

Q3. What is a free market economy?

A free market is a market structure by which the output level and price of goods are solely dependent on market demand and supply and is unaffected by government policies or external regulations.

Q4. What are the features of a free market economy?

Q5. What are the advantages of a free market economy?

-Reduced welfare loss

-Firms are more efficient due to higher competitiveness

Q6. What are the disadvantages of a free market economy?

-Prone to market failure

-Public goods will not be produced

-Merit goods under consumed and demerit over consumed

Q7. What is market failure?

Market failure refers to the failure of price mechanism to conduct efficient resource allocation and thus, calls for the intervention of the government. The price mechanism will fail under the conditions when there is absence of the provision, the presence of externalities and the presence of imperfect market. It is also a condition of market failures when the society is unable to reduce the extensive disparity in the distribution of the net social benefit gain when there is extensive unequal distribution of income

Q8. What is moral suasion?

Q9. What are the benefits and limitations of moral suasion?

Q10. How does carbon permit works in curbing air pollution?

Q11. Why does the government conduct direct provision of public museums but not university education?

Q12.Why is government intervention ineffective in solving market failure?

Q13. Why parks and overhead bridges public goods are while hospitals and primary school education merit goods?

Q14. What is bureaucratic inefficiency? Top


Macroeconomics

Economics Tuition Bishan – Economics Definitions – Chapter 1 – National Income Accounting

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Q1. What is nominal Gross Domestic Product (GDP)?

-The monetary value of all final goods and services produced within a country within a given period of time, expressed in current price level before corrected for inflation.

-Measures from a territorial perspective.

Q2. What is real Gross Domestic Product (GDP)?

The real value of all final goods and services produced within a country within a given period of time, expressed in bare year price level after it is corrected for inflation.

Q3. What is nominal Gross National Product (GNP)?

-The monetary value of all final goods and services produced by nationals within a given period of time, expressed in current price level before corrected for inflation

-Measures in term of income of all citizens in and outside of the country. (Citizen and resident perspective)

Q4. What is real Gross National Product (GNP)?

The real value of all final goods and services produced by nationals within a given period of time, expressed in bare year price level after it is corrected for inflation

Q5. What is nominal Gross National Product (GNP)?

-The monetary value of all final goods and services produced by nationals within a given period of time, expressed in current price level before corrected for inflation

-Measures in term of income of all citizens in and outside of the country. (Citizen and resident perspective)

Q6. What is meant by ‘GDP at 2000 base year price level’?

-Real GDP

-The real value of all final goods and services produced within a country within a given period of time, expressed in bare year price level after it is corrected for inflation.

-GDP @ PPP- Real GDP issued for comparing real GDP among countries

Q7. What is Net Property Income from Abroad?

-Income earned by local firms and individuals abroad less income earned by foreign firms and individuals locally

-For Singapore, NPIA is negative, as contribution of foreign workers is much more extensive than contributions from Singaporeans and local MNCs abroad

Q8. What is personal income?

The flow of income that is earned by the individual after compulsory deduction (CPF) but before deduction for income tax.

Q9. What is personal disposable income?

-The flow of income available to individuals for spending and saving (CPF) after compulsory deduction and deduction for income tax and additions from transfer payments such as child benefits or subsidy.

-Personal disposable income determines the amount of consumption of an individual – Yd – Determines purchasing power

Q10. What is standard of living?

Measures the average quality of life of a population which includes the material and non-material aspects of life.

Q11. What is qualitative standard of living?

Standard of living measured in term of the quality of life, which will reflect the intangible aspect of comfort of the life of the people and this is commonly represented by the mortality rate, birth rate, level of working hours and stress and the level of externalities in the country consumption and production.

Q12. What is quantitative standard of living?

-Standard of living measured in term of the purchasing power which will reflect the level of material comforts and this is commonly represented by the real per capita income

-Only real per capita income/GDP can be used as the economic indicator that directly determine the quantitative value of SOL

Q13. What is real per capita income?

Real income of an individual in an economy

Q14. What is Human Development Index (HDI)?

-Measured the standard of living in term of the progress of the well-being of the individuals

Includes:

-Life expectancy at birth

-Adult Literacy

-Adjusted real per capita income

Q15. What is Measurement of Economic Welfare (MEW)?

-Measured the standard of living in term of the monetized value of the qualitative aspect of standard of living

Includes:

-Discounting for externalities

-Adding of non-marketed activities

-Adding the value of leisure

Q16. What is Consumer Price Index (CPI)?

Measures the change in price of a fixed basket of goods and services commonly purchased by households in a given time period.

Q17. How is Consumer Price Index (CPI) used?

-It is used as a deflator in compilation of real economic figures, e.g. real GDP per capital.

-CPI is also used in economics policy formulation and business planning.

-It determines the cost condition which will affect the production capacity. Inflationary cost condition will mean that the production capacity is experiencing rising costs condition which makes economic growth unsustainable. -Rising prices will also affect the competitiveness of the economy as the export price level and cost of FDI is affected by the price level.

-Rising price will lower purchasing power will lead to a fall in the level of material comfort that could worsen SOL

Q18. What is cost of living?

The amount that is spent in order to maintain a certain way of life/standard of living.

Q19.What is cost of living index?

A theoretical price index that measures the amount one needs to spend in order to maintain a certain level of satisfaction.

Q20. What is labor force?

-Working population (both active and inactive)

-Refers to both employed and unemployed individuals (aged 15 and above) that are willing and able to work.

Q21. What is working population?

Refers to the proportion of population who are available for employment, inclusive of the economically inactive.

Q22. What is GDP growth rate?

The amount at which GDP increases/decreases (usually measured annually)

Q23. What real GDP growth rate?

The rate at which real GDP increases or decreases

Q24. How to calculate real GDP growth rate?

Economic Growth Rate – Inflation Rate = Real Economic Growth Rate

Q25. What is balance of trade?

Revenue from exports less expenses spent on imports (of goods and services)

Q26. What is balance of payment?

-Records the flow of currency due to trade, investment, flow of savings, equity transactions

-Inflow of money from abroad less outflow of money from the country

Q27. What is current account?

Records monetary transfer for exports and imports of goods and services, income flows and net transfers in and out of the country.

Q28. What is capital account?

Records all inflows and outflows of funds due to financial activities like acquisition and disposal of fixed assets, shares, government grants for overseas project, etc.

Q29. What is financial account?

Records flow of funds due to transfer of saving and equity transaction

Q30. What is exchange rate?

The measure of one country’s currency in another country’s currency.

Q31. What is nominal effective exchange rate?

Value of an individual country’s currency relative to a basket of major currencies in the index, before adjusting for the effects of inflation.

Q32. What is real effective exchange rate?

Value of an individual country’s currency relative to a basket of major currencies in the index, after adjusting for the effects of inflation.

Q33. What is Gini Co-efficient ratio?

-Measure of inequality of wealth/income distribution.

-It is measure as a ratio between 0 and 1.

-A low Gini co-efficient indicates more equitable income.

Q34. What is wage-to-GDP ratio?

Proportion of total wage earned individuals employed to GDP

-Ratio – 0 to 1

-Higher the ratio, the more even the income distribution

(50% of income from wage shared by 80% of working citizens)

Q35. What is time comparison?

Comparison of standard of living of a country with two different time periods.

Q36. What is space comparison?

Comparison of standard of living between two countries in the same time period.

Q37. Why is there a need for diversification of economy?

-Widen scope of economic growth

-Reduce vulnerability of the economy in term of dependency on fewer sectors of growth

Q38. What are the uses of national income figures?

-Measure economic growth

-To derive the real per capita income for valuation of standard of living of the people (time comparison – 1 country with 2 different time periods)

-To use the value of the real per capita income to compare SOL between countries (space comparison – 2 countries for the same time periods)

-To indicate the rate at which the economy is growing as the value of national income will depict the actual production capacity

-To derive information on the level of economic activities in both the internal and external aspects of the economy

-To determine the contribution of each sector to GNP

-To assist the government in formulation of taxation and social policy

Q39. What is actual production capacity? What is actual growth?

It refers to the actualization of resources into monetized products and services which is commonly measured in term of the percentage change in real GDP

Q40. What is potential production capacity? What is potential growth?

It refers to the expansion of the availability of resources for production which is measured in term of rightward shift of the long run supply curve and outwards shift of the production possibility curve (PPC)

Q41. What are the limitations of GDP figures?

-The underground economy especially if the economy has a lot of illegal activities and production like illegal gaming and rental services of pirated CDs

-Valuation of certain items may differ for certain nations such as the treatment of interest from bonds is considered non-income but interest from banks is considered income and taxable income

Q42. What are the difficulties in determining national income? What are the problems of time comparison?

-Changes in price level

-Growth of the population

-Distribution of Income Not reflected in National Income Figures

-Lack of the consideration of the composite of expenditure

-Lack of consideration of the quality of products and goods and services

-Length of working hours and conditions of work not shown

-Unrecorded and undeclared items. (moon lighting)

-Social costs and benefits not accounted for

Q43. What are the difficulties in using national income to compare standard of living between two countries? What are the problems of space comparison?

-Different price structures

-Different rates of foreign exchange

-Different Treatment of Some Items Coverage of Items in National Income Estimates

-Different Sources of Statistical Data

-Lack of the Consideration of the Composite of Expenditure

-Distribution of Income is Not the Same

-Difference in Quality of Goods

Q44. What is purchasing power parity (PPP)?

Exchange rate is determined by settling the exchange rate based on an equivalent domestic purchasing based on the price level of the countries.

Q45. Why does higher GDP growth rate represent improved standard of living?

-Higher level of real per capita income which implies that the purchasing power of the people has improved. This will lead to a higher level of material comforts and enjoyment and this implies that their SOL has improved.

-Increase in the total production capacity of goods and services for the citizens and residents to consume, implying that there is a higher level of material comfort.

-Higher level of tax revenue and this will provide more funds for government to embark on infrastructural and institutional development. This will make their lives more convenient and comfortable and thus raise the SOL.

Q46. Why does increase in GDP growth rate not imply improved standard of living?

-If the percentage increase in price level or population or both are to rise above the percentage increase in GDP, the percentage increase in real per capita income will not rise, implying that there is no improvement in SOL.

-If the rise in GDP did not take into consideration the actual distribution of income. This means that not all the citizens will experience rise in real per capita income, indicating an increase in purchasing power.

-Even if the GDP increases does contribute to growth in production capacity, the low level of production of welfare good such as does not improve the lives of the people.

-Must consider the qualitative aspect of SOL such as the stress level and level of externalities.

Q47. Why are there problems of the inaccuracy of national income figures?

Weak administrative system, double accounting and under-declared income.

Q48. How to measure the economic performance of a country?

-The GDP growth rate or the value of the GDP

-The sectoral performance analysis

-Growth of capital intensive industries

-The unemployment rate

-Wage rate

-The consumer price index

-The level of investment

-The level of balance of trade

-Exchange rate variation

Q49. How to measure the competitive edge of a country?

-Wage rate

-Cost of resources

-Productivity

-Exchange rate

-Cost of living.

-Taxation

-Level of government expenditure

Q50. How to measure standard of living of a country?

Real per capita income

-Composition production in term of types of goods

-Level of consumption expenditure

-Gini-coefficient ratio

-Wage-to-GDP ratio

-Human Development Index

-Measurement of economic welfare

-Qualitative aspects of standard of living

-Unemployment Rate

-Inflation Rate

Q51. What is the GDP deflator?

It is the ratio of nominal GNP to real GNP expressed as an index.

Q52. What is net factor income from abroad?

Net factor income from abroad = difference between income earned in foreign countries by residents of a country and income earned by non-residents in that country.

Q53. Why is there a need to raise productivity?

Raising productivity will lower cost of production, which will enable workers to raise wage above inflation rate. This will sustain or raise purchasing power and thus, maintain or improve standard of living.

Q54. How to calculate nominal GDP? What is the equation for nominal GDP? (Formula)

The formula for computing nominal GDP = (quantity of A X price of A) + (quantity of B X price of B) + (quantity of C X price of C).

Q55. How to calculate nominal GNP? What is the equation for nominal GNP? (Formula)

GNP = GDP + Net factor income from abroad

Net factor income from abroad = income earned in foreign countries by the residents of a country – income earned by non-residents in that country

Q56. What is the relationship between exchange rate, foreign direct investment (FDI) flows and trade flows?

Appreciation of exchange rate will raise price of export demand in foreign value and cost of FDI which will reduce export demand the inflow of FDI. It will also lower the price of import in local value and this will contribute to rise in import demand, contributing to high import expenditure. Consequently, there will be net trade deficit.

Q57. What is the relationship between money supply, exchange rate and inflation rate?

Reduction in money supply will lead to rise in interest rate which will reduce aggregate demand, curbing excess demand condition, which will eradicate demand-pull inflation. Rise in interest rate will also induce inflow of hot money and thus increase local money supply and then lowering the interest rate, which will contribute asset-based inflation.

Q58. What are the components of current account balance?

-Balance of Trade

-Service Balance

-Income Balance

-Transfer Balance

Q59. What is the relationship between FDI, export demand, import demand and real GDP?

FTA promotes export demand and import demand, enabling firms to raise production as there will be more resources available and large market demand. At the same time, FDI will rise as MNC will invest in countries with export capacity. Consequently, this will lead to a rise in AD which will raise real GDP via the multiplier effect.

Q60. What is the relationship between government expenditure and budget deficit?

-Rise in government expenditure/low government revenue

-Budget deficit – need borrowing – internal loan will lead to increase debt burden while external loan will reduce the future earning of the nation

-May create crowding out effects if there is excessive government borrowing

Q61. What is the relationship between productivity, GDP rate and inflation rate?

-When government increases productivity, it will increase demand for labour and this will raise wage rate. Consequently, with a higher wage, workers will raise their purchasing power to raise their ability to curb inflation rate

-Increase in productivity (5%) > Wage Rate increment (4%) > Inflation rate ðIncrease purchasing power without increasing cost

Q62. What is export competitiveness?

Competition for export demand, seen in terms of price and quality of exports

Q63. How to calculate Gini Co-efficient ratio?

Measure of inequality of wealth/income distribution.

It is measure as a ratio between 0 and 1.

A low Gini co-efficient indicates more equitable income.

Q64. How to calculate wage-to-GDP ratio?

Proportion of total wage earned individuals employed to GDP

-Ratio – 0 to 1

-Higher the ratio, the more even the income distribution

Q65. What is the difference between nominal GDP and real GDP? What is the difference between nominal GNP and real GNP?

The difference is due to the inflation rate

Q66. How does economic growth indicate improvement in standard of living?

-The rise in GDP will mean that there is a higher level of real per capita income which implies that the purchasing power of the people has improved. This will lead to a higher level of material comforts and enjoyment and this implies that their SOL has improved.

-The increase in GDP would also imply that there is an increase in the total production capacity of goods and services for the citizens and residents to consume, implying that there is a higher level of material comfort.

-A higher level of national income will enable the nation to attain a higher level of tax revenue and this will provide more funds for government to embark on infrastructural and institutional development. This will make their lives more convenient and comfortable and thus raise the SOL.

Q67. How does balance of trade imply improved standard of living?

The level of balance of trade is critical in the examination of international of economic performance, especially for nations which rely extensively on external trade for growth. Balance of trade surplus would mean that there is a higher level of export demand which will induce a higher of local production that will raise national income and employment. When the total trade in proportion to the GDP increase, it implies that the economy’s resource and production capacity has expanded which will be an indication of economic growth for countries which rely extensively on trade for growth. This is significant for export-oriented economy like Singapore and Japan

Q68. What is privatization?

The conversion of state-owned enterprises into commercial entities.

Q69. How to measure degree of openness of economy?

Openness can be seen in terms of export demand-to-GDP ratio, degree of exposure to monetary banking system, value of FDI-to-total investment ratio

Q70. What economic indicators are used?

Wage-to-GDP ratio, consumer price index, human development index, measurement of economic welfare, labor participation rate

Q71. What is productivity?

It refers to the measure of output as a result of a production process, per unit per output.

Q72. What is labor productivity?

It refers to the amount of good or service that a worker is able to produce in a given period of time.

Q73. What are economic indicators?

They are statistics that can measure the performance of an economy.

Q74. What is budget deficit?

It refers to an economic condition where the expenditure by a government, company or individual exceeds the revenue gained.


Economics Tuition Bishan – Economics Definitions – Chapter 2a – Economic Growth

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Q1. What is economic growth?

Economic growth refers to the growth of the production in term of actual or potential production capacity.

Q2. How to measure economic growth?

Economic growth is usually measured in term of the percentage change in real GDP.

Q3. What is potential growth? What is short-term growth?

Potential growth refers to the expansion of the availability of resources for production which is measured in term of rightward shift of the long run supply curve and outwards shift of the production possibility curve (PPC).

Q4. What is actual growth?

-Actual economic growth refers to the actualization of resources into monetized products and services which is commonly measured in term of the percentage change in real GDP.

-Actual economic growth is the percentage annual increase in national output actually produced that is the percentage change in the Gross National Product/Gross Domestic Product over the previous year.

Q5. What is sustainable economic growth? What is long-term growth?

Sustainable growth refers to the expansion of the actual production capacity without incurring excessive rise in cost condition.

Q6. What is the Production Possibility Curve (PPC)?

The PPC reflects the resource and production capacity an economy can attain with the given resources and technology.

Q7. What are the determinants of economic growth?

-Physical Capital

-Labour Resources

-Land and Raw Materials

-Entrepreneurship

-Technological Advancement

-Favourable cultural, social and political environment

-Legal institutions

-Cultural attitudes

-A social structure that allows fluid upward and downward mobility based on performance and merit

-Political stability

Q8. How to achieve desirable economic growth?

-Sustainable Growth

-Dimensional and Diversified Development

-Benefits of economic growth is triggered downward and widely distributed

-Minimization of opportunity cost between standard of living and growth rate and between industries

Q9. What are the positive impacts of economic growth?

-Higher Standard of Living

-Redistribution of Income is Easier

-Encourages Investment

-Provide a higher degree of employment

-Care More for the Environment

Q10. What are the negative impacts of economic growth? Why should the government not focus excessively on economic growth? Why other aims are more important that economic growth?

-Current Opportunity Costs of Growth

-May lead to structural unemployment

-May induce inflationary condition

-Inequality in Income Distribution

-Depletion of Non-Renewable Resources

-Increase in Negative Externalities

-Non-Economic Costs, such as stress and anxiety

Q11. What is Gini co-efficient?

The Gini coefficient is a measure of statistical dispersion, commonly used as a measure of inequality of income distribution or inequality of wealth distribution.

Q12. What is Gross Happiness Index?

Gross National Happiness (GNH) is an attempt to define quality of life in more holistic and psychological terms than Gross National Product.

Q13. What is Genuine Progress Indicator?

Genuine Progress Indicator (GPI) is a concept in green economics and welfare economics that has been suggested to replace gross domestic product (GDP) as a metric of economic growth.

Q14. What is life expectancy?

Average age people are expected to live to

Q15. What are the obstacles to economic growth?

-Lack of financing

-Lack of capable and efficient government bodies to develop and implement plans to achieve the aims

-Restraint of the economy

-Constraints of the policies

-Inability to control systemic factors

Q16. Why is economic growth the most important aim?

-Economic growth provides government higher tax revenue

-Economic growth will enable the government to introduce more public expenditures to help lower income group and improve infrastructural development and facilities to raise standard of living for lower income group

-Economic growth will generate greater market demand and stimulate inflow of foreign direct investment

-To expand the supply of goods and resources to curb inflationary impact

-Improvement in balance of trade and balance of payment to ensure external stability

Q17. What is a technical recession? What is economic recession?

It refers to an economic condition in which a country experiences negative economic growth for at least two consecutive quarters.

Q18. What is jobless growth?

Situation where there is economic growth without the increasing labour to increase production

-This can happen with the improvement of technology and factors of production.

Q19. What is inflationary condition? What is overheating of an economy? What is rising cost condition?

This refers to a situation where cost of production increases, leading to cost-push inflation. Typically, this condition is attributed by the inability of production capacity to meet rising aggregate demand.

Q20. What is sub-prime mortgage?

It refers to a type of loan granted to individuals that do not qualify for conventional lending as they face difficulties maintaining repayment schedule.

Q21. What is capital flow?

It refers to the movement of capital in or out of a country due to certain factors like market and investor confidence.

Q22. What are raw materials?

It refers to basic material or substance from which a product can be made.

Q23. What is physical capital?

It refers to factors of production like machinery and buildings.

Q24. What are capital goods?

They are already-produced durable goods that can be used in production process of goods and services.

Q25. What is Foreign Direct Investment (FDI)?

It refers to direct investment in production in another country, conducted by company. The investment is used to support an existing business operation or start up a new business operation.

Q26. How do countries attract Foreign Direct Investment (FDI)

Establishing improved infrastructure, maintaining political and social stability to boost investor confidence and introduce incentives that would benefit foreign investors.

Q27. Why is there overheating of an economy?

The inability of production capacity to meet the increasing aggregate demand is possibly due to increasing consumption, investment, government expenditure and net exports. Also, excessive government regulation to boost economic growth may also lead to overheating.

Q28. What is literacy rate?

It refers to the rate or proportion of the population within a country over age fifteen that can read or write, within a period of time, usually a year.

Q29. What is child mortality rate?

It refers to death of infants under five years-old within a period of time, usually a year.

Q30. What is hot money?

It refers to money held by foreign investors that is liable to switch to another country’s currency within a short notice, so as to obtain highest returns.

Q31. What is labor productivity?

It refers to the amount of good or service that a worker is able to produce in a given period of time.


Economics Tuition Bishan – Economics Definitions – Chapter 2b – Unemployment

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Q1. What is unemployment?

Refers to all individuals who are able and willing to work but not offered a job.

Q2. What is unemployment rate?

-The ratio of unemployed people to the labour force/active working population.

-Unemployed people are individuals aged 15 and above who are unemployed but are willing and able to work.

Q3. What is labor force?

Refers to both employed and unemployed individuals (aged 15 and above) that are willing to work

Q4. What is active working population? What is working population? What is working age population?

Refers to all individuals, above 15 years of age, who are able and willing to work and are employed.

Q5. What is labor participation rate?

-Conversion of inactive working population into active working population.

-Proportion of labour force that are employed.

Q6. What is inactive working population? What is economically inactive labor force?

-Refers to the portion of the labour force who is not working, does not have a job to return to, and are not looking for a job.

-E.g. Full-time students, housewife, the disabled, etc.

Q7. What types of unemployment are there?

-Demand-deficient / cyclical unemployment

-Frictional unemployment

-Structural unemployment – Technological unemployment, Sectoral unemployment

-Regional unemployment

-Seasonal unemployment

Q8. What is the equilibrium level of unemployment?

This occurs when the labour market is in equilibrium but some workers of the working are unwilling or unable to find work at the current wage level despite the fact that DDL is equal to SSL

Q9. What is disequilibrium level of unemployment?

This occurs when there is an excess labour supply where the supply of labour does not equal to the demand for labour as the workers are unwilling to settle for lower wage rate.

Q10. What is the natural rate of unemployment?

Due a combination of frictional and structural unemployment, the labour market will experience a condition of unemployment at a particular level of inflation rate. This rate of unemployment can exist even when the labour market demand equals to the labour market supply.

Q11. What is demand-deficient unemployment? Why is cyclical unemployment?

Demand-deficient unemployment occurs as a result of a fall in demand for labour caused by an economic recession under a condition of wage inflexibility where there is ‘stickiness’ in real wage rates as workers are unwilling to accept lower wages, stated by Keynes. (difficult to adjust downward)

Q12. What is frictional unemployment?

It occurs as result of poor information in the labour market which makes it difficult for workers to find employment and thus creates a time lag before workers find suitable jobs.

Q13. What is sectoral unemployment?

-Sectoral unemployment occurs when there is a change in pattern of demand and change in cost competitiveness within a particular sector of the economy

-Change in competitive advantage

Q14. What is displacement of workers?

A replacement of a batch of workers due to certain reasons

Q15. What are the various types of structural unemployment?

-Sectoral unemployment

-Technological unemployment

Q16. What is structural unemployment?

Structural unemployment is caused by the changing pattern of demand and/or supply in the economy as a result of sectoral adjustment, technological advancement, imperfect labour market and seasonal adjustment of production period.

Q17. What is regional unemployment?

-This form of unemployment occurs when a certain region experiences full employment but another region has unemployment.

-This is due to occupational and geographical immobility between regions of a country which occurs as certain regions are no longer able to attract investment to provide employment due to poor investment environment and higher wage rate.

Q18. What is technological unemployment?

-Technological unemployment occurs as a result of a change in production techniques, usually with the introduction of new technology

-Rise in Productivity lead to fall in dd for labour (displacement of workers due to use of capital) due to skill incompatibility (new technology)

Q19. What is seasonal unemployment?

It is caused by relatively regular and anticipated decline in business activity during a certain time period of the year.

Q20. How to increase labor participation rate?

-Provide more financial and social support to encourage female workers to join the labour

-Shorten the training and development process to allow new workers to enter the labour market at an earlier stage

-Extend the retirement age to sustain labour supply

-Reduce unemployment benefit/For Singapore, the government uses incentive (workfare) to encourage labour participation

Q21. What are the negative impacts of unemployment?

-Rise in opportunity of idle resources seen in term of loss of production and the need for more funding to finance the introduction of unemployment benefit -Increase in cost of government expenditure -National income will be lowered which will lead to a reduction in real per capita income. -Unemployment will also create social instability as illegal activities and crime rate will rise. -Unemployment will also lead to unequal distribution of income as the excess labour supply will drive wage rate downwards, lowering the income of the workers and this will lead to social dissatisfaction. -Unemployment will undermine the economy’s production capacity as resources are under-utilized. -Unemployment is also an indication of the loss of competitiveness as the economy may cut production and reduce employment as it cannot sustain their comparative advantage in export demand and inflow of investment into the economy.

Q22. Why should the government keep unemployment rate low? -Reduce opportunity cost of idle resources -Present budget deficit/strain – rise in unemployment rate benefit/fall in tax

-Increase production capacity

-Maintain a high SOL (more people have income to spend/tight labour market will lead to rise in wage rate)

-Prevent unequal distribution of income – to maintain social stability

-Raise tax revenue to provide financing for infrastructural and institutional development

-Ascertain competitiveness

Q23. Why is low unemployment more important than other aims?

-Unemployment may reduce the production capacity needed to propel economic growth as there is under-utilization of resources

-Unemployment may not enable the people to overcome inflation due to lower purchasing power or lack of income

-Unemployment may create inequality of distribution of income

-Curbing unemployment is more critical than curbing inflation

Q24. Why are other aims more important than low unemployment?

-External disequilibrium is likely to affect unemployment rather than the other way round

-Fall in Xd – fall in production – fall in Investment – increase in unemployment (Singapore is dependent on Xd/FDI for production which will create cyclical unemployment when there is adverse global economic downturn (as the economy tries to increase production, it will induce increase in demand for resources and the rise in cost-push inflation)

-Exchange rate fluctuation due to the fluctuation in flow of capital – unstable external prices – undermine trading activities, investment, external debt – undermine production – undermine employment

-Excessive focus on unemployment may lead to excessive inflation – fall in real wage of workers – may not encourage work efficiency – no real increase in output

-Focus on high economic growth – will lead to structural unemployment as the economy focuses on high-valued production, which is capital-intensive and technological-based. Consequently, skill incompatibility and displacement of workers will occur as a result of technological advancement and sectoral advancement.

Q25. What are the possible solutions to curb unemployment?

-Expansionary fiscal policy

-Expansionary monetary policy

-Supply-side policy

-Wage flexibility

Q26. What are the solutions to curb structural unemployment? What are the supply-side policies to curb structural unemployment?

-Infrastructural development

-Manpower development

Q27. What are the limitations of solutions to curb structural unemployment?

Workers are not receptive to retraining and upgrading.

-Employers may not want to spend money on retraining/upgrading the skills of their workers as workers may job-hop after training. (difficulty in retaining training benefits)

-High cost in adjusting the structure of the economy (increase in taxation – politically unfavourable/may increase government debt)

-Inherent constraint- limited resources

-Time lag –unable to solve unemployment in short run

-Depends on efficiency of public bodies

-Saturation of infrastructural development; because of maturity of economic development

Q28. What are the solutions to curb demand-deficient unemployment?

Expansionary Fiscal Policy

-Inducing more investment and export demand through raising efficiency and expansion of resource capacity. (fall in COP to induce profit-increase investment-raise production-increase employment) – Long-term solution

-Infrastructural development will raise production and create employment to compensate the loss in production due to fall in external demand (increase in government expenditure will raise aggregate demand, via the multiplier effect which will raise production and employment) – Short-term solution

Q29. What are the solutions to curb frictional unemployment?

Institutionalization effort has been introduced to eradicate the market -imperfection and employment hindrances, so as to facilitate information about the labour market. E.g. Work Development Agency (WDA)

-Better job information. This could be provided by government centres, by private employment agencies, or by newspapers.

-Reduce the level of unemployment benefits. This will make the unemployed more desperate to get a job and thus prepared to accept a lower wage

-Can use workfare to encourage more workers to work

Q30. What are the limitations of solutions to curb frictional unemployment?

Costly to set up and run such agencies.

-Government agencies -Tax payers’ money

-Newspaper: cost money to advertise so some do not advertise

-Clear definitions of jobs needed and most times not available leading frustrations and distrust etc

Q31. How can monetary policy curb unemployment?

In an expansionary monetary policy, the central bank will increase the money supply through the quantitative or qualitative monetary tools so as to lower interest rate which will lead to lower cost of borrowing. This will lower the cost of credit consumption which will induce higher level of consumption while the cost of borrowing will make investment more profitable, leading to higher level of investment. Consequently, there will be a rise in aggregate demand which will induce rise in national income and production via the multiplier effect. This will lead to higher level for employment in term of demand for labour resources.

Q32. How effective is monetary policy in curbing unemployment?

-Able to induce more permanent source of employment as it induces market-based investment

-Can induce more efficient and innovate production due to market-based economic activities as seen in R&D based industries

-Can create stabilizing effect on the industries due to liquidity provided through monetary policy

-Provide a greater variety of employment for investment in new industries

-Its strength lies in its impact on the influence on the level of investment which is a critical source of employment

Q33. What are the limitations of monetary policy in curbing unemployment?

-Inability of the government or central bank in controlling money supply due to liberalisation of the banking system and the influence of inflow of hot money (difficult for the economy to set capital control)

-Inelastic MEI – Investment is based on FDI and low interest rate will not lead to rise in FDI as local interest rate does not affect FDI

-Small multiplying effect – undermining the MP from expanding the economy (high MPM and MPS)

-Increase in local investment may not be able to compensate the loss in production due to fall in external demand (70% of the production in Singapore is directly or indirectly linked to external demand)

Q34. How can fiscal policy curb unemployment?

-The expansionary fiscal policy will increase the aggregate demand by raising government expenditure and lowering taxation which will contribute to the rise in the national income that will raise the production level, leading to rise in employment. Through the building of infrastructural development and provision of public services, production of goods and services will lead to more employment

-Lowering of taxation will induce investment which will lead to more production and thus, solving demand deficient unemployment.

Q35. How effective is fiscal policy in curbing unemployment?

Direct impact on production and thus, can raise employment directly through the provision of more public services and the development of infrastructure

-Have a dimensional effect – can raise the income of lower income group and improve standard of living / it will also raise the efficiency of these industries which can be achieved through government spending on infrastructural and manpower development

Q36. What are the limitations of fiscal policy in curbing unemployment?

-The provision of government expenditure will increase government debt and taxation if it requires financing (sovereign debt)

-The amount of increase in government expenditure cannot compensate the fall in production due to the fall in FDI and export demand.

-Time lag

-Crowding out effects occurs due to excessive government borrowing, which will create a contractionary effect on the expansionary fiscal policy as Investment will fall The level of investment will decrease as the cost of borrowing is higher and there is deprivation of fund for private investment – (weak planning by the government will undermine the effectiveness of the fiscal policy) borrowing)

-Excessive infrastructural development will create redundantly for the public facilities

-Efficiency of the government

Q37. How can wage flexibility system curb unemployment?

The introduction of the wage flexibility system (fixed and variable wage) will help the firms to cut down production cost so as to dampen the effects of rising cost condition and thus, prevent business failures. This will lower down the possibility for firms to conduct retrenchment. Such a policy will raise the level of employability for the workers.

Q38. How can infrastructural development curb unemployment?

-New industries are also developed with infrastructural development to provide more employment opportunities to help workers who are retrenched as there will be direct increase in production capacity. Furthermore, the infrastructural development will also raise the physical mobility of workers which will solve regional unemployment due to structural rigidities.

-In the short term, the implementation of infrastructural development will raise production and create employment to compensate the loss in production due to fall in external demand (increase in government expenditure will raise aggregate demand, via the multiplier effect which will raise production and employment.

Q39. What is Job Credit Scheme?

The recent introduction of Job Credit Scheme (form of Fiscal Policy) also aims to lower down the cost of wages so as to encourage the firm to sustain employment. (part of fiscal policy leads to a fall in cost of production [subsidy to the firm. 12.5% of wage up to 2500]

Q40. How can manpower development curb unemployment?

Raise the productivity of the workers with skills development through a constructive and efficient training system – overcome skill incompatibility and displacement of workers

Q41. How effective is manpower development in curbing unemployment?

-educational level of the workers must be at a certain level

-cost of training and availability of facilities and trainers

-difficulty in retaining training benefits

Q42. How effective is infrastructural development in curbing unemployment? What are the limitations of infrastructural development in curbing unemployment?

source of funding – budget strain

-problem of white elephant and rise of corruption


Economics Tuition Bishan – Economics Definitions – Chapter 2c – Inflation

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Q1. What is inflation?
A sustained, inordinate and general increase in prices. When this occurs, it implies that the price level has increased over the previous year and this is measured by the consumer price index.

Q2. Why is there inflation? What are the causes of inflation?
-Galloping inflation
-Mild inflation
-Hyper-inflation
-Demand-pull inflation
-Cost-push inflation
-Structural rigidities
-Imported inflation
-Asset-based inflation
-Stagflation
-Tax-based inflation

Q3. What is galloping inflation?
Price increasing beyond 2 digit annually

Q4. What is mild inflation?
Inflation rate is single digit and non-distortionary to relative price. (below 2%)

Q5. What is hyper inflation?
Extremely high inflation rate. (more than 100%)

Q6. What is stagflation?
Stagflation is an economic situation in which inflation and economic stagnation occur simultaneously and is sustained over a period of time. (Loss of output increase and rise in unemployment/rise in price level)

Q7. What is deflation?
A sustained, inordinate fall in general price level of goods and services.

Q8. How to calculate inflation rate?
Using consumer price index (CPI)

Q9. What is demand-pull inflation?
It occurs when there is an increase in the aggregate demand which will contribute to excess demand condition which will lead to the rise in price level under rising cost and full employment condition

Q10. What are structural rigidities?
It refers to the condition of immobility of economic resources due to the inflexibility structural establishments that will lead to rising cost condition as here is a rise in unit cost of resources.

Q11. What is cost-push inflation?
It occurs when there is a rise in cost of production which will lead a fall in the aggregate supply that will lead to an excess demand condition, contributing to increase in price level. When the cycle becomes cyclical, it will develop as wage-price spiral or price-wage spiral.

Q12. What are the various types of cost-push inflation?
Imported inflation
Tax-based inflation
Structural rigidities
Asset-based inflation

Q13. What is asset-based inflation?
It occurs when there is rising prices of assets which will lead to rising cost of condition in term of mortgage loan that will rise of the cost of rental and thus, contributing to cost push inflation

Q14. What is imported inflation?
The rise in global price of certain essential goods or global boom will cause the price of imports to rise which will lead to a rise in cost of living and cost of production, contributing to cost-push inflation. For example, rise in the price of oil.

Q15. What is tax-based inflation?
Increase in indirect tax like GST will encourage producers to raise their price of goods and services. This will trigger the cost of production at respective production and distribution especially in industries where value of tax is not separated from the price of goods (Listed price: $2.00, GST: $0.14)

Q16. What is the internal value of money?
The purchasing power of a unit of local currency on local goods and services which is inversely determined by the price level.

Q17. How to determine the internal value of money?
-Decrease in price level will raise the value of money which will lower purchasing power
-Increase in price level will lower the value of money which will raise purchasing power

Q18. What is the external value of money?
The purchasing power of local currency in foreign denomination on foreign goods and services

Q19. What is cost of living?
A theoretical price index that measures the difference in the price level of the amount of good and service one needs to spend in order to maintain the livelihood in an economy.

Q20. What is cost of living index?
It measures the percentage change in unit cost of production of any particular industry.

Q21. What is Consumer Price Index (CPI)
CPI measures relative changes in value of money as a percentage variation in the general price level over a period of time. Price changes are expressed as an index number to show how it differs from a reference/base year.

Q22. What is price-wage spiral?
It happens when big business corporations increase price to increase their profit margin. Cost of living rises and unions may ask for higher wages to make up for loss of living standards. Cost of production and prices eventually will rise.

Q23. What is wage-price spiral?
It happens when powerful union demands for higher wages but is not matched by a corresponding higher increase in productivity. It leads to higher prices and inflationary pressures. Higher prices then lead the unions to again demand higher wages, and the spiral continues.

Q24. What are the internal factors of inflation?
-Impact on Investment, Production and Employment
-Unequal distribution of income
-Reduction in level of saving
-Increase in cost of living
-Worsen standard of living
-Undermine main function of money
-Misallocation of money
-Increase in cost of adjustment to adapt to inflation

Q24. What are the external factors of inflation?
-Loss of international competitiveness
-Balance of trade and payment deficit
-Depreciation of exchange rate

Q25. What are the negative impacts of inflation?
-Loss of international competitiveness
-Balance of trade and payment deficit
-Depreciation of exchange rate
-Impact on Investment, Production and Employment
-Unequal distribution of income
-Reduction in level of saving
-Increase in cost of living
-Worsen standard of living
-Undermine main function of money
-Misallocation of money
-Increase in cost of adjustment to adapt to inflation

Q26. How can monetary policy curb inflation?
With contractionary MP, central bank of the country will reduce money supply by selling treasury bonds and raising interest rates of borrowing. Higher interest rates will push consumers to save and consume less since the opportunity cost of consumption has increased and the cost of credit consumption is higher. As for investment, it will fall as there is increase in cost of borrowing, leading to reduction in profitability. Consequently, AD will decrease and through reverse multiplying process, price will decrease and inflation is curbed, since the excess demand condition is eradicated.

Q27. How effective is monetary policy in curbing inflation? What are the limitations of monetary policy in curbing inflation?

-Central Bank cannot control the money supply due to the presence of foreign banks / liberalisation of the banking system
-MEI is interest inelastic – increase in cost of borrowing will decrease investment less than proportionally – interest rate is not reflected on Investment) – Singapore is FDI dominated / if the business confidence is high, the rise in interest rate will not decrease the level of profitability as the level of revenue is still high and thus, the interest is still profitable.
-Although price level stabilizes, there is no growth in the economy. In more extreme cases, the economy will shrink.
-Increases in interest rates will attract hot money inflow from other countries and this will raise the local money supply which will lower the interest rate, making it difficult for the government to conduct contractionary monetary policy.

Q28. How can fiscal policy curb inflation?
Fiscal policy in the contractionary mode decreases government expenditure (G) and raises tax to curb inflation. Reducing G would mean that the government stops spending on public facilities and welfare so that total money supply in the economy is reduced. Increase in taxes will lower the disposable income of the consumers, and reduce profitability after tax and thus decreases government expenditure, consumption and investment

Q29. How effective is fiscal policy in curbing inflation? What are the limitations of fiscal policy in curbing inflation?
-Raising tax is a bad political move as it may cause social unrest
-Time lag for policy implementation
-Reduction in essential infrastructure development for the public is not -beneficial (Lower standard of living, lower productivity for the private and public sector)
-Cannot control imported and cost-push inflation

Q30. How can exchange rate management policy curb inflation?
-The Central Bank will intervene into foreign exchange rate market to raise the exchange rate by direct intervention where the central bank increases the demand for local dollars through buying of local dollars and selling forex.
-Alternatively, some economies may conduct exchange rate monetary policy by raising interest rate to attract more capital inflow to induce an increase in demand for local dollar which will also appreciate the exchange rate. This will help to curb imported inflation.

Q31. How effective is exchange rate management policy curb inflation? What are the limitations of exchange rate management policy curb inflation?
-Strong exchange rate makes import cheaper reduce cost of raw material.
-Exports would be more expensive in terms of foreign currency – fall in X, assuming Marshall-Lerner condition – unemployment in export industries (fall in production)
-Government needs to set aside funds for intervention in FOREX market – raise the opportunity cost of resource – less economic development
-Exchange rate management by raising interest rate is short-lived, since the speculator will sell local $ when it appreciates, therefore increasing the supply of local $ which will lower exchange rate

Q32. How can direct regulation curb inflation?
-Price control – Price ceiling for certain goods below equilibrium
-Income Policy – capping wage at a certain level/Flexible wage structure – fall in variable wage during inflation – dampen cost-push inflation
-Wage and price control seeks to curb wage-price inflationary spiral

Q33. How effective is direct regulation in curbing inflation? What are the limitations of direct regulation in curbing inflation?
Due to extensive government regulation in building facilities, the government is able to control the cost of living to prevent the inflationary spiral
Price policy is against the principle of market forces which wage controls depends on the corporation of the free trade union

Q34. Why should inflation rate be kept low? Why is low inflation rate more important than other aims?
-Low inflation helps to prevent unequal distribution of income
(Price of goods for resources is not lowered which will sustain the purchasing power of the lower income group while the price of assets will not rise excessively to raise the wealth of the rich – income and wealth disparity will not widen – social dissatisfaction will be minimised – social stability is promoted)
-It also prevents rise in cost of living and cost of production.
-It also maintains purchasing power and ability to save.
-It will induce investment, production and employment, prevent misallocation of resources
-It helps to maintain international competitiveness due to cost competitiveness
-It helps to prevent the occurrence of balance of trade deficit.
-It helps to prevent fluctuation of exchange rate (depreciation).

Q35. What is inflation rate?
The rate of inflation is calculated as the rate of in¬crease of a price index.

Q36. What is rising cost condition? What is inflationary condition?
This refers to a situation where cost of production increases, leading to cost-push inflation.

Q37. What is direct regulation?
It refers to the direct government intervention, where all economic decisions are made by the government itself.

Q38. What are the possible solutions to curb inflation?
-Contractionary monetary policy
-Contractionary fiscal policy
-Strong exchange rate management policy
-Supply-side policies like infrastructural development, manpower development, technological development

Q39. What is core inflation?
It refers to the measurement of inflation that excludes specific items that experience volatile price changes, such as private accommodations and transport costs.

Q40. What is speculation?
It refers to the buying or selling of a financial asset, so as to reap quick profit.

Q41. What is hot money?
It refers to money held by foreign investors that is liable to switch to another country’s currency within a short notice, so as to obtain highest returns.

Q42. What is capital flow?
It refers to the movement of capital in or out of a country due to certain factors like market and investor confidence.


Economics Tuition Bishan – Economics Definitions – Chapter 3 – Aims of Government & Macroeconomic Policies

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Q1. What are the aims of government?
Economic growth, full employment, balance of payment equilibrium, price stability and equitable distribution of income.

Q2. What is economic growth?
Economic growth refers to the growth of the actual or potential production capacity.

Q3. What is sustainable economic growth? What is long-term growth?
An increase in real GDP without experiencing inflationary condition.

Q4. What is full employment?
Full employment would refer to the full utilization of resources for the production capacity which is measured in term of employment rate.

Q5. What is price stability?
-Price stability is measured by the consumer price index which will indicate whether there is inflation or deflation.
-With price stability, the economy is able to maintain the cost of living and cost of production and thus avoid the detrimental impact of deflation and inflation.

Q6. What is balance of payment equilibrium?
At BOP equilibrium, there is no excessive deficit and surplus of the balance of payment and trade which will affect the flow of the currency and thus affect the exchange rate.

Q7. What is equal distribution of income? What is equity?
-Income distribution is measured by the Gini coefficient and Wage to GDP ratio.
-The lower the Gini co-efficient and higher wage to GDP ratio, the less income disparity.

Q8. What is jobless growth?
-Situation where there is economic growth without the increasing labour to increase production
-This can happen with the improvement of technology and factors of production.

Q9. What is demand-side management policy?
It is a policy that influences aggregate demand so as to meet certain macro-economic objectives.

Q10. What is supply-side management policy?
-Through the implementation of the policies, the government can expand the availability of resources (supply of resources) and increase the utilization of resources (productivity of wage) thereby increasing the supply of the goods and services to raise actual and potential growth without incurring rising cost condition.
-It involves the implementation of policies to (1) increase the rate of utilization of resources so as to raise actual production capacity and (2) the expansion of the availability of resources to raise potential production capacity

Q11. What is monetary policy?
The policy involves the variation of money supply and interest rates by the central bank to affect the level of economic activity in an economy to achieve certain macro-economic objectives.

Q12. How does expansionary monetary policy work?
When expansionary monetary policy is conducted, the government will increase the money supply through the buying of government bonds which will lower interest rate. This will lower the cost of credit consumption and reduces the reward for saving which will encourage more consumption and reduce willingness to save. Also, the level of investment will be raised as the level of profitability is raised since the cost of investment is lowered as lowering interest rates lowered the cost of borrowing. Consequently, there will be a rise in consumption and investment which will raise the aggregate demand, via the multiplier effect and thus raises the real GDP, production and employment.

Q13. How does contractionary monetary policy work?
When contractionary monetary policy is conducted, the government will reduce the money supply through the selling of government bonds which will raise interest rate. This will raise the cost of credit consumption and raise the reward for saving which will discourage consumption and reduce willingness to save. Also, the level of investment is lowered as the level of profitability is reduced since the cost of investment is higher as rising interest rates raised the cost of borrowing. Consequently, there will be a fall in consumption and investment which will lower the aggregate demand, via the reverse multiplier effect and thus lower the real GDP, production and employment will lower price (curb inflation).

Q14. What are the benefits and limitations of expansionary monetary policy?
Benefits
-Can create a more market-oriented impact on the economy which is more permanent as it induces private investment
-Market-based economic activities will be more effective as the production may be more innovative and efficient (more diversified form of investment – dynamic for economic development – more sources of growth of NY and greater variety of employment opportunities
liquidity provided by the government will induce stability for the economy (more money supply will enable higher level of consumption/more fund for business operation) – more cash flow

Limitations
-Inability of the central bank in controlling money supply due to liberalization of the banking sector
-Inelastic MEI – Investment is based on FDI and low local interest rate cannot affect FDI/Market pessimism may not induce borrowing
-Small multiplying effect-undermining the MP from expanding the economy(high MPS and MPT)
-Increase in local investment may not be able to compensate the loss in production due to fall in external demand

Q15. What are the benefits and limitations of a contractionary monetary policy?

-Ineffective if the interest elasticity of capital/investment (MEC/MEI) is highly inelastic. E.g. due to positive business expectations (Investors are still willing to increase investment despite high cost of financing.)
Effectiveness is reduced if the MPW in the country is high and k is small
-Unrestricted movement of short term capital (hot money) will reduce effectiveness. Appreciation of S$ will be dampened by profit-taking – Appreciation is for very short period (speculator will sell local $ – raise SS of local $ – exchange rate depreciates immediately)
-Hence, exchange rate MP is usually introduced along with capital control
-Higher interest rates may be politically unpopular as it increases cost of servicing mortgages on residential and industrial properties.

Q16. What is fiscal policy?
The policy involves the variation of government expenditure and taxes to affect the level of economic activity in an economy to achieve certain macro-economic objectives.

Q17. How does expansionary fiscal policy work?
-It is used to solve recession or curb unemployment by raising aggregate demand
Increase in government expenditure – increase aggregate expenditure directly through infrastructural development and provision of public services
-Tax reduction – increase disposable income – raise consumption and increase return on investment, (lower tax on corporate earnings) contributing the rise in investment expenditure – rise in aggregate expenditure/national income (multiplier effect)
-This will close up the deflationary gap and thus curb recession.

Q18. How does contractionary fiscal policy work?
-It is used to curb demand-pull inflation by lowering aggregate demand
-Decrease in government expenditure will decrease aggregate expenditure directly.
-Tax increment will reduce disposable income and thus lower consumption while the return on investment decrease due to higher tax on corporate earnings, contributing the fall in investment expenditure
-The effect will lead to the fall in aggregate expenditure which will decrease national income via the reverse multiplying effect. This will close up the inflationary gap and thus curb inflation.

Q19.What are the benefits and limitations of an expansionary fiscal policy?
-Low multiplier – reduces effectiveness of policy (High MPS/High MPM)
-Crowding out effect – If the government expenditure is financed through borrowing from the public through the issues of government bond – increase in demand of loan – increase in interest rate-increase in cost of borrowing-discourage private investment as there is deprivation of fund for private investment and higher cost of borrowing due to high interest rate [contractionary effect that undermines the impact of expansionary FP]
-Fiscal drag – income increases (expansionary policy) – public in a higher tax bracket – slower growth in disposable income – slower increase in C – reduces effectiveness of FP. This is the result of automatic stabilizers that are in place in the fiscal system
-Time lag
-High cost of financing
-Saturation of infrastructural development will lead to under-utilization of public facilities

Q20. What are the benefits and limitations of a contractionary fiscal policy?
-Low multiplier- reduces effectiveness of policy
-Time lag
-Expenditure on public works projects already happening cannot be cut. Reductions in expenditure may be minimal. (lower SOL/undermine efficiency of industries)
-raising tax is politically unfavourable
-Cannot be used to solve cost-push inflation (raise tax to raise AD will lead to tax-based inflation) and imported inflation

Q21. What is exchange rate management policy?
-The foreign exchange system attempts to adjust the foreign reserves of the country to influence the exchange rate which will affect the trading and investment activities that affect FDI, imports and exports to achieve macro-objectives.
-When exchange rate is managed with the adjustment of interest rate by influencing the local money supply, it is known as the monetary exchange rate policy.

Q22. How does strong exchange rate policy work?
-Increase in exchange rate – imports cheaper in domestic currency – reduce imported inflation.
-This can be done through the manipulation of the FOREX market through direct buying of the local currency, implying an increase in demand for the currency which will appreciate the foreign value of the local currency

Q23. How does weak exchange rate policy work?
-Fall in exchange rate – exports becomes relatively cheaper in foreign value and imports relatively more expensive – rise in (X-M) assuming Marshal-Lerner condition – rise in AE, increases employment and growth.
-This can be done through the manipulation of the FOREX market through direct selling of the local currency, implying an increase in supply for the currency which will depreciate the foreign value of the local currency

Q24. What are the benefits and limitations of a strong exchange rate policy?
-Limit on how much exchange rate can be appreciated – amount of forex available/extensive fluctuation in price of global resources
-Price of imported resources may rise excessively – appreciation may be too extensive – need to raise more forex but the country may have limited forex reserve
-Resource owners may raise the price of resources as the value of US$ owned by the resource owners may be lowered, prompting them to raise the price of oil
-Exports would be more expensive in terms of foreign currency – fall in X, assuming Marshal-Lerner condition  unemployment in export industries
-Government needs to set aside funds for intervention in forex market – Rise in opportunity cost – seen in terms of the usage of fund for other aspects of economic development.
-Appreciation – raise price of export – fall in export demand – loss of export competitiveness
-Solution: Produce high-value production – Ped of exports is price-inelastic – But reliance on technological advancement – structural UN+

Q25. What are the benefits and limitations of a weak exchange rate policy?
-Import prices would be higher in terms of domestic currency- imported inflation
-Government needs to set aside funds for intervention in forex market
-Exchange Rate Depreciation will not raise Xd or FDI if the world economy is in a recession as the fall in Xd/FDI is due to lower foreign NY. Hence, price of export demand falls – will not raise Xd (e.g. sub-prime market crisis in 2009)

Q26. What is infrastructural development?
Build up facilities to attract more investment and raise the productivity of the economy. This will lead the expansion of the PPC – widen the scope of economic growth

Q27. What are the benefits and limitations of infrastructural development?
-Source of funding – budget strain
-Problem of white elephant and rise of corruption

Q28. What is trade facilities development?
The development of international air and sea routes with air and sea ports acquired by the national-linked PSA and CAAS along with the national airlines and shipping firms to help to provide trading facilities to help to promote trade and investment. This is vital to Singapore to place herself as a global city.

Q29. What is capital accumulation?
Creation of a financial centre for the creation of funding for investment (Raise EG) – cost of funds for Investment falls (for low i/r)

Q30. What are the benefits and limitations of capital accumulation?
-Requires financial knowledge and expertise
-Political stability

Q31. What is manpower development?
Raise the productivity of the workers with skills development through a constructive and efficient training system – overcome skill incompatibility and displacement of workers

Q32. What are the benefits and limitations of manpower development?
-Educational level of the workers must be at a certain level
-Cost of training and availability of facilities and trainers
-Difficulty in retaining training benefits

Q33. What is technological development?
-Raise the technological level of the economy through training and research and development (raise competitiveness – Raise EG) – will raise the efficiency of production
-Decrease cost of production but may create structural unemployment as technological advancement will contribute to skill incompatibly and displacement of workers due to greater use of machinery

Q34. What are the benefits and limitations of technological development?
-Requires the facilities and pools of skilled labour
-Problems of funding
-Source of technological transfer – depends on the developed nations
-The need of a research environment
-The need of intellectual property right law

Q35. Why does Singapore introduce supply-side fiscal policy instead of demand-side fiscal policy?
– FP-affect AD-Demand-side implication
–depending factors –time period
–impact on resource (change in AS) or production capacity (change in AD)
-FP-affect resource capacity-affect potential growth (SS-side implication) – outward shift of the LRAS. Infrastructural development and manpower development will enhance mobility of resource, which will expand availability of resources – shift LRAS to the right – lower cost of production to reduce price –-Raise in AD on a quantity basis, raise real GDP (achieving sustainable EG)

Q36. What is supply-side fiscal policy?
-A set of government economic policies which aims to change the underlying structure of the economy and improve both the resource capacity of markets and efficiency of the industries, and also that of individual firms and workers within markets so as to aim to achieve the aims of the economy.
-The policy will either raise the efficiency of production which will decrease cost of production, contributing to change in the aggregate supply or the expansion of resources which will lead to outward shift of LRAS.

Q37. What are tariffs?
A tariff is a tax levied on imports mainly to protect home industries by making import less competitive than local products. Tariffs- increase price of imported goods – increase in quantity purchased of domestic goods and fall in quantity of imports. (import substitution – raise local production to raise employment)

Q38. What are the benefits and limitations of tariffs?
-Tariffs bring revenue to the government
-Tariffs increase prices. It will have little impact on quantity if the demand for import is inelastic
-Domestic customers have to pay a higher price. This means more inefficient local producers are able to sell their product
-Deadweight loss is created due to resource misallocation
-Retaliation measures may be undertaken by the exporting countries

Q39. What are subsidies?
-Fall in COP
-fall in price of exports lead to raise in export demand
-fall in price – Import Substitution – Replace foreign imports with cheaper local goods
-Subsidies can be given in the form of outright cash payments to a domestic producer, or they could also be indirect in the form of tax concessions, loans at below market interest rates, etc. These provide domestic firms a cost advantage, a subsidy allows them to market at lower prices than their foreign competitors

Q40. What are the benefits and limitations of subsidies?
It may lead to a drain in government resources as subsidies invoke government expenditure that could have been spent on development projects. Taxpayers eventually pay for the subsidies.

Q41. What are quotas?
Quotas take the form of a physical limitation on the quantity of the commodity or value of the commodity which is allowed to enter the country in a given year. It is usually enforced by issuing licenses to some group of individuals or firms

Q42. What are benefits and limitations of quotas?
-Quotas do not bring revenue to the government
-It is usually set on the basis of certain volume which may grow increasingly out of date with times. This might penalize a local form that wishes to expand its production
-It might invite retaliation measures by the exporting countries

Q43. What are exchange controls?
Control the amount of FOREX available for exchange

Q44. What are embargos?
Total ban on particular good

Q45. What is Free Trade Agreements (FTAs)?
-Deals struck, usually between 2 nations, or sometimes with a grouping of nations to increase bilateral trade through measures such as cutting tariffs on most goods.
-The main aim is to spur trade and investment between the 2 sides

Q46. What are the benefits and limitations of Free Trade Agreements (FTAs)?
Benefits
-Trade creation as removal of tariffs encourage greater volumes of trade between signatories (to lower cost of product through outsourcing by trade)
-Availability of larger markets – a larger market place and broaden business opportunities for firms. Also FTAs help suppliers to offer their services to customers in partner countries
-Removal of tariffs translate to savings and lower prices- Goods and services cheaper in partner country due to tariff savings- increased X, reductions in tariffs on some categories of goods, e.g. alcoholic drinks- cheaper goods for consumers/ greater variety of goods
-Job creation and growth opportunities due to increase in investment and trade- FTAs will encourage more FDIs between the signatory countries -job opportunities and increased productive capacity (long term economic growth) – diffusion of technology
-Fewer restrictions on services trade, foreign investment, flow of profits and flow of labour e.g. USSFTA – liberalization of banking services- Citigroup can tap into local network. Singaporeans find it easier to work in US and more US and Australian universities are recognized in Singapore
-Helps small nations like Singapore remain competitive and build better goodwill between countries

Costs
-Trade diversion – trade is diverted away from cheaper nation in favour of a less efficient tariff free member of FTA
-May incur higher cost of production- e.g. in Singapore- US FTA, textile and apparels must use yarn that are from Singapore or US which may not be the cheapest source to get duty-free treatment
-Poorer countries may be left out from enjoying benefits of FTAs signed between richer countries or may get the losing end of a FTA signed due to the inability to bargain with a powerful developed partner
-Greater income inequality within countries may benefit the larger firms rather than the SMEs
-Increased dependence on foreign countries may be risky particularly tor strategic goods and necessities

Q47. What are the benefits and limitations of direct controls?
-May face problems with militant trade unions – strikes – education in production- increase in inflation
-wage structure will help to keep cost of wage down to prevent retrenchment to sustain employability – prevent retrenchment

Q48. What are price policies?
-Price ceiling set below equilibrium
-May increase the supply of the resources through the government buffer stock

Q49. What are the benefits and limitations of price policies?
-Suppressing the symptoms of the problem without addressing the main cause -Shortage of supply-How to raise supply?
-May lead to severe shortages – rationing – administrative costs to government
-Shortages- illegal activities (smuggling, black markets, etc.)
-Most effective in curbing wage-price spiral (Advantage)

Q50. What is rising cost condition? What is inflationary condition?
This refers to a situation where cost of production increases, leading to cost-push inflation.

Q51. What is trade facilities development?
The development of international air and sea routes with air and sea ports acquired by the national-linked PSA and CAAS along with the national airlines and shipping firms to help to provide trading facilities to help to promote trade and investment. This is vital to Singapore to place herself as a global city.

Q52. Why is monetary policy ineffective in Singapore?
-Singapore is an interest-rate taker in the international financial market
-lack of control of MS-liberalisation of banking sector
-MEI is interest-inelastic -small k
-Govt focuses on the control of exchange rate rather than interest rate – need to stabilize the exchange rate since external demand is 4.5 times of GDP
-Imported inflation is a significant source of inflation – use exchange rate management to control inflation

Q53. Why does Singapore adopt an exchange rate management policy?
Ped export is price-inelastic – Appreciation – raise price of exports in foreign value – fall in export demand – total revenue of exports ¬ will still increase (Why Ped of exports is price-inelastic – export demand is high-value added – low degree of substitution)
-Strong exchange rate – fall in import prices – fall in cost of production – fall in export price – fall in export demand – maintain export competitiveness – fall in import price – fall in cost of living – prevent wage increment – lower COP – fall in export prices

Q54. Why Singapore cannot conduct depreciation of exchange rate to solve the lack of external demand and Foreign Direct Investment (FDI)?
-Depreciation – rise in import prices in local value – rise in COL/ rise in COP – fall in cost of competitiveness and increase the need to raise wages
-Depreciation – fall in real wage of foreign workers in term of foreign value – will induce wage increment – raise COP
-Depreciation may not raise export demand / raise FDI if the fall in XD/FDI is due to fall in NY of foreign nations
-Need of a strong exchange rate to stabilize Singapore as a financial centre (must ensure foreigner savings, will be maintained in future value) – encourage Singapore to become a wealth-management centre

Q55. What are assets?
It refers to an output good or factor of production that can be partially consumed or used up in production respectively. For instance, a car.

Q56. What is Marshall-Lerner condition?
It refers to an economic condition that affects the effectiveness of currency revaluation, when the sum of elasticity of demand for imports and exports is greater than one.

Q57. What is a flexible wage structure?
It refers to a system that allows for fluid changes in wage of workers, so as to ensure that they can cope with the cost of living and maintain current standard of living.

Q58. What are direct controls?
Income Policy (Reduce inflation)/Flexible Wage Structure
-keep Wage Cost competitive
– fixed portion
-variable portion is adjustable
-Wage cuts freeze – fall in COP – Maintain employment
-Wage increases to move in line with productivity


Economics Tuition Bishan – Economics Definitions – Chapter 4a – International Trade

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Q1. What is the Theory of Comparative Advantage? What is comparative advantage?
Comparative advantage is seen when a country has a lower relative opportunity cost in the production of a good when compared to another country in the respective areas of production for similar given resources, despite not producing more units of goods as compared to another country. (One country is efficient in the production of both goods while the other country is inefficient in the production of both goods: specialisation for the efficient country is based on the goods with higher relative efficiency while specialisation for the production of country which is inefficient is based on the good with lower relative efficiency.

Q2. What are the conditions for specialization?
-2 countries
-2 commodities
-No transportation costs
-No trade restrictions
-No foreign exchange difficulties
-Constant returns to scale in both industries in both countries
-Perfect knowledge and perfect mobility of factors within the country
-Limited resources of each country are fully employed

Q3. What is absolute advantage?
Absolute advantage is seen when a country can produce more units of a good as compared to another country for the given level of resources. (One country is efficient in the production of one good while the other country is efficient in the production of another good)

Q4. What is trading price? How is trading price derived?
It is derived from the term of trade which is based on the opportunity cost. The international trading must be within the range of the term of trade such that the trading price based on opportunity cost is higher than the opportunity cost of the exporter or seller and lower than the opportunity cost of the importer or the buyer.

Q5. What are the detriments of international trade?
-Increasing competition between countries leads to the closure of small local firms
-Encourage the depletion of resources
-Expose the economy’s vulnerability in term of over dependency for economic growth
-Stifle the country’s creativity and adaptability of the workers as it promotes specialization
-Stifle economy from exploring other areas of growth

Q6. What are the benefits of international trade?
-Countries can now reap the advantages of economies of scale. (cost saving gained from large scale production – fall in AC=TC/increase in Q) With increased trade, there would be increased market demand. Thus production will increase, allowing firms to reap EOS, lowering average costs of production
-Consumers can now enjoy a greater variety of goods and services. This would increase the standards of living in the country since the consumer can enjoy other types of goods, which the country is not able to produce due to both natural and man-made constraints.
-Trade can also enhance greater efficiency in production through greater specialization. This would allow firms to cut down on costs of production, which could lead to lower prices that consumers can enjoy.
-With trade, the country’s PPC can be shifted outwards as the availability of resources increases
-A country embarking on economic development can now import more capital equipment and raw materials for its economic development. In due time, the country will be able to expand the production capacity and hence achieve economic growth
-A wider variety of goods and services at a lower price level for consumption to raise consumer satisfaction, satisfying their taste and preferences
-Firms are able to enjoy both internal and external economies of scale – large scale of the market – increase in production – reap EOS and lower average cost of production
-Increasing world output – specialization based on comparative advantage – will raise the efficiency of production of the respective countries which specialize – thus raising world output
-Countries with surplus of raw materials can export these in exchange of other goods and services – enable optimization of resources at a global scale – reduces wastages
-Increased competition among suppliers in world markets – raise the efficiency of production – the world market has more producers
-Provide growth for the nations engaged in trade as there is greater market and flow of foreign direct investment – raise the production capacity and opportunities of employment
-Facilitates transfer of knowledge and technology
-Promotes beneficial political links

Q7. What are the limitations of comparative advantage? Why the theory of comparative advantage cannot be used to explain the trade pattern?
-Countries will trade with another country without comparative advantage in trade – buy from source with a higher price level – Proximity of the countries – lower transport cost will reduce trading price
-There may be trade restrictions and exchange rate fluctuations distorting the international trading price, making it less beneficial to trade with these countries

Q8. What is dynamic comparative advantage?
Dynamic CA refers to the capacity of the economy in adjusting its comparative advantage to raise international competitiveness

Q9. Why should countries trade?
-To overcome the lack of resources – small economy
-To derive an international market – to overcome the limitation of small nation (lack of market)
-To use trade as a means to increase competitiveness – derive lower cost of imports to lower cost of production – to attract more FDI and increase export demand
-Use FTA to raise Xd so as to induce more FDI – FDI will increase because MNC only invests in Singapore as we can export due to our export capacity

Q10. Why should countries diversify their economic development?
-To avoid the disadvantages of specialization
-To reap the advantage of diversification

Q11. What are the advantages of diversification?
-Widen the scope of economic growth
-Provide a greater variety of jobs for employment
-Provide greater synergy of the economy to enhance the integration of the industries which raise our competitiveness as a global hub for trade and investment

Q12. How to interpret terms of trade (TOT)?
-A country’s TOT worsens when the unit value of its imports rises by a bigger % than the unit value of its exports.
-A deterioration in TOT means that the country is able to obtain less foreign goods for the same quantity of exports
-A country’s TOT improve when the unit value of its imports rises by a smaller % than the unit value of its exports
-An improvement in TOT means that the country is able to obtain more foreign goods for the same quantity of exports
-Improvement in the TOT for one country is deterioration in the TOT for another country

Q13. How to calculate terms of trade (TOT)?
For TOT Index: Index of price of exports/Index of price of imports

Q14. What is the significance of Terms of Trade (TOT)? 
-Affects BOT (Change in TOT will affect export and import demand
-Affects Global equality of distribution of Y and wealth
-Determine the degree of expansion of economy of resource capacity – can attain potential growth easier
-May affect the cost of living as the price of import will be affected while the price of export will affect export demand and the level of production and national income
-May affect SOL as TOT will affect our price of imports and exports which will affect our export and import demand

Q15. What is Free Trade Agreement (FTA)?
A free trade agreement involves the abolishment of tariffs and other forms of trade restrictions and it may include other forms of de-regulations such as:
-Abolishment of restriction on mobility of resources and fund
-Intellectual Property rights
-Protection of Investment and Return

Q16. What are the factors affecting terms of trade (TOT)?
-Lower prices of imports
-Higher prices of exports
-Changes in exchange rate
-Inflation rate – affect cost of production – affect price of export and import
-relative income level
-taste and preference of the products
-change in exchange rate
-comparative advantage – affected by the change in cost of production
-structural changes in the economy – economic development

Q17. How do Terms of Trade (TOT) affect the Production Possibility Curve (PPC)?
International trading price will make the term of trade more favourable for trading countries to allow them to shift the PPC outward to TPC to allow higher level of consumption beyond PPC (TOT range, 10C<1W<15W)

Q18. How do favorable terms of trade (TOT) affect an economy?
-If the favourable TOT is due to improvement in the quality of the product which will raise the export demand and the price of exports, there will be a higher level of production which will raise national income and employment. Furthermore, when the export demand is price-elastic, it will induce rise in export revenue which will lead to higher level of production, employment and rise in national income.
-If the favourable TOT is due to rise in cost of production, there will be a rise in price of export demand which will decrease export demand. Subsequently, a fall in production, employment and national income. Furthermore, when the export demand is price-inelastic, the total revenue for export will decrease. Therefore, it can be seen that favourable TOT will lead to favourable and less harmful impact.

Q19. What is import substitution strategy?
Strategy to replace imported goods and services by producing them domestically.

Q20. What is protectionism?
The act of imposition of trade barriers on the importing of goods and resources by regulating the prices or quantity of the imported goods and resources so as to encourage the growth of local production. This is line with the notion of import substitution strategy, which involves the replacement of imports with local production.

Q21. What methods of protectionism are there?
-Tariffs or Custom Duties
-Quotas
-Import Licenses
-Embargos on Imports
-Subsidies
-Exchange Controls

Q22. Why should countries use protectionism?
-Protect growing industries
-May help to widen the scope of economic growth
-Prevent dumping
-Allow declining industries to phase out gradually
-Dampen impact of unemployment during recession
-Protect home industries from foreign competition
-Retaliate against another country
-Correct balance of payment disequilibrium
-Protect key industries to sustain economic growth
-Allow economy to be more self-sufficient

Q23. What is trade diversion?
Where a customs union results in greater specialization according to comparative advantage, and hence a shift in production from higher cost to lower cost sources.

Q24. What are the benefits and limitations of Free Trade Agreements (FTAs)?
-Minimize conflicts between nations
-Common market allows more efficient trade
-Guaranteed increase in trade
-Unable to protect infant industries

Q25. How does Free Trade Agreements (FTAs) benefit advanced economies? How does Free Trade Agreements (FTAs) benefit developed nations?
-Raise the standard of living through trade which allows the consumers to attain a greater variety of goods and services at lower price – seen front the expansion of consumption possibilities
-Expand the potential and actual growth of the economy as specialisation and trade will raise resource and production capacity
-Expand their export market which will allow the MNCs to attain economies of scale through large scale of production made possible from EOS.
-Attain more resources to expand their production capacity to achieve sustainable economic growth

Q26. How does Free Trade Agreements (FTAs) benefit emerging economies? How does Free Trade Agreements (FTAs) benefit developing economies?
-Raise the standard of living through trade which allows the consumers to attain a greater variety of goods and services at lower price – seen front the expansion of consumption possibilities
-Expand the potential and actual growth of the economy as specialisation and trade will raise resource and production capacity
-Provide massive employment as trade will encourage more investment which will raise large scale of production that induces employment.
-Attain a higher level of technology through transfer of technical knowledge
-Attain more fund for investment which will allow the nation to pursue economic development, overcoming the lack of funding for economic development

Q27. What are the detrimental impacts Free Trade Agreements (FTAs) have on advanced economies? What are the detrimental impacts Free Trade Agreements (FTAs) have on developed nations?
-Increase the complexity of trade which will complicate the bureaucratic process and raise transaction cost
-Reduce the source of government revenue which will lead to the government to impose tax on the local people and thus, raise the tax burden of the people
-Encourage the growth of market power as the firms are likely to grow and thus, raise the degree of consumer exploitation
-Create structural unemployment as the developed nations adjust their comparative advantages which will contribute to the change in the sectors of the economy

Q28. What are the detrimental impacts Free Trade Agreements (FTAs) have on emerging economies? What are the detrimental impacts Free Trade Agreements (FTAs) have on developing nations?
-Increase the complexity of trade which will complicate the bureaucratic process and raise transaction cost
-Reduce the source of government revenue which will lead to the government to impose tax on the local people and thus, raise the tax burden of the people
-Encourage the growth of market power as the firms are likely to grow and thus, raise the degree of consumer exploitation.
-Accelerate the exploitation of resource utilization, thus undermining the potential growth.
-Create unequal distribution of income and wealth as portion of the population who fail to capitalize on the economic development will be undermined
-Develop vulnerability as the economy relies extensively for the global market, subjecting the economy to the global trade cycle and economic trends and crisis

Q29. What are the impacts of international businesses? What are the impacts of foreign direct investment (FDI)?
-Facilitate transfer of knowledge and technology
-Reduce the need for infrastructures that FDI brings in
-Dependency on foreign firms
-Vulnerable to foreign business cycles

Q30. What are the factors that limit free trade?
-High transport cost
-Lack of mobile factor
-Increasing cost of production
-Market imperfections
-Political instability
-Acts of protectionism like dumping and bank

Q31. What are Terms of Trade (TOT)?
-Refers to the rate at which a country exchanges its export for imports.

Q32. What is ‘dumping’?
Foreign producers selling at a price below their cost

Q33. What are the benefits and limitations of free trade?
-Minimize conflicts between nations
-Common market allows more efficient trade
-Guaranteed increase in trade
-Unable to protect infant industries

Q34. How are subsidies used as an act of protectionism?
-Increase subsidies to local producers – fall in COP – fall in Price of local goods – replace the more expensive imports
-Subsidized exporters and domestic producers will have lower the cost of production and thus enables the firms to lower the cost of production so as to lower the price of export goods to increase export demand while the domestic price of local goods will be lowered to substitute imported good
-Increase subsidies to lower cost of production – decrease price of export – increase in export demand

Q35. What are exchange controls?
The control of amount of foreign exchange available for imports which will indirectly control the value of import expenditures.

Q36. What are tariffs?
Custom duties or tax on imported goods and services by the government.

Q37. What are quotas?
Quantity restriction imposed on imported goods and services by the government.

Q38. What are embargos?
Complete ban on certain imports to or exports from a country

Q39. What is import expenditure?
Amount spent on importing goods and services from foreign country into the domestic country

Q40. What are intellectual property rights?
Encourage the growth research and development and investment in these areas

Q41. What is government procurement?
-Increase transparency of procurement process
-Increase business opportunity with foreign government

Q42. What is a custom union?
An agreement where no tariff and trade restriction among the nations but a common tariff against other trading nations.

Q43. What is trade creation?
Arises when there is a shift in trade from a high-cost producer to a low-cost member country.

Q44. What is preferential trade agreement (PTA)?
A trade agreement whereby trade between the signatories is freer than trade with the rest of the world. There will be no restriction of trading activities and regulation of the flow of investment and mobility of resources.

Q45. What is common market?
An agreement where no tariff and trade restrictions among nations and they are to use a common monetary and fiscal policy.

Q46. What is export revenue?
Amount earned from exporting goods and services from domestic country out to foreign country.

Q47. What is balance of trade?
-It refers to the difference between the total value of goods and services exported to other nations and the total value of foreign goods and services spent by local economy
-Balance of trade = Export revenue – Import Expenditure

Q48. What is an infant industry?
An industry that is just starting out and hence vulnerable to collapse when faced with more established foreign competition.

Q49. What is production capacity?
It refers to the volume of production that can be attained over a fixed period of time.

Q50. What is advanced economy? What is a developed economy?
It refers to a highly-developed economy. For instance, USA is an advanced economy.

Q51. What is emerging economy? What is a developing economy?
It refers to a growing economy that is experiencing extensive growth and undergoing rapid industrialization. For instance, China and India are emerging economies.

Q52. What is factor endowment?
It refers to the amount of land, labor, entrepreneurship and money that can allocated for production within a country.

Q53.What is the Marshall-Lerner condition?
It refers to an economic condition that affects the effectiveness of currency revaluation, when the sum of elasticity of demand for imports and exports is greater than one.

Q54. What is taxation?
It refers to the compulsory imposition of fine by the authorities on individuals, so as to deter certain consumer or producer behavior.

Q55. What is mobility of resources?
It refers to the ease of flow of labor and capital from one point to another. (i.e. between countries, cities, firms, individuals)

Q56. What is deregulation?
It refers to the reduction of government intervention in certain economic activities.

Q57. What is transaction?
It refers to the movement of funds to direct the movement of specific durable goods or raw materials.

Q58. What is a trade union?
It refers to an organization of workers and employers to regulate the relations of those involved, so as to protect their interests.

Q59. What is ‘retaliation’?
Also known as a form of protectionism, it involves the imposition of trade barriers by one country, in response to the protectionist measures imposed by the other country.

Q60. What is international trade?
It refers to the exchange of goods, capital or services between countries.

Q61. What are exchange rate fluctuations?
It refers to the change in value of a currency against another currency due to certain economic conditions, like hot money.

Q62. What is Production Possibility Curve (PPC)?
It refers to the a graphical representation of alternative combinations of the quantity of two particular goods or services that an economy can produce by re-allocating resources from one good or service to another. The curve aids in efficient allocation of resources without adversely affecting the required production of essential goods or services.


Economics Tuition Bishan – Economics Definitions – Chapter 4b – Globalization

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Q1. What is globalization?
It involves the rapid increase of economic activities across national boundaries, which results in increasing international integration of markets and flows of goods and services, funds and capital and resources and labour

Q2. What is capital and labor flow?
Movement of FDI and foreign investment portfolio

Q3. What is labor flow?
Movement of labour from countries of lower productivity (low wage) to those with higher productivity (high wage)

Q4. What is the flow of fund?
-Flow of short term capital fund, seen in terms of savings, bonds, transactions and equity transactions
-Extensive impact on exchange rate and inflationary condition

Q5. What is Foreign Direct Investment (FDI)?
Movement of capital that is under foreign ownership and foreign control of production facilities.

Q6. What is economic integration?
-Standard trading procedure
-Smoothen the mobility of flow of funds
-Facilitate development of trading infrastructure (Statutory Boards / State entrepreneurs -BOL, CAAS, PSA)
-Ensure optimization of resource utilization
-Expand and integrate the consumer market
-Greater integration of monetary and financial system

Q7. What is international factor flows?
Flow of capital and labour across nations

Q8. What is a standard trading procedure?
With standardized procedures set by international bodies of trade (WTO), communication between country regarding trade issues will be more efficiency. Terms and rules of trading is specified to raise the efficiency of trade between members.

Q9. What are the benefits of globalization?
-Increased consumption and production possibilities
-Promotes efficient allocation of resources
-Promote a higher level and value of investment
-Accelerate economic growth and raise employment opportunities
-Increase in welfare
-Keeps government power in check

Q10. What are negative impacts of globalization?
-Higher degree of competitiveness for resources and export market
-Occurrence of structural unemployment
-Inflationary condition contributing to rising cost of living
-Growing income inequality among the nations and within the nations
-Labour market inequality
-Exploitation of cheap resources in developing countries
-Environmental issues

Q11. What are the determinants of Capital Flows? What are the determinants of Foreign Direct Investment (FDI)?
-Business Facilitation
-Political and economic framework
-Availability of lost cost / skilled labour
-Abundance of raw materials
-Market size and growth
-Access to regional or global market – trade network (capacity for export)

Q12. What are the positive of capital flows for receiving country?
-Higher rates of private investment leads to economic growth and employment (raise FDI will raise investment, raise AD via k, thus raising national income, production and employment
-Transfer of technology and skills
-Increased tax revenue for host government (raise national income – raise taxes)

Q13. What are the costs of capital flows for receiving country?
-Cause appreciation of host countries currencies, lowering export competitiveness
-Income disparity where only a small portion of economy benefits from FDI (only for workers who work for MNCs)
-A competitive local industry may foreclose when competing with large foreign firm
-Destruction of environment

Q14. What are the benefits of capital flows for a source country?
-Increase returns of investment – developed through the extended economy
-Benefit from lower cost of production
-Stimulates export of machinery and other capital goods

Q15. What are the negative impacts of capital flows for a source country?
-Reduction of GDP and decrease in total domestic wage – outflow of I will decrease domestic production – decrease demand for local workers (US firms increases production of US goods in China – selling of China – made US goods in China to Chinese – decrease production in US)
-Loss in tax revenue
-Export decrease as firms set production units aboard

Q16. What are the benefits of labor flows?
-Equalization of wage – low wage workers in developing economy can get higher wages by working abroad
-Increase in total world output as labour flows from a country of lower labour productivity to one that has a higher labour productivity
-Changes in income distribution: Migrants workers get more income by working in foreign country
-Increases in remittances from workers working overseas: important source of foreign exchange (for example – The Philippines – raise remittance – raise dd for peso leads to Appreciation of peso leads to fall in price of imports – help to curb imported inflation)

Q17. What are the negative impacts of labor flows?
-Brain drain from source country
-Drain on government resources arising from immigration of unskilled labour: Countries that provide generous welfare payments may attract unproductive people who will enjoy welfare benefits at the expense of locals

Q18. What are the impacts of globalization on Singapore?
-Structural unemployment
-Inflation
-Detrimental influence of international monetary and financial instability and global economic downturn
-Unequal distribution of income and wealth

Q19. What are the possible solutions to overcome the problems of globalization?
-Exchange rate management
-Supply-side management
-Manpower development/taxation and subsidies
-Creation of international trade network system
-Taxation – attract investment
-Infrastructural development

Q20. How does outsourcing curb the negative effects of globalization?
-Expand the resource capacity for Singapore – cheaper labour cost
-Expand the production through investment abroad – broaden the economic scope of development
-Help Singapore to increase competitiveness in the export of its good as the price of export is reduced through outsourcing
-Allow Singapore to focus on its comparative advantage to enhance competitiveness – advance high–valued production – raise our production status
-Spare the country’s resources which can be used in other areas of development – diversify the economy

Q21. What are the limitations of outsourcing?
-Structural UN+ – certain sectors will be eliminated or shrink in the size of the industry
-Less tax revenue for the government
-Complexity of the integration for the industries – may create inefficiency
-Increase competition from these countries which outsourcing is distributed to develop CA – replace industries in Singapore
-Subjected to exchange rate fluctuation – affect the cost of trade
-Advantage and Disadvantage of outsourcing in the receiving nation
-Advantage and Disadvantage outsourcing of from the outsourced nation

Q22. What is mobility of resources?
It refers to the ease of flow of labor and capital from one point to another. (i.e. between countries, cities, firms, individuals)

Q23. What is outsourcing?
It refers to a business strategy conducted by firms to cut costs by transferring a portion of production process to external suppliers instead of allowing full production process to be conducted locally.

Q24. What is remittance?
It refers to the transfer of money from one country to another.

Q25. What is labor productivity?
It refers to the amount of good or service that a worker is able to produce in a given period of time.

Q26. What is brain drain?
It refers to the flight of highly-intellectual and trained individuals from the host country to another country.

Q27. What is asset appreciation?
It refers to the increase in value of assets over time.


Economics Tuition Bishan – Economics Definitions – Chapter 5a – Foreign Exchange

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Q1. What is exchange rate?
The foreign exchange rate is the price of a currency in terms of another currency. It is the external value or price of a country’s currency.

Q2. How to calculate exchange rate?
S$1 – US$0.82/ US$1 –S$1.22; (1/0.82)

Q3. What is appreciation of a currency?
An increase in value of one currency relative to another currency as a result of the increase in market demand for or the reduction in the supply of currency in the forex market. (rise in dd for local $/fall in ss of local S$)

Q4. What is depreciation of a currency?
A decrease in value of one currency relative to another currency as a result of the fall in the demand for or the increase in the supply of the currency in the forex market. (rise in dd for local $/fall in ss of local S$)

Q5. What are the advantages of a flexible exchange rate system?
-Automatic stabilization: The BOP and BOT (must satisfy the Marshal-Lerner Condition (PED of exports + PED of imports > 1)
-Efficient allocation of resources possible (exchange rate acts like a price mechanism) – Social optimization of resource allocation at global level – Maximisation of net social benefit gain (only feasible when perfect market condition exists for global market – many buyers and sellers)
-Freedom to pursue an independent domestic policy goals aimed at securing internal equilibrium – curb inflation – when government does not regulate exchange rate, the monetary policy can work independently to regulate internal aspect of the economy – can use MS to regulate interest rate
-There is no need for large official reserves to maintain the exchange rate (fall in Opp. cost of holding reserve) – more resource for other aspect of economic development

Q6. What are the assumptions for a flexible exchange rate system?
Pedx + Pedm > 1
-Capital inflow and outflow are constant – it will affect the price of export and import demand, therefore it affects trade pattern as the exchange rate will vary extensively

Q7. What are the disadvantages of a flexible exchange rate system?
-Uncertainty –Discourages trade and investment – as trading price fluctuate will affect trading and investment activities
-Speculation
-Inflationary impact: Depreciation increases export demand creating demand pull inflation. Also, cost-push inflation because imported raw materials and essentials are more expensive.

Q8. How is exchange rate determined in a flexible exchange rate system?

-The flexible exchange rate system determines the exchange rate based on the demand and supply of currency in local or foreign currency in the foreign exchange market.
-State that the intersection of Dd & Ss of S$ in the forex market will determine exchange rate.
-State market forces of dd and ss of local currency in forex market are determined by expert dd and capital inflow for dd for S$ and import dd and capital outflow for SS of S$.
-State that the export dd and import dd are caused by the following factors:
-State the capital inflow and outflow are affected by the following factors:

Q9. What is a managed-float exchange rate system?
In this exchange rate system, the central banks occasionally enter foreign exchange markets to adjust their official holdings to moderate major swings in the exchange rates. The central bank may attempt to raise and lower exchange to influence the economic activities so as to achieve the economic aims of the government by directly increase the demand and supply of the local currency to influence the exchange rate.

Q10. What is a fixed exchange rate system?
In the fixed exchange rate system, the government peg the exchange rate of the country to the currency value of another.

Q11. What are the advantages of a fixed exchange rate system?
-Removes uncertainty and discourages speculation – encourage trade and investment – ascertaining trading price, the cost of production and imported resources will be stabilized
-No need for artificial trade restrictions – foreign exchange can be used to control price of imports and exports to affect trading activity – we need to use protectionism – can avoid the effects of protectionism

Q12. What are the disadvantages of a fixed exchange rate system?
-Opportunity cost of having a large reserve – idle fund which can be used for economic development – need to keep US$ to ensure that the government can increase the demand for local $
-Speculation (in anticipation if the government switch to flexible system)
-A reluctance in reducing surplus/deficit (China’s surplus)
-Monetary Policy ineffective: Contractionary policy will attract FDI putting upward pressure on ER. Government has to sell domestic currency increasing money supply again – inflow of FDI – Foreigner will inject more fund into local money market – increase in local money supply – decrease in interest rate – fall in cost of mortgage loan – raise dd for loan – asset-based inflation

Q13. What are the determinants of exchange rate?
-Change in demand for local goods and services
-Change in relative interest rates between countries
-Expectation change in future value of domestic currency relative to foreign
-Change in return on capital investment
-Change in cost of production
-Change in taste and preference of foreign consumers

Q14. What is over-valuation?
Over-valuation refers to the condition where the exchange rate pegged by the government is above the market-determined exchange rate.

Q15. What is under-valuation?
Under-valuation refers to the condition where the exchange rate pegged by the government is below the market-determined exchange rate.

Q16. What are the reasons for exchange rate regulation?
-To reduce the uncertainty in trade
-To prevent speculative movements of “hot money”
-To correct BOP deficit/surplus
-To neutralize short run pressure on the exchange rate

Q17. What are the impacts of the appreciation of a currency?
-Impact of exchange rate
-Effect of balance of trade
-BOP Improvement (Surplus)
-Effects of local production and employment
-Effects of economic growth
-Effects on cost of living and standard of living

Q18. What are the impacts of the depreciation of a currency?
-Rise in import price and fall in export price/ Cost of FDI fall
-Fall in import demand, rise in export demand/ FDI increase (BOP)
-raise export demand – rise in AD – rise in NY and fall in import demand – Potential Growth (Economic Growth)
-rise in AD, rise in production/ rise employment
-raise COL/ SOL fall (Price stability and SOL)
-Optimization of Resources
-Distribution of Y

Q19. What is Purchasing Power Parity (PPP)?
Exchange rate is determined by settling the exchange rate based on an equivalent domestic purchasing based on the price level of the countries. To prevent distortion of real per capita Y due to exchange rate fluctuation – use to convert real GDP per capita of different countries into a common denomination based on inflation rate

Q20. How is the Purchasing Power Parity (PPP) used?
Foreign exchange rate of the currency (PPP) = Foreign price level / Local price level

Q21. What is the nominal effective exchange rate (NEER)?
-Exchange rate that is determined by using a basket of weighted selected currency
-Weightage of currency is determined by relative importance of the country’s trading and investment activities on the exchange rate

Q22. What is the real effective exchange rate (REER)?
NEER after taking into consideration the impact of the change in the relative prices on the external value of the currency

Q23. What is capital flow?
It refers to the movement of capital in or out of a country due to certain factors like market and investor confidence.

Q24. What is hot money?
It refers to money held by foreign investors that is liable to switch to another country’s currency within a short notice, so as to obtain highest returns.

Q25. What is speculation?
It refers to the buying or selling of a financial asset, so as to reap quick profit.

Q26. How to prevent speculation of hot money?
The government can introduce capital control.

Q27. What is the external value of a currency?
It refers to the value of a currency in terms of another country’s currency. For instance, the value of 1 SingDollar to 1 USD, where how much USD can 1 SingDollar buy.

Q28. What is a flexible exchange rate system?
It refers to a fixed exchange rate system that is occasionally re-regulated.

Q29. What is the market equilibrium for foreign exchange?
It refers to the price and quantity level of a currency where the demand curve and supply curve of a currency intersects.

Q30. How is exchange rate determined in a managed-float exchange rate system?
In this exchange rate system, the central banks occasionally enter foreign exchange markets to adjust their official holdings to moderate major swings in the exchange rates. The central bank may attempt to raise and lower exchange to influence the economic activities so as to achieve the economic aims of the government by directly increase the demand and supply of the local currency to influence the exchange rate.

Q31. How is exchange rate determined in a fixed exchange rate system?
In the fixed exchange rate system, the government peg the exchange rate of the country to the currency value of another.

Q32. What is the Marshall-Lerner condition?
Pedx + Pedm > 1

Q33. What is capital accumulation?
It refers to the acquisition or retaining of capital assets in order to pursue wealth creation.

Q34. What is capital investment?
It refers to the allocation of capital into financial assets in order to reap profitable returns.

Q35. What is capital control?
It refers to a form of government regulation to restrict the flow of capital in and out of the domestic economy.

Q36. What is core inflation?
It refers to the measurement of inflation that excludes specific items that experience volatile price changes, such as private accommodations and transport costs.

Q37. What is currency manipulation?
It refers to currency intervention by one or more financial institution in order to increase or decrease the value of a currency. For instance, China has been criticized by the US for currency manipulation.

Q38. What is a gradual and modest appreciation?
It refers to a steady and minimal strengthening of a currency. It is known that Singapore adopts such as stance.

Q39. What are official reserves?
It refers to the sum of tradable currencies, gold reserves and other forms of funds that a country possesses.

Q40. What is mortgage loan?
It refers to a particular loan that bank or mortgage lender offers an individual in order to finance the purchase of a real estate.

Q41. What is a trade-weighted exchange rate?
It refers to an index of a currency’s value with respect to a basket of foreign currencies.

Q42. What is a basket of currency?
It refers to a selected sum of currencies with different weightings that is used as a benchmark to measure regional currency movements.

Q43. What is future value of saving?
It refers to the value of money kept by individuals after a certain period of time with respect to the current time period.

Q44. What is per capita income?
It refers to the total national income divided by the total population within a country.


Economics Tuition Bishan – Economics Definitions – Chapter 5b – Balance of Payment

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Q1. What is balance of payment?
A statement of a country’s trade and financial transaction with the rest of the world over a particular period of time, usually a year

Q2. What are the components of balance of payment?
-Current Account
-Capital Account (LT term capital inflow)
-Financial Account (inflow of hot money/ equity transaction)
-The Balancing Item
-The Overall Balance

Q3. What is current account?
-Monetary transfer for exports and imports of goods and services, income flows and net transfers in and out of the country.
-It comprises of visible balance (BOT), invisible balance (services), income balance(remittance of profit and dividends), transfer balance (remittance)

Q4. What is capital account?
All inflows and outflows of funds due to financial activities like acquisition and disposal of fixed assets, shares, government grants for overseas project, etc.

Q5. What is financial account?
-Records investment overseas by local residents and the inward flow of investment funds from foreign residents. International flows of investment funds can be short term or long term.
-Short term capital flows is bank deposits (affected by interest rate)
-Long term capital flows include the holdings of securities or bonds by local or foreign residents

Q6. What is the balancing item?
The balancing item is a statistical item to compensate for the errors and omissions made in recording the value of the country’s international transactions.

Q7. What is the overall balance?
The sum of the current account balance, capital account balance, financial account balance and the balancing item

Q8. What is the official financing account?
-An accommodating account that shows how the monetary authorities have dealt with the net money flow in order to reflect that the balance of payments always balances.
-It consists of Deposits and Withdrawals in IMF, Gold Reserve and Foreign Currency Reserves

Q9. How changes in balance of payment equilibrium affect exchange rate?
-Surplus in BOP – inflow of money will be greater than the outflow of money – need to transfer the money into the official financing account – increase in demand for local dollar and decrease in supply of local dollar – Appreciation
-Impact of surplus BOP and appreciation will lead to negative effect like asset-based inflation and loss of export competitiveness as price of export will be higher due to appreciation but currency is stable and this will promote Singapore as a financial hub
-Deficit in BOP – inflow of money will be lesser than outflow of money – need to borrow from the IMF or withdrawal from the Gold Reserve or Foreign Currency Reserve – decrease demand for local dollar and increase in supply of local dollar- Depreciation
-Impact of deficit BOP and depreciation will contribute to imported inflation and raise the value of foreign debts but the price of exported goods will be lowered, raising export competitiveness.

Q10. What is the J-curve effect?
The effect of depreciation of ER to correct for a BOP deficit.

Q11. What is balance of payment deficit?
Inflow of money will be lesser than outflow of money

Q12. What is balance of payment surplus?
Inflow of money will be greater than the outflow of money

Q13. What are the factors affecting balance of payment disequilibrium?
-Relatively High Domestic Inflation
-Relatively High Economic Growth Rate
-Overvalued Domestic Currency
-Loss in Comparative Advantage (inefficiency of local industries/change in global -pattern of production)
-Large increase in imports
-Low domestic interest rates
-Poor expectations of business profits
-Undervalued domestic currency
-High levels of domestic protection

Q14. What are the impacts of balance of payment disequilibrium?
-In the short-term, temporary and planned balance of payments disequilibrium does not pose a serious problem to an economy. BOP deficit may be necessary to promote economic growth, which will induce import of capital goods and resources – induce production and employment
-In the long-term, persistent and unplanned disequilibrium is a serious problem and indicates a fundamental economic problem in the economy (may induce import of luxury goods –BOT deficit)

Q15. Why should the government be concerned of balance of payment disequilibrium?
-A long term and persistent BOP deficit will the exchange rate stability which will undermine the trading activities and flow of FDI
-If the cause of the BOP deficit is due to BOT deficit which will indicate a fall in production of exported goods and service, the impact on unemployment will be a serious problem for the economy.
-The growth of expenditure on goods and services may indicate a higher level of standard of living but it will also mean that local industries and losing out.

Q16. Why should the government not be concerned of a balance of payment deficit?
-A short and temporary BOP deficit will not prove serious problem as it will temporarily lower exchange rate to enhance competitiveness
-If the BOP deficit is due to outflow of local FDI into foreign country, the growth of infrastructural business will be beneficial to the large economy in the long run. Furthermore, if the deficit is due to import of resources and capital equipment, it will be beneficial for the growth of the economy.

Q17. What is undervaluation of currency?
Undervaluation refers to the condition where the exchange rate pegged by the government is below the market-determined exchange rate.

Q18. What is overvaluation of currency?
Overvaluation refers to the condition where the exchange rate pegged by the government is above the market-determined exchange rate.

Q19. What is the Marshall-Lerner condition?
Pedx + Pedm >1

Q20. What is invisible balance?
Services

Q21. What is income balance?
Remittance of profit and dividends

Q22. What is visible balance? What is trade balance?
Balance of trade

Q23. What are the factors affecting balance of trade?
-Inflation rate – affect cost of production – affect Px and Pm
-relative income level
-taste and preference of the products
-change in exchange rate
-comparative advantage – affected by the change in cost of production
-structural changes in the economy – economic development

Q24. What are the factors affecting financial account?
-Interest rate- determined the return on saving
-change in the exchange rate (encouraging speculative activities)

Q25. What are the factors affecting capital account?
-return on business
-taxation policy
-market demand- market sentiment
-efficiency of the industries – return on investment

Q26. What are the impacts of balance of payment deficit on a domestic economy?
-Inflationary impact on the economy
-Fall in national income and level of employment due to lower FDI and export demand
-Decreases in foreign reserves
-Affect the confidence of the investors

Q27. What are the impacts of balance of payment deficit on an external economy?
-Fall in exchange rate of a country’s currency
-Deterioration in terms of trade (TOT)

Q28. What are the impacts of a balance of payment surplus on domestic economy?
-Increase in national income and level of employment due to higher level of FDI and surplus BOT
-Increase in foreign reserves
-Reduces the competitiveness of the export demand and in the attraction
-Worsen the trading and capital flow condition of the trading partners.

Q29. What are the impacts of balance of payment surplus on an external economy?
-Rise in exchange rate of a country’s currency
-Improvement in terms of trade (TOT)

Q30. What is the scope of impact when there is balance of payment surplus?
-Xd/Md/FDI/flow of fund – affect BOP equilibrium
-AD (Real GDP)/Potential Growth – Sustainable Economic Growth
-Production/Employment – low unemployment
-COL/COP/SOL – Price stability
-Distribution of Income and Wealth
-Optimization of resource allocation

Q31. What are the internal impacts of a balance of payment disequilibrium?
-Inflationary impact on the economy
-Fall in national income and level of employment due to lower FDI and export demand
-Decreases in foreign reserves
-Affect the confidence of the investors
-Increase in national income and level of employment due to higher level of FDI and surplus BOT
-Increase in foreign reserves
-Reduces the competitiveness of the export demand and in the attraction
-Worsen the trading and capital flow condition of the trading partners.

Q32. What are the external impacts of a balance of payment disequilibrium?
-Fall in exchange rate of a country’s currency
-Deterioration in terms of trade (TOT)
-Rise in exchange rate of a country’s currency
-Improvement in terms of trade (TOT)

Q33. How to calculate balance of payment?
The sum of the current account balance, capital account balance, financial account balance and the balancing item

Q34. How to assess economic performance using balance of payment?
-From the current account, the level of production of goods services can be noted as seen level of export of goods and services. We can also observe that the industries are mainly producing high valued production and there is the concentration of tertiary services.
-The value of the income balance also reveals that the economy has a concentration of FDI and the increase in the flow of capital account (Long run) will also suggest that Singapore is competition enough to attract FDI. High depend of FDI and the presence of net export will substantiate that the economy is experiencing economic growth as the production capacity is increasing.
-The import expenditure will indicate the level of the resource capacity the country can posses as Singapore relies greatly on import for production. It also indicates the level of standard of living as the rise in the import of services will mean that there is increase in consumption of services from abroad in the areas of tourism
-High volume of deficit in the transfer balance reflects the high degree of dependency on foreign supply of labour.
-For financial account, the flow of the transfer will affect the banking and finance industry which is one of critical industry in the economy and the indicator of the flow of hot money which will affect our short term exchange rate. The change in the exchange rate will affect the trading prices and of cost FDI which is affects the AD that influences production and national income.
-The official financing reserve will reflect the level of stability of the external equilibrium as the amount and the distribution of reserve will affect the country’s ability to stabilize exchange rate.

Q35. What is hot money?
It refers to money held by foreign investors that is liable to switch to another country’s currency within a short notice, so as to obtain highest returns.

Q36. What is capital flow?
It refers to the movement of capital in or out of a country due to certain factors like market and investor confidence.

Q37. What is remittance?
It refers to the transfer of money from one country to another.

Q38. What is speculation?
It refers to the buying or selling of a financial asset, so as to reap quick profit.