A level Econs Essays Revision Questions

Q18. Discuss the usefulness of national income statistics for comparing the economic performance performance and standard of living of different countries. 1. Content Conten t requirements requir ements :

2. Thinking Thinking requirement requirement

I.1 What is meant meant by ‘NY ‘NY statistics statistics’? ’? •

GDP and GNP (Nominal and real)

•

Breakdown of GDP in terms

What does ‘ discuss ’ the usefulness entail?

i. of value value added added by secto sectorr (output (output stat statist istics ics), ),

•

Consider both usefulness & limitations

•

Make judgments about the severity of the limitations

•

Draw implications from the discussion

ii. type of expend expenditure iture (expenditur (expenditure e statis statistics) tics) , iii. type type of inco income me (inco (income me stati statisti stics) cs) •

Per capita GDP and GNP

•

Real figures

•

GDP or GNP at PPP

I.2 What is meant meant by ‘economic ‘economic performance’ performance’? ? Extent to which the country is able to achieve its 4 macro goals: economic growth, full employment, price stability, BOP equilibrium I.3 What is meant meant by ‘SOL’? ‘SOL’? Extent to which wants and needs (material and non-material) of the residents are met. I.4 What criteria criteria do you use use for ‘usefulness ‘usefulness’’ of the measure? •

Completeness

•

Accuracy

Essay outline 1. Intro •

Point out that (good) macro performance pertain to the 4 macro goals.

•

Define SOL.

•

Briefly highlight the info available from NY statistics.

•

Spell out the terms by which the judgement will be made –  The usefulness will be examined in terms of the extent to which it can completely and accurately measure economic performance & SOL. 2. Body Economic performan ce

Usefulness

Limitations

Compare Compa re output outp ut performan perf ormance ce

Employment

 –

 –

 –

 –

By comparing growth rates which is YOY % change in real GDP.

 –

Explain the meaning of GDP and ‘real’. Highlight that changes changes in in real GDP reflect changes in the quantity of  quantity of  output produced and not mere price changes. Country with a higher ‘+’ve growth rate has a better output performance.

Can use NY statistics statistics to infer about the unemployment situation in the country. •

 –

Because real GDP growth rate usually co-relate with employment level.

However, unemployment could be rising together with GDP •

Because growth could be accompanied by structural changes that cause structural unemployment.

•

E.g. S’pore in 2003

Price stability  –

NY statistics do not measure inflation rate of the country.

BOP  –

NY statistics only shed partial light on current account performance . •

It indicates value of net exports and net property income from abroad.

However, knowledge of net unilateral transfers and S-T & L-T capital flows are not provided SOL

GDP and GNP per capita  –

 –

 –

Define ‘per capita’ Explain that comparison of these values between countries require converting them into a common currency

Income distribution  –

 –

Explain why the conversion factor used should be purchasing power parities (PPP) instead of  the market forex rates.

Purchasing power parities are the rates of currency conversion that equalise the purchasing power of  different currencies by eliminating the differences in price levels between countries. Hence, it is the exchange rate that allows you to buy the same basket of goods in each country using their domestic currency.

 –

 –

 –

 –

Higher output value ⇒ higher income level ⇒ higher consumption level Higher income levels ⇒ more tax revenue from direct taxation ⇒ enable govt to spend on items that contribute to HHs’ SOL. E.g. health care, education , sanitation.

But it is not correct to conclude that a higher GDP per capita imply higher SOL for all residents since income distribution may not be distributed in the same manner in all countries.  Thus, need additional data e.g. Gini ratio

Non-material aspects of SOL  –

 –

Explain why GDP or GNP per head in PPP is useful for comparing SOL  –

 The income approach in NY statistics provides some indication of income distribution which affects SOL.

 –

NY does not measure the nonmaterial aspects of SOL. E.g. China may have higher GDP per capita than Cambodia or Myanmar but she also has poorer air quality and/or her workers work longer hours and have less time for family and social interactions.  This means additional indicators that can measure these nonmaterial aspects are needed. Give examples.

Empirical evidence show that countries with higher per capita real GDP score higher in quality of  life indicators. GNP per head useful for comparing SOL of countries which are open to FDI

Limitations for comparing output performance and SOL

Inaccuracy of NY statistics due to  –

Omission – underground economy  This problem is bigger in LDCs.

•

However, while it is difficult to compare the extent of differences with accuracy, the rank order of the comparison is probably still valid if the countries being compared have same extent of underground economy.

•

Inaccuracy of PPP  –

Difficult to determine a common basket of goods to calculate the PPP rate 3. Synthesis and conclusion •

With regards to comparing different countries’ economic performance, NY statistics are rather useful for comparing output performance only. For a complete comparison, unemployment figures, inflation rates and BOP figures are also needed.

•

As NY is actually intended to measure a countries output performance it is thus more useful for comparing output performance than SOL.

•

But since material SOL is a big aspect of SOL and is largely dependent on a country’s output/Y level, NY statistics remains a useful measure for comparing SOL.

•

 To improve on the comparison, supplementary measures that address the limitations ought to be used as well.

Q19. A government’s macroeconomic aims are low inflation, low unemployment, balance of payments equilibrium and economic growth.

Which of these aims do you consider most significant for Singapore and why? [25] I. •

Dissecting the question What are ‘macro aims’?  –

Economic growth.

 –

Low unemployment (UN rate is at its natural rate.)

 –

Low inflation (< 2%).

 –

BOP equilibrium

•

‘which’ => Need to make a judgment.

•

What criteria do you use for ‘most sig’?  –

 –

 –

•

II.

 The aim itself is significant Its achievement aid the achievement of the other aims ‘for S’pore’ => Need to consider the special chts of S’pore – small and open & DC

‘why’ => need to justify with economic analysis and consideration of S’pore context

Outline 1. Intro •

Briefly define the 4 macroeconomic aims.

•

Briefly highlight that S’pore is a small and open & that has reached DC status in terms of GDP per head.

•

An examination of which aim is the most important for S’pore requires examination of the significance of each aim and their inter-links with each other.

•

Assessment will be made on the basis of  o

 The extent of importance of the aim

o

 The extent to which it aids the achievement of the other aims

2. Body

A. Explain the importance of each macro goal a. Economic growth •

Very significant goal because it is the basis for improvement in material SOL. o

o

•

Higher production level → higher income level for HHs → ability to satisfy more wants and needs. Higher income levels → more tax revenue for G on on health care, education etc.

S’pore already reached a high material SOL but , the goal of economic growth remains relevant – areas for improvement include non-material which require funding by the govt. b. Full employment

•

Full employment is an important goal because unemployment leads to severe hardship for those unemployed.

•

When economic growth is accompanied by full-employment, it means that the fruits of economic growth are widely enjoyed. c. Low inflation Explain the impt of this goal by explaining the negative effects of inflation.

•

Inhibits price signals from playing is allocative role efficiently

•

Fall in SOL for fixed Y earners d. BOP equilibrium

=> no problem of external indebtedness When imports spending exceed export earnings, and the imports are largely consumer goods & services, current SOL are actually enhanced but the country would have to be borrowing in the current period to pay for the imports and the servicing of  the debt will mean lower SOL in the future.

B. Economic growth is the most significant goal a. Attainment of economic growth enables the achievement of other goals •

•

Economic growth is needed for full N: When there is actual growth with AD shifting to the right, there will be a reduction of involuntary unemployment. Economic growth facilitates income redistribution by the govt => Growth can be considered to be the most significant goal since it is an important goal both for the long-term (for improvement in SOL over time) and short-term (if the economy is in a recession). b. Economic growth is most significant but it can’t be achieved without attaining the other goals

•

Inflation → lower economic growth

Reasons o

o

o

•

High and cost push inflation → fall in domestic I and FDI will be discouraged. Inflation → downward pressure on the forex rate. The loss of forex stability lowers FDI. It can thus be seen that the achievement of inflation is a pre-requisite for  economic growth for a small and open economy like S’pore that is dependent  on international trade and FDI for growth.

Deteriorating BOP → higher UN o

o

Rising current a/c deficit, ceteris paribus → fall in AD → decreases in GDP and rising involuntary UN. Since S’pore, as a small economy is dependent on rising external demand and FDI for economic growth, S’pore cannot afford to be having rising current  account deficits (that is due to rising trade deficit) and rising BOP deficits (that is due to falling FDI) over time.

c. However, although economic growth is the most significant goal, it can’t be pursued as the sole objective Economic growth may → DD-pull inflation, structural UN, income inequality 3. Synthesis and conclusion •

Economic growth is the most significant economic goal. This is because it is the basis for improvement in SOL.

•

However, the other goals are also important. For example, the attainment of price stability is important in itself and for the achievement of economic growth in Singapore. The ideal is for economic growth to be achieved together with internal and external balance.

•

It should also be noted that economic growth can adversely affect the attainment of other goals. =>This means in the formulation of economic policies, there must be an adequate mix of policies to match the various goals of the country. E.g. If growth is being promoted through measures to encourage firms to adopt new technology, then the govt needs to at the same time implement measures to facilitate re-training to manage the resultant structural unemployment.