1 Chapter 1: Scarcity, Choice and Opportunity Cost 2-3
2 Explain two ways in which an economy might move rom a point within its !!C to a point on it" # 3 $iscuss the most eective economic policies to move the !!C outwards" % # &hat is meant 'y the 'asic economic pro'lem o scarcity( ) % $iscuss whether economic growth solves the pro'lem o scarcity" * ) Chapter 2: +esource ,llocation in Competitive -ar.ets / 0-1 * , manuacturer wishes to sell more o his product" 2ow may he try to achieve his aim( 13 0 Chapter 3: +esource ,llocation in Competitive -ar.ets // 11-13 1 Explain price elasticity o demand and income elasticity o demand" 1# 13 , government is proposing to increase the tax on petrol" Examine the relevance o price elasticity o demand and income elasticity o demand or this proposal" 1# 11 ,ssess the relevance o elasticity concepts in explaining the eects o the worldwide recession caused 'y the 111 terrorist attac.s on the airline industry" 1%-1) 12 Chapter #: -icroeconomic !ro'lems: -ar.et 4ailure 1*-10 13 !olicies on !ollution and Evaluation Summary 11-21 1# !olicies on !ollution and Congestion caused 'y Cars Summary 22-23 1% Chapter %: 5overnment /ntervention in the -ar.et / 2# 1) Chapter ): 4irms and 2ow 6hey Operate / 2%-33 1* $iscuss whether rising costs limit the si7e o irms over time" 31 10 8an.ing -erger in Singapore ,nalysis 31 11 Chapter *: 4irms and 2ow 6hey Operate // 32-30 23 $iscuss the view that the proit motive will always lead to a ew large irms dominating the mar.et or each and every type o product" 31 21 Explain what is meant 'y productive and allocative eiciency" #3-#1 22 9, irm should 'e encouraged to maximi7e proits 'ecause this ma.es it eicient": $iscuss whether this argument is true or a irm operating in an imperect mar.et" #2 23 $istinguish 'etween monopolistic competition and oligopoly" #3 2# Explain why oligopoly is a common mar.et structure in many economies" ## 2% Explain why governments throughout the world have 'een involved in the supply o services such as electricity" #% 2) Chapter 0: 5overnment /ntervention in the -ar.et // #)-#0 1 J1 Topics Chapter 1: Scarcity, Choice and Opportunity Cost 1" /ntroduction Study o the use o scarce resources to satisy unlimited human wants &ants: things people would consume i they had unlimited income +esources: inputs to produce goods and services Scarcity exists due to unlimited wants ; worn out goods ; newer goals !ositive <can 'e chec.ed 'y acts= vs" normative <statement o value= 2" 4actors o !roduction >and: productive resources supplied 'y nature >a'our: human eort directed to the production o goods and services Supply: num'er o wor.ers ; average num'er o hours each wor.er is prepared to oer Specialisation $exterity, greater use o machinery and more sophisticated production techni?ues -onotony, loss o cratsmanship, increased ris. o structural unemployment Capital: man-made resource used in urther production /nvolves postponing present consumption Entrepreneurship: ta.es ris. o 'eing in 'usiness /normation: data or the 'asis o .nowledge-'ased economy 3" Opportunity Cost +eal cost in terms o the next 'est alternative oregone Calculating opportunity cost re?uires time and inormation Opportunity cost may vary with circumstance Economic rent: dierence 'etween what is earned and what could have 'een earned @sed in speciali7ation and trade #" !roduction !ossi'ility Curve -aximum attaina'le com'ination o two goods and services that can 'e produced in an economy, when all availa'le resources are used ully and eiciently, at a given state o technology ,ssumptions: ixed amount o resources, actors ully and eiciently employed, technology ixed, time period give, 2-product model 4ully: using all resources availa'le Eiciently: do as many things you can with the resources used Scarcity: unattaina'le com'inations outside !!C ; society has to choose among com'inations o 2 goods Shit: ?uantity and ?uality o resources <thin. 4O!= ; technology A s.ewed( Choice 'etween instant gratiication and improving economy in the uture 2 %" 6he -arginalist !rinciple Consume till -!8 B -!C: cost o producing an additional unit o good B 'eneit o consuming an additional unit o good 4or the price mechanism to wor., inormation need not 'e .nown with perect accuracy 'y every individual acting in the mar.etplace: dependent on marginal 'uyers who .eep suppliers on their toes )" Eiciency Static eiciency: how much output can 'e produced now rom a given stoc. o resources at a given point in time $ynamic eiciency: changes in the amount o consumer choice availa'le in mar.ets together with the ?uality o goods and services availa'le !roductive eiciency: a'sence o waste in the production process B minimi7ing the opportunity costs or a given value o output ,llocative eiciency: society produces and consumes a com'ination o goods and services that maximi7es its welare $istri'utive eiciency: goods and services produced to those who want or need them 3 &heat Cloth 3 C$raw dotted line to show comparison 'etween 2 countries with a common yardstic. Explain two ways in which an econoy ight o!e "ro a point within its PPC to a point on it. #1$% /ntroduction $eine !!C 8ody ," /ncrease employment o resources >ower wages to 'e more competitive A may 'e enticed to produce more goods 4iscal policy: increase government spending eg" circle line A multiplier eect -onetary policy: lower interest rate A irms 'orrow more, increase investment 8" /ncrease eiciency in use o resources !ay 'ased on productivity: 'ut only or Do's where output can 'e measured <actory wor.ers= +eallocate resources to more eicient uses +etraining # , 8 5ood E 5ood F O ,: resources not ully utili7ed A underemployment and unemployment 8: eicient use o resources A ull employment &iscuss the ost e""ecti!e econoic policies to o!e the PPC outwards. #1'% /ntroduction Outward shit: increase in productive capacity A sustain economic growth over long run 8ody ," >a'our /ncrease 'irth rate 'ut diicult to do so in developed countries A emale la'our orce participation ; need lots o incentives Education and training 'ut ta.es long time and does not necessarily yield results 4oreign talent through tax incentives 8" Capital -GCs A investment <machines= ; learn their technological .nowledge /nvest in r;d C" Entrepreneurship /ncentives and su'sidies to start 'usinesses $" >and +eclamation Conclusion $epends on which country Eg" 4or @S,: encourage capital goods, less consumption goods" 4or China: entrepreneurship % (hat is eant )y the )asic econoic pro)le o" scarcity* #1+% /ntroduction Scarcity A scare resources, unlimited wants 8ody Scarcity A choice A opportunity cost 1= /ndividual: timeH consumerH how to maximi7e use o limited resources A more la'our I more machines 2= 4irm: least-cost com'ination o resources in order to maximi7e proits 3= 5overnment: choice 'etween competing proDectsH cost-'eneit analysis #= Economy: pro'lem o how to allocated scare resources eiciently 'est illustrated 'y the !!C <8rie= /mplications: 6rade as a solution to alleviate scarcity 6rade-o 'etween consumer goods and capital goods &hat <how scarcity aects decision-ma.ing o an economy=, how much, or whom and what to produce <mar.et system= ) E 5ood E 5ood F O ) # % ) &iscuss whether econoic growth sol!es the pro)le o" scarcity. #1,% /ntroduction Economic growth A increase in national income A generally get to consume more goods and services 8ody 1= /ncrease in ?uantity and ?uality o resources A increase in productive capacity >a'our: due to reduction in unemployment and underemployment S.ills and educational level >and Capital stoc.: most eective way to alleviate pro'lem o scarcity A more capital economy produces in one period, more output capital can produce in the next to satisy wants in society 2= 6echnological improvement A increase in productive capacity: 'etter and new methods o producing goods + ; d A technological 'rea.through A new products A create more wants 3= /ncrease in income A consumers a'le to satisy wants 8ut with greater aluence, people have more wants due to advertising and promotions A luxury goods o the past may 'ecome necessities #= Supply limited $emand accelerating A China I /ndia economic growth Crude oil important as it is a source o uel Eg" land in Singapore 8ut technological improvements allow society to ma.e use o renewa'le resources as sources o energy 8ut more wants created %= E?uity in distri'ution Economic growth does not guarantee a reduction in income gap Corruption, ood shortages * Chapter +: -esource .llocation in Copetiti!e /ar0ets 1 C,ssumption: -any 'uyers and sellers such that no single 'uyer I seller can exert control over mar.et price <price ta.ers= 1" $emand 6heory $emand: amount that consumers are willing and a'le to purchase at each given price over a given period o time $emand curve slopes downwards /ncome eect: eect o change in real income resulting rom change in price o good Su'stitution eect: eect o change in price on ?uantity demanded arising rom consumer switching to, or rom, alternating products $eterminants !rice 6aste: education, culture, age group, health scares /nterrelated goods: su'stitute vs" complement !opulation: a'solute change, change in composition Seasonal changes: climate, estival Expectations o the uture: uture changes in price I income +eal disposa'le income: changes in taxes I money income +edistri'ution o income Consumer surplus: dierence 'etween maximum amount consumers willing to pay or a given ?uantity o good and what they actually pay 2" Supply 6heory Supply: ?uantity o a good or service producers are willing and a'le to oer or sale at each given price over a given period o time $eterminants !rice CO!: change in price o actor inputs Other prices: Doint I competitive supply /nnovation: lower production costs Gatural actors: climate, unexpected events 5overnment policies: indirect taxes, su'sidies Gum'er o sellers !roducer surplus: dierence 'etween amount received 'y producers and minimum amount they are willing and a'le to accept or the supply o a commodity 3" -ar.et E?uili'rium 8uyers and sellers satisied with current com'ination o price and ?uantity 'ought or sold, and are under no incentive to change their present economic actions 0 ,dDustment to e?uili'rium 8elow e?uili'rium Shortage A consumers compete or goods, 'idding up prices A price increases, ?uantity supplied increases A shortage eliminated A mar.et settles at e?uili'rium ,'ove e?uili'rium Surplus - producers reduce prices to get rid o stoc.s A increase sales and decrease production A price alls, ?uantity demanded increases, surplus eliminated A mar.et settles at e?uili'rium Shits in supply and demand: consider individual eects on price and ?uantity then sum up /nterrelated demand and surplus Joint I competitive I derived demand Joint I competitive supply #" Case Study &hen as.ed to explain how a group o people intend to aect a certain mar.et, 'ring in limitations Elasticity o demand +esponses o other irms I groups o people ,nalyse theoretically irst, then see how and why the data its I does not it the theory $esira'ility: consider or whom: producer, consumer, society Eectiveness: limitations, long run vs" short run 1 . anu"acturer wishes to sell ore o" his product. 2ow ay he try to achie!e his ai* #1+% /ntroduction Sell more A only considering e?uili'rium ?uantity A increase demand I supply Eect: long run vs" short run 8ody 1= /ncrease demand: explain eect on ?uantity demanded ,dvertising and promotion: create product dierentiation and 'rand loyalty Competitive mar.et: other irms will do li.ewise as they ear losing mar.et share 2uge unds need to 'e devoted A increase CO! A reduce proits / irm passes cost increase to consumers in terms o higher prices A all in ?uantity sold A assuming demand elastic A total revenue alls 8ut una'le to increase price in competitive mar.et A irms may engage in price wars 8ut in long run i campaign successul in altering people:s taste and preerence A rise in ?uantity sold Expanding num'er o mar.ets: go regional I glo'al Easier to penetrate mar.ets where demand or product more price elastic /ncrease supply A all in price A more than proportionate rise in ?uantity demanded /mprove ?uality o product I increase product dierentiation through 'etter sales service I improved pac.aging Eect o money spent or r;d on Costs then price o product -ar.et share in long run <increase= $eli'erate attempt to reduce price o good through discounts !rice elasticity o demand 2ow long discount can 'e sustained without eroding proits 2= /ncrease supply: explain eect on ?uantity demanded /nvestment in r;d >ower CO!, more eicient production methods, 'etter ?uality products +aising productivity through greater speciali7ation and 'etter la'our- capital com'ination Sourcing cheaper sources o raw materials Evaluation +educes price A may conlict with proit maximi7ation -ore eective strategy i selling product that is price demand elastic A mass produce A reap EOS A lower prices A increase sales volume more than proportionately 13 Chapter ,: -esource .llocation in Copetiti!e /ar0ets 11 1" !rice Elasticity o $emand -easure o degree o responsiveness o ?uantity demanded o good to a change in its price, ceteris pari'us Coeicient: sensitivity o consumers to price changes Gegative: inverse relationship 'etween price and ?uantity demanded $eterminants ,vaila'ility o su'stitutes Gecessities vs" luxuries !roportion o income 6ime period: longer A switch to su'stitutes A more price elastic @seulness 5overnment taxation policies: raise revenue, discourage consumption 4irms: pricing policy Eectiveness o trade unions: can as. or higher wages i demand or product is price inelastic !rice sta'ility: prices more volatile i demand more price inelastic when supply shoc. 2" /ncome Elasticity o $emand -easure o degree o responsiveness o demand o good to change in consumers: income, ceteris pari'us Coeicient Gegative: inerior good !ositive: normal good >ess than one: necessities -ore than one: luxuries @seulness !roduction plans: 'oom vs" recession 6argetting dierent income groups: segment mar.et 3" Cross Elasticity o $emand -easure o degree o responsiveness o demand o good to change in price o another good, ceteris pari'us Coeicient Gegative: complement !ositive: su'stitute @seulness Eects on products: demand when aced with change in price o rival:s product Strong complements A can sell Dointly 11 #" !rice Elasticity o Supply -easure o degree o responsiveness o ?uantity supplied o good to a change in its price, ceteris pari'us !ositive: direct relationship 'etween price and ?uantity supplied $eterminants 6ime period: longer A supply more price elastic 'ecause possi'le to change anything 4actor mo'ility Gum'er o irms: more A supply more price elastic Stoc.s and spare capacity: more A can produce more A supply more price elastic >ength o production period: shorter A supply more price elastic @seulness 6axation: incidence !rice sta'ility %" 5overnment !olicies 6axation I su'sidies $emand more price inelastic A higher incidence /ncidence: distri'ution o 'urden 'etween consumers and sellers -inimum price !rotect income o producers Creates surplus or uture shortages 4inancing annual surpluses A 'urden on taxpayers A not good in long run Cushion ineiciency Gew producers attracted A increase surpluses unless government has measures to increase demand -aximum price >ower-income consumers to aord necessities !rotect consumers ,llocation o goods may 'e 'iased 8lac. mar.et, especially during war time 5overnment can encourage supply 'y drawing on past surpluses, giving su'sidies and tax relie, reducing demand 'y controlling income )" Case Study Gote dierence 'etween elasticity o the product and the elasticity o the inal product <which involves the use o the product= Gote dierence 'etween less inelastic and more elastic &hen as.ed how a strategy might aect a company, consider eect on total revenue then proits 12 *" Essay >imitations to using elasticity concepts to explain price changes Elasticity concepts are static A need to relax ceteris pari'us assumption in reality A simultaneous changes occur A need to consider relative magnitudes o changes in demand and supply Coeicients o elasticity mere estimates Consumers not homogenous group ,mong high-income earners, there are the yuppies see.ing the high lie and are li.ely to 'e more price and income sensitive compared to oreign investors who would consider socio- political actors -ay not consider some goods as su'stitutes 13 Explain price elasticity o" deand and incoe elasticity o" deand. #1$% $einition 4ormula Sign Coeicients: range o values or elastic I inelastic Examples with their estimated values . go!ernent is proposing to increase the tax on petrol. Exaine the rele!ance o" price elasticity o" deand and incoe elasticity o" deand "or this proposal. #1'% /ntroduction ,ssume speciic tax or simplicity @ses o petrol: irms: and commuters: transportation Gormal good: income increase A demand or cars increase A demand or petrol increase 8ody 1= $emand or petrol price inelastic: explain why /ncrease in indirect tax A supply alls at given price A supply curve shits vertically upwards 'y amount o tax $emand or petrol inelastic A all in ?uantity demanded less than proportionate +elevance: need high tax i government wants to reduce consumption to desired level 2= /ncome elasticity o demand less relevant 'ecause it is due to changes in income A tax on petrol aects price directly, not income 5overnment li.ely to 'e less successul i they increase tax on petrol in period o economic 'oom 8oom: incomes rise A demand or cars <luxury good= A increase 'y more than proportionately A derived demand A increase demand or petrol 1# The terrorist attac0 on New 3or0 on 11 Septe)er +$$1 caused a worldwide recession and an increased "ear o" "lying, )oth o" which se!erely a""ected the deand "or tra!el )y air. This led to the closure o" soe o" the a4or airlines in the world. .ssess the rele!ance o" elasticity concepts in explaining the e""ects o" these e!ents on the airline industry. #1'% 8ody 1= !rice elasticity o demand $einition &hen supply o airlines ell due to closure o maDor airlines A price expected to increase A ?uantity demanded all 'y more than proportionate A total revenue all +elevance ,irlines should expect that reducing supply causing a rise in price can lead to a all in total revenue 8ut the demand or travel or 'usiness is li.ely to 'e inelastic" So price increase A less than proportionate all in ?uantity demanded A total revenue increase Eect on total revenue depends on si7e o 'usiness mar.et vs" holiday ma.ers $ue to the ceteris pari'us assumption, the a'ove will only ta.e place i other actors remain constant" /n this context, incomes have changed causing demand curve to shit A total revenue all 2= /ncome elasticity o demand $einition ,ir travel luxury good or most, necessity or 'usiness travelers +elevance +ecession A all in income A all in demand A all in total revenue /mplication: individual airlines need to reduce price I engage in non- pricing strategies to increase mar.et share 3= Cross elasticity o demand $einition !otential su'stitutes: train I coach I ship $egree o su'stituta'ility depends on the length o light >ong haul lights: wea. su'stitutes especially or 'usiness travelers Short distance: stronger su'stitutes / another airline <eg" Kantas= reduces price to increase mar.et share A all in demand or a particular airline <eg" S/,= A S/, reduces price A price war A may not cover costs A erode proits 8udget airlines also pose as competition 1% ,irlines close down routes I less schedules A all in supply A increase price $emand inelastic: long haul lights A no close su'stitutes A total revenue increase $emand elastic: short distance lights A switch to trains I coaches A total revenue alls #= !rice elasticity o supply $einition 4all in price A all in ?uantity supplied 8ut short run: supply price inelastic A less than proportionate all in ?uantity supplied +easons >a'our: need time to retrench I reallocate la'our to other departments 4light schedule I routes: need time to deli'erate which routes I schedules to close A choose the unproita'le I lowest passenger volume Conclusion Cannot loo. at each value separately 'ecause in real world many varia'les change at the same time 1) Chapter 5: /icroeconoic Pro)les: /ar0et 6ailure 1" -ar.et 4ailure Scarce resources A need to allocate resources eiciently A o'Dective: maximi7e society:s welare <social optimality= -S8 B -SC: 'eneit to society rom one additional unit o good B cost to society o producing one extra unit o good &ays to allocate resources 6otal government intervention 4ree mar.et <'ased on price mechanism= -ixed economy <ree mar.et with some government intervention= 4ree mar.et economy !rivate ownership o resources ; individual decision-ma.ing guided 'y sel-interest !rice serves as signal or resource allocation ,utomatic wor.ing o supply and demand A spontaneity A allocative eiciency E?uili'rium where demand B supply: maximi7ation o consumer and producer surplus ,ssumes no externalities ; perect competition -ar.et ailure occurs when ,llocative ineiciency: externalities I pu'lic goods, imperect competition /na'ility o mar.et to achieve social o'Dective eg" income e?uity 2" Externalities Cost I 'eneit on a third party not involved in the consumption I production o good Gegative 6ypes: industrial pollution, pollution and congestion rom vehicles, demerit goods eg" cigarettes External cost: second-hand smo.e A health pro'lems, ire ha7ard, environmental cost A littering, anti-smo.ing campaigns A money comes rom taxpayers who largely do not smo.e 6o ta'acco company: proit-maximising private producer: -!8 B -!C 6o society: to attain social optimality: e?uili'rium level -S8 B -SC B -!C ; -EC Overproduction: deadweight loss !ositive 6ypes: merit goods eg" healthcare, education External 'eneit: higher standard o living o everyone 'ecause o highly-s.illed Do's @nder-production 'y ree mar.et: deadweight loss 8ecause o partial mar.et ailure, government intervention comes in 1* 10 3" !u'lic 5oods Gon-excluda'le: impossi'le I costly to exclude non-paying consumers rom receiving the good Gon-rivalrous: consumption 'y one person does not reduce amount availa'le to others Eg" Gational deense 4ree rider A conceal demand A private producer cannot gauge demand A will not produce A non-production in ree mar.et A total mar.et ailure 5overnment provision necessary since pu'lic goods are socially desira'le and largely indivisi'le #" /ne?uality +epresented 'y the >oren7 Curve I 5ini coeicient Singapore: 3"#0% in 233* European countries: 3"2% A 3"3 >atin ,merica and the Cari''ean: 3") ,verage worldwide: 3"# %" Essay &hen as.ed to suggest new policies, consider whether it is possi'le I practical to enact them !olicies may 'e diicult to administer, and policing expensive Opportunity costs involved in attempted to control negative externalities !olitical implications eg" pu'lic satisaction 11 Policies on Pollution and E!aluation Suary 1= /dentiy: 6axation Explain: 6ax polluters per unit o -EC A CO! increases or private irms A supply alls rom -!C to -SC 'y amount o -EC Evaluate: C Gegative externality internali7ed 'y irm: incentive or irm to 'e more -cost-eective to maximi7e proits I reduce pollution C !rovides revenue or government to inance other social and community development proDects C ,'le to allow mar.et to continue operating according to mar.et orces and reach state o e?uili'rium x +e?uires accurate valuation o -EC I amount o pollution - Over-valuation: output 'elow socially optimal level, reducing society:s welare I deters production A aects economic growth - @nder-valuation: output still not 'rought to socially optimal level x $iicult to apportion 'lame x Eectiveness dependent on price elasticity o demand: i highly price inelastic, eect o tax on output ineective unless tax very large I irm a'le to move 'urden to consumers and get away scot- ree 2= /dentiy: Kuotas Explain: 8an production i pollution exceeds a certain limit A limits -EC 'y restricting output at socially optimal level Clearly deined amount o pollution each irm can have Evaluate: C ,'le to control level o pollution in the country as a whole E $oes not allow price to e?uili'rate ?uantity demanded to ?uantity supplied: irms may decide to produce less so they do not exceed the maximum amount o pollution they can have <compare this to taxation= E $iicult and tedious to gauge how much pollution each irm produces: waste o resources and time on inspection E Geed vigilance and commitment o government 3= /dentiy: >egislation Explain: 4orce producers to 'ear costs o more proper disposal o industrial wastes eg" antipollution e?uipment 23 Evaluate: x $iicult and costly: spend resources on inspection E / chances o 'eing caught and penalties are small, legislation ineective E Geed vigilance and commitment o government E Got immediately eective 'ecause o 'ureaucracy involved in esta'lishing laws E >ose voters leading to loss in power #= /dentiy: Gationalisation Explain: 5overnment ta.es over the polluters: irms and ensures production at socially optimal output Evaluate: x &aste o resources: opportunity cost to other proDects 'ecause less unds availa'le E $iicult to accurately valuate ?uantity demanded E Go competition: ineicient, no innovation %= /dentiy: Campaign I advertisements to educate pu'lic Explain: +aise awareness o pollution situation to pu'lic in hope they might do something to cur' pro'lem Evaluate: x Costs o these measures might outweigh 'eneits E $uration needed 'eore eects can 'e elt and there is no guarantee that the campaign will 'e eective E -ay 'e eective or only a short period o time 'ecause the pu'lic is constantly 'om'arded 'y such campaigns that it is starting to lose its intended eect )= /dentiy: Su'sidies Explain: Su'sidise purchase o antipollution e?uipment so that irms: CO! does not increase that much 'y purchasing these e?uipment A irms more li.ely to 'uy the e?uipment than 'eore Evaluate: x Opportunity cost to other pu'lic proDects E Go guarantee that irms will 'uy the e?uipment E 4irms need time to incorporate use o new e?uipment: 'ut in the long run pro'a'ly mitigates the pro'lem o pollution i irms use the e?uipment 21 *= /dentiy: @r'an planning Explain: >ocate actories away rom residential areas eg" Jurong /sland 5reenery <to reduce impact= Evaluate: x -erely shiting the pollution to another area A does not solve the root o the pro'lem 'ut reduces external cost since less people aected 'y pollution E Contentious as to whether greenery helps to reduce impact Summation: ,ir pollution may not 'e due to the country itsel, so need international I regional cooperation Can integrate a ew policies or 'etter results 22 Policies on Pollution and Congestion caused )y Cars Suary 1= /dentiy: E+! per tax unit Explain: +estricts car usage <nowadays rely more on this policy= /ncreases cost o car Dourney A ?uantity demanded or car travel alls Evaluate: x Congestion in other areas I small roads E /ncrease 'usiness cost A pass to consumers 2= /dentiy: COE Explain: +estricts car ownership Evaluate: x /ncreasing aluence A income elasticity o demand or cars E Cannot stem people:s aspirations E Geeds vigilance and political will <in other countries, government might not 'e a'le to have COE= 3= /dentiy: Eicient and aorda'le pu'lic transport Explain: >ess pollution and congestion on roads Evaluate: x Got all countries have resources to 'uild an eective pu'lic transport system A >$Cs: no money, $Cs: complex commuting patterns E 4or it to 'e aorda'le, possi'ly need government to inance" Otherwise i let to the private irm, they would want to charge more to maximi7e proits" #= /dentiy: +egistration tax, annual road license Explain: +estricts car usage Evaluate: C-ay wor. i there is vigilance and commitment 'y government %= /dentiy: +e'ates or green vehicles eg" 23L o purchase price Explain: >ower price A ?uantity demanded higher Evaluate: x Still not widely advocated E -ay still 'e too expensive to aord 23 )= /dentiy: &ee.end cars Explain: +estricts car usage Evaluate: x Still not widely advocated E !eople associate cars with prestige <eg" ,mericans love or S@Ms= 2# Chapter ': 7o!ernent 1nter!ention in the /ar0et 1" 6ac.ing Externalities Gegative externalities Ndetails on page 21-23O !ositive externalities Su'sidies: external 'eneit internali7ed <wor.s li.e the tax= Can 'e easily implemented to 'ring a'out increase in production and consumption $iicult to valuate external 'eneit generated 2igh government expenditure A high tax rates can su'se?uently discourage investment in country 4irms lose incentive to 'e more productively eicient A ineicient irms may survive $irect provision o merit goods Social Dustice: merit goods should 'e accessi'le to all and not provided according to a'ility to pay >arge positive externalities: eg" ree healthcare com'ats spread o disease $ependants: eg" ree education to protect children rom irresponsi'le parents who ail to provide children ?uality education /gnorance: consumers may not reali7e how much they will 'eneit and i they had to pay, they would rather go without it 2" 5overnment 4ailure ,llocative eiciency reduced ollowing government intervention to correct mar.et ailure !ro'lem o incentives /mposition o high taxes can distort incentives 2igh marginal tax removes incentive or people to wor. harder to earn more $isincentive to produce and consume $esire 'y politicians to get elected: popular policies introduced <eg" minimum wage law= !roit motive o private sector largely removed !ro'lem o inormation $iicult to valuate external cost I 'eneit $iicult to accurately estimate level o consumer demand or product !ro'lem o distri'ution /ncrease ine?uity Eg" tax on use o domestic uel <.erosene in /ndonesia= A low income households may eel greatest eect as tax on uel oil may ma.e lie o poor worse since they use proportionately more domestic uel than others 2% 8ureaucracy and ineiciency: administrative costsH time lags Shits in government policy: too re?uent changes A diicult or irms to plan ahead 2) Chapter 8: 6irs and 2ow They Operate 1 1" !roduction in the Short +un Short run: at least one ixed actor >ong run: period o time long enough or all actors to vary, except level o technology, which varies in the very long run >$-+: as more units o a varia'le actor are applied to a given ?uantity o a ixed actor, there comes a point 'eyond which the extra output rom additional units o the varia'le actor will eventually diminish Stage 1: 6! increases at an increasing rate, -! rises A due to speciali7ation o la'our Stage 2: 6! increases at a decreasing rate, -! alls, >$-+ sets in A due ineicient use o ixed actor Stage 3: 6! alls, -! alls -! B change in 6! I change in > 2" 6heory o Costs in the Short +un 4actor 6otal 4ixed Cost 6otal Maria'le Cost -arginal Cost $einitio n Sum o all costs o production do not vary with the level o output a.a overhead costs -ust 'e paid even without production Costs incurred or use o varia'le actors li.e la'our Maries directly with output level ,dditional cost incurred in producing an extra unit o output in the short run while some inputs remain ixed -C B change in 6C I change in K Example s +ent o actory 'uilding, interest on capital invested in e?uipment +aw materials, la'our 2* 5raph ,verage curves ,6C B ,MC ; ,4C ,4C: amount o ixed costs per unit o output ,4C B 64C I K ,MC: total varia'le costs per unit o output ,MC B 6MC I K Stage 1: ,MC alls, ,4C alls" Since ,4C and ,MC all, ,6C also alls Stage 2: ,MC rises, ,4C alls" Since all in ,4C P rise in ,MC, ,6C still alls Stage 3: ,MC rises, ,4C alls: Since all in ,4C Q rise in ,MC, ,6C rises 20 3" O'Dectives o 4irms !roit-maximisation: e?uili'rium level o output since there is no tendency to change 8eore e?uili'rium level, -+ P -C so irms want to produce more ,ter e?uili'rium level, -+ Q -C and rational irms will not produce at this output level 4irm continues production as long as it can cover varia'le costs -otivation o owners vs" motivation o managers: separation o control and ownership A principal-agent pro'lem: managers tend to pursue their alternative goals while maintaining minimum level o proits to appease shareholders +evenue maximi7ation: managers aim to maximi7e irm:s short run total revenue >ong-run proit maximi7ation: managers aim to shit cost and revenue curves so as to maximi7e proits over some longer time period 5rowth maximi7ation: managers may aim or expansion to maximi7e growth in sales volume over time #" 6heory o Costs in the >ong +un +eturns to scale: measure o resulting change in output when all inputs are changed in the same proportion <can 'e increasing, decreasing or constant= >+,C: lowest average cost or given level o output when all inputs are varia'le -inimum eicient scale: smallest plant si7e 'eyond which no signiicant additional /EOS can 'e achieved /EOS: savings in costs that occur to a irm due to the irm:s expansion, and have 'een created 'y irm:s own policies and actions 6echnical: concerned with production process 4actor indivisi'ility economies: larger plant si7e ma.es it possi'le to eectively use indivisi'le actors <com'ine harvesters, power transmission: large and costly= A raises average output and reduces >+,C Specialisation o la'our: simpler and repetitive Do's which re?uire less training ; more eicient eg" car manuacturing -anagerial: unctional speciali7ation 'y employing experts to increase eiciency as a whole 5reater use o existing sta $ecentralisation o decision-ma.ing: increasing eiciency o management 'ecause o aster low o inormation within irm A distortions and delays o inormation avoided Commercial 8argaining advantage and accorded preerential treatment 'y suppliers 'ecause they 'uy raw materials in 'ul. 8ul. sales rom 'ul. advertising and large-scale promotion 21 4inancial Easier and cheaper to raise unds: given lower interest rate and larger loans 'ecause 'etter credit ratings and more collateral +aise capital through issue o shares to pu'lic who has more conidence in reputed irms +is.-'earing ,dvantage in 'earing non-insura'le ris.s eg" conditions o demand or inal products and supply o raw materials $iversiication o products and mar.ets $iversiication in sources o supply +;d 8etter ?uality products A increased mar.et share and demand 8etter methods o production A more productively eicient A lower average cost &elare: ma.ing wor.ers eel they 'elong to the company A more apt to increase eiciency and productivity o company /$OS Complexity o management !rincipal-agent pro'lem 8ureaucracy Strained relationships: impersonal A no loyalty to irm A apathy, stri.es EEOS: savings in costs that occur to all irms in an industry due to the expansion o the industry Economies o concentration ,vaila'ility o s.illed la'our: demand or la'our large enough A special educational institutions I irms can colla'orate to develop training acilities Go lac. o la'our to employ 'ecause experts want to migrate there eg" Silicon Malley &ell-developed inrastructure to cater to that industry +eputation: 'uilds up name which consumers associate with ?uality A encourages 'rand loyalty and steady clientele Economies o disintegration Su'sidiary industries developed to cater to needs o maDor industry Eg" car industry in Japan: range o irms speciali7e in production o dierent inputs or car manuacturing A provide output at lower prices to main industry 'ecause speciali7ation allows su'sidiary irms to produce at large scale A enDoy EOS !rocess waste products into useul products and sell them to cover CO! Economies o inormation: pu'lications help improve productivity o irms <research and expertise= 33 E$OS /ncreased strain on inrastructure: taxed to limits eg" congestion A loss o time and increased uel consumption +ising costs o 4O!: growing shortage o speciic raw materials I s.illed la'our %" 5rowth o 4irms -ethods o growth /nternal expansion: ma.e more o existing product or extending range o product when it 'uilds a new 'igger plant -erger Mertical integration: irms engaged in dierent stages o productive process 8ac.ward integration vs" orward integration Eg" Star'uc.s merge with irm producing coee 'eans A wants guaranteed access to raw materials 2ori7ontal integration: irm ta.es over similar irm at same stage o production in the same industry Eg" Coee 8ean and Star'uc.s merge Eg" $8S and !OS8 -ar.et domination Conglomeration Eg" 'an. ta.ing over developing irm to 'uild properties $iversiy output )" Survival o Small 4irms $emand-side actors Gature o product 8ul.y and perisha'le goods: small, locali7ed mar.ets eg" resh ish Mariety preerred to standardi7ation eg" ashion Specialised products: limited mar.ets eg" highly speciali7ed machines !restige mar.ets: limited 'y price eg" sports cars, luxury yachts $irect and personali7ed services eg" lawyers, doctors 5eographical limitations: high transport costs or 'ul.y products A local mar.et rather than national mar.et Supply-side actors $EOS set in early: optimum si7e o irm small Mertical disintegration: entire production process 'ro.en into series o separate processes and dierent small irms perorm each process >ow 86E >ac. o capital 31 @nwillingness to ta.e greater ris.s >arger irm A higher expenditure A greater ris. o investment 4ear o uture all in price o inal product: expansion o output A increase mar.et supply A excess supply A lower prices and lower proits 8anding: small irms may 'and to gain advantages o 'ul. 'uying while still retaining their independence !roit cycles: early stage o product cycle A total demand or product low Gon-proit maximi7ation attitudes Owner values independence or wants to maintain control among amily mem'ers Contented with reasona'le income rom domestic mar.et @nwilling to ta.e increased ris.s associated with expanding into oreign mar.et *" Case Study 4actors: thin. long run vs" short run, demand-side vs" supply-side EOS A lower >+,C A a'le to reduce price !roits plough to r;d A 'etter ?uality products ; urther reduction in ,C 8loc. new entrants due to enormous 4C A less existing competitors A increase mar.et share ,lways end EOS with ,C / a particular industry is stated in the extract, try to give egs o EOS speciic to the industry 0" Essay Survival o small irms: or conclusion, use 'anding I small irms may want to merge in the ace o glo'alisation 32 &iscuss whether rising costs liit the si9e o" "irs o!er tie. #1'% /ntroduction Si7e: sales revenue I turnover, level o output, mar.et share Over time A long run A irm no longer constrained 'y ixed actor 8ody 1= Can limit Short run cost +eason: over-use o ixed actor, ineicient la'our-capital com'ination A increase -C A eventual increase in ,C /ncrease costs A all in proits i total revenue is constant A constrain irm:s a'ility to expand 2= &ill not limit >ong run ,ll inputs can vary A irm can expand A enDoy all in >+,C due to internal EOS <list 2 egs= 4all in >+,C A all in price to ward o competitors <erecting 'arriers to entry= A increase proits A plough into r;d A 'etter ?uality products ; i yields results A urther all in ,C due to 'etter production methods Si7e o irm determined 'y demand or irm:s product A i irm ma.ing supernormal proits A can still expand in si7e even i cost increases eg" monopoly selling uni?ue products Conclusion: 2owever, si7e o irm over time constrained 'y -ES <list 1 eg o internal $OS=" -ES huge eg" electricity I water compared to -ES limited eg" ashion" :an0ing /erger in Singapore .nalysis &hy merge( 4ace competition rom oreign 'an.s A Singapore wants to expand 'eyond our shores: 'ig A enDoy EOS A all in ,C A can compete with oreign 'an.s Core part o Singapore economy A 111* ,sian inancial crisis A 'ig sta'le &hy should not merge( !ossi'le monopoly power /ncrease price Kuality o service +eduction I removal o amiliar products and services A aects consumer satisaction Geglect lower-income group 33 +etrenchment 3# Chapter ;: 6irs and 2ow They Operate 11 1" Comparison o the # -ar.ets 6ype !erect Competition -onopoly -onopolistic Competition Oligopoly Gum'er o 'uyers I sellers >arge Go one 'uyer I seller can inluence price 4irm price ta.er Only one irm 4irm price setter >arge 4O! relatively mo'ile &hen irm ma.es decisions, does not have to worry how its rivals will react 4ew large irms /nterdependent 8arriers to entry Gone 4O! perectly mo'ile Go transaction I transportation costs -inimal sun. costs 2igh Gatural: huge sun. costs <,4C alls over very large output A ,C alls continuously A enDoys huge /EOS=, exclusive ownership o essential raw materials ,rtiicial: non-price competition, contrived 'arriers <cartel=, legal protection: exclusive rights <patents, taris to 'loc. oreign irms= Go I >ow 4irm lowers price A proits spread thinly over many rivals A rivals suer negligi'ly +etaliation unli.ely Go collusion A .een competition Su'stantial Gatural ,rtiicial: legislation, collusion I mergers, non-price competition, advertising Gature o products 2omogeneous 8uyers no preerence Go close su'stitutes CE$ and !E$ very $ierentiated: ?uality, design, 2omogeneous I dierentiated 3% or any irm low location, promotion $emand price elastic 3) Rnowledge !erect Seller .nows rivals: prices, mar.et costs and availa'le technology 8uyers .now all sellers: prices, ?uality and availa'ility o products A will not purchase at a higher price than e?uili'rium price /mperect Consumers not ully aware o CO! /mperect !roduction methods and prices Cost structures dier as some irms enDoy more avoura'le locations I rentals /mperect 4irm:s curve ! B ,+ B -+ ! P -+ Cannot increase 'oth output and price at the same time as curve is downward sloping ! P -+ Some degree o control over own prices Go single e?uili'rium price in mar.et A no mar.et demand curve ! P -+ 4irm increases price A other irms will not 4irm decreases price A other irms ollow A may lead to price war !rice rigidity: menu 3* costs, ear o harming irm:s image <all in price A all in ?uality= Examples Stoc. mar.et 4orex mar.et ,gricultural products: many armers in >$Cs @tilities Starhu':s E!> coverage S-+6 or GS and E& lines 8u''le tea @R 'rewery industry 6axi companies O!EC -o'ile service provision 4irm:s S+ e?uili'rium Supernormal, normal I su'normal proits -C B -+ and -C must 'e rising 4irm:s >+ e?uili'rium Gormal proits Gew irms will enter industry to erode supernormal proits Gormal I supernormal proits 4irm will shut down i su'normal proits Gormal proits Gormal I supernormal >+ e?uili'rium curve !roductive eiciency Eicient 4irm produces at -ES /neicient unless 'y coincidence /neicient &ill settle at >+,C that is not necessarily at -ES /neicient unless 'y coincidence 4irm:s !OM: all points on >+,C 30 Society:s !OM: -ES ,llocative eiciency Eicient ! B -C /neicient ! P -C Could 'e seen as premium society pays or product dierentiation 31 2" ,nalysis o /mperect -ar.et Structures 6ype -onopoly -onopolistic Competition Oligopoly Economic eiciency ,llocative ineiciency: ! P -C, output 'elow optimum !roductive ineiciency E-ineiciency 'ut increasingly reduced due to glo'alisation, reduced customs duties and 'arriers to trade $ynamic eiciency: r;d ,llocative ineiciency: ! P -C !roductive ineiciency: do not utilise optimal plant capacity, do not exhaust potential or urther EOS 'ecause all small irms $ynamic ineiciency: no r;d ,llocative ineiciency: ! P -C, output 'elow optimum !roductive ineiciency $ynamic eiciency: r;d Mariety o products @ni?ue !ossi'le innovation and new products: 86E stimulus to the creativity re?uired to destroy 'arriers A monopoly proits stimulates new entrants producing new and competing products >arge variety A increase in consumer welare $ierentiated +;d and new proits !roits lead to une?ual income distri'ution: dollar votes ; shit o consumer surplus to producer Supernormal proits A plough into r;d A 'etter ?uality products ; 'etter methods o production A lower ,C 'ut there is no guarantee that monopolies will do this -ore e?uity: no redistri'ution o income rom consumers to shareholders Gormal proits: no additional proits to plough into r;d Supernormal proits ploughed into r;d #3 6heory vs empirical evidence -ES high A /EOS A lower -C than !C industry A lower ! and higher oIp 'ut monopolies charge high prices 'y restricting output !ractise price discrimination Nhas 'oth costs and 'eneitsO Gatural monopolies !erectly contesta'le mar.ets: costs o entry and exit 'y potential rivals are 7ero, and when such entries can 'e made very rapidly eg" deregulation o airline industry in 11*0 2it and run competition: mar.et contesta'le or certain seasons eg" parcels service during estivals +educes wasteul competition <instead o extensive &asteul competition ,dvertising provides 'etter consumer inormation which helps move mar.et structure closer to !C model 'ut loss o consumer sovereignty 2igh price rigidity: price sta'ility &asteul competition: more li.ely to engage in extensive advertising A encourages price competition, with increased sales volume and reaping o EOS, price reduce urther 8ut possi'le monopoly power through collusion 8ut multiple 'randing gives consumers misguided inormation in thin.ing products are rom dierent irms !I+IC K ,+ -Cm -+ -Cp c !c !m 3 K c K m #1 advertising, money can 'e spent to produce more goods= #2 3" !rice $iscrimination !roducer sells speciic commodity to dierent 'uyers at two or more dierent prices Same consumer charged dierent prices or same product or reasons not associated with cost dierences Conditions !ossi'le Seller has control over mar.et supply -ar.et segmentation and identiia'le groups ; no resale !roita'le: each mar.et as dierent !E$ 4irst degree !ractice o charging each customer his reservation price Captures all consumer surplus as revenue Eg" auction sites /mpractical to charge each customer a dierent price 4irm usually does not .now the reservation price o each customer: consumers do not tell and producers may not want to spend time and resources to ind out Second degree Charge dierent prices or dierent 'loc.s o the same product to the same 'uyer Eg" photocopying shops 6hird degree Sells same product at dierent prices to dierent customers Conditions 6wo or more mar.ets which can 'e separated !E$ o each mar.et must 'e dierent 2igher price charged in mar.et with more price inelastic demand Cost: loss o consumer surplus 8eneits #3 4irm: higher proits and may use these proits rom one mar.et to withstand possi'le price war in 'rea.ing into another mar.et Consumer Consumer may not have 'een a'le to aord good otherwise 2igher proits may 'e reinvested into r;d A 'etter ?uality products ; 'etter methods o production !rovision o goods that would otherwise not 'e produced due to high costs i production and consumption o good is one that coners positive externalities on society ,dditional proits might exceed losses such that irm will still continue producing the good ## &iscuss the !iew that the pro"it oti!e will always lead to a "ew large "irs doinating the ar0et "or each and e!ery type o" product. #1'% 1= 8arriers to entry 4ew large irms merge A greater mar.et share A reap EOS A all in >+,C A all in price A ward o rivals I 'loc. new entrants <natural 86E= A a'le to maintain supernormal proits / plough into r;d A 'etter methods o production A urther all in ,C - ma.e more proits 8ut some industries have low 86E <technology easily replicated= A low sun. cost eg" retail, grocery 2= -ar.et si7e Small: eg" Singapore television 'roadcasting -ediacorp vs" -ediawor.s 4irms will eat into each other:s mar.et share A erode proits A so to .eep proits Dust let one irm dominate -ar.et 'ig: eg" @S then can aord to have ew large irms 3= Gature o product >arge irms: uni?ue products with no close su'stitutes Small irms: availa'ility o su'stitutes, prestige mar.et I services, locali7ed demand, perisha'les, limited -ES A ashion, speciali7ation, personali7ed services #= 5overnment /ntervention I pu'lic:s desire 4ew large irms will help to reduce price A increase in consumer surplus A increase in consumer welare Supernormal proits A plough into r;d to produce 'etter ?uality products &ill still have competition unli.e monopoly A still have the incentive to 'e more cost-eicient I innovative #% Explain what is eant )y producti!e and allocati!e e""iciency. #1$% 1" ,llocative eiciency $einition: situation in which it is impossi'le to change the allocation o resources in such a way as to ma.e someone 'etter o without ma.ing someone else worse o ,ssumption: no externalities I pu'lic goods A ! B -C A right amount ; type o good produced to maximi7e societal welare / -8 Q -C, last unit o good less than opportunity cost o producing that unit A society 'eneits rom not producing that last unit / -8 P -C, last unit o good more than opportunity cost o producing that unit A society 'eneits rom producing that last unit ,ssumption aside, -S8 B -SC !erect competition: irm price ta.er -+ B -C B ! A allocatively eicient !rice Kuantity 3 S <-C= $ <-8= !I+I C Kuantit y -+ -C K1 3 !1 #) 2" !roductive eiciency >ong run concept 4irm:s !OM ,ny given level o irm:s output produced at lowest possi'le ,C A all points on >+,C curve are productively eicient Society:s !OM >+,C minimum A irm is at optimum si7e I -ES A all /EOS exploited !I+I C Kuantit y -+ >+, C K1 3 !1 #* <. "ir should )e encouraged to axii9e pro"its )ecause this a0es it e""icient.= &iscuss whether this arguent is true "or a "ir operating in an iper"ect ar0et. #1'% C&hen comparing eiciency, only tal. a'out long run 1= ,llocative eiciency: ! P -C true or all imperect mar.ets 'ecause they are price setters A deadweight loss to society A allocatively ineicient 2= !roductive eiciency: Got operating at -ES <where >+,C cuts -C= A not ully exploited all /EOS A productively ineicient !C industry needs to 'e at -ES 'ecause it needs to 'e as cost- eective as possi'le A price ta.er A cannot pass cost increase to consumers Ms" imperect mar.et need not 'e at -ES 'ecause price setter A can pass cost increase to consumers 3= E-ineiciency -onopoly: lax in cost control A no existing competition A can pass cost increase as price increase 8ut monopoly can also 'e cost eicient due to ear o new entrants 5lo'alisation and international competition / mar.et is contesta'le 4orce monopoly to 'e cost eicient Oligopoly more li.ely to 'e cost-eicient compared to monopoly 'ut wastage o resources A large scale advertising I promotion A increase cost or irm and opportunity cost to society as the money could have 'een used to produce more goods #= $ynamic eiciency Supernormal proits in long run A a'le to invest in r;d A 'etter methods o production A all in ,C in very long run Ms" !C industry: no dynamic eiciency !I+IC Kuantity ,+ -+ -C >+,C !m !c Kc Km 3 6riangle B $&> #0 &istinguish )etween onopolistic copetition and oligopoly. #1$% 6ype -onopolistic competition Oligopoly Gum'er o sellers -any A one irm:s action less li.ely to aect others , ew large irms A interdependence A one irm:s action li.ely to evo.e responses rom rivals Gature o product $ierentiated eg" retail: restaurants A aect demand curve A demand price elastic 2omogeneous I dierentiated eg" mo'ile service provision, petrol companies I taxi companies, O!EC A .in.ed demand curve 4irm increase price: rivals will not ollow A ?uantity demanded or irm:s product alls more than proportionately A demand price elastic 4irm reduces price: rivals li.ely to ollow A price war ; ?uantity demanded or irm:s product increases less than proportionately A demand price inelastic Gon- pricing competitio n Smaller scale >arger scale >i.elihood o colluding >ess -ore: large mar.et share 86E >ow I no A low sun. cost ; technology easily replicated A long run normal proits 2igh A natural: high sun. cost eg" utilities, telecomm A 64C very huge A >+,C .eeps alling A enDoys huge EOS A very low >+,CA new entrants cannot produce at such low >+,C ,rtiicial: patents Ensure supernormal proits in long run !I+I C Kuantity 3 ,+ !I+IC Kuantity 3 ,+ !e #1 Explain why oligopoly is a coon ar0et structure in any econoies. #1'% 1= 4irms want to 'e 'ig to maximi7e proits -erger o small irms A EOS A all in >+,C A all in price A ward o rivals ; 'loc. new entrants -onopoly A attracted 'y supernormal proits A monopoly loses its power 2= Society may desire oligopolies Oligopoly A competition A greater innovation through r;d which monopolistic competition cannot aord since it only ma.es normal proits Ms" monopoly A lax A E-ineiciency 3= 5overnment:s intervention Singapore government A ace o international competition in a ree mar.et, local irms have to 'e 'ig eg" 'an.ing A go regional A li'erali7ation and deregulation o industries: mo'ile service industry, taxi companies 4irms preer operate in oligopolistic structure rather than monopolistic: monopolies more closely watched 'y government vs" oligopolies harder to o'serve whether they are colluding #= Some industries due to huge sun. cost A oligopolistic I even natural monopoly eg" utilities, telecommunications, transport, 6M 'roadcasting in Singapore since mar.et si7e is too small A one single player most eicient %3 Explain why go!ernents throughout the world ha!e )een in!ol!ed in the supply o" ser!ices such as electricity. #1+% /ntroduction 5overnment A social 'eneits ; social costs which private irms unli.ely to ta.e into account Electricity A essential good or households and 'usinesses 8ody 1= Could 'e a natural monopoly -ar.et si7e cannot operate with more than one player at -ES: huge sun. cost A ,C .eeps alling A private irms li.ely to 'e monopolistic A charge very high prices A need or regulation 2= !rivate A does not cater to lower income group vs" government more li.ely to do so 3= 2uge initial investment A private irm li.ely to charge higher price to cover costs vs" government can su'sidise rom revenue I taxes #= / there is competition among a ew private irms A wastage ; duplication o resources vs" government: save costs or advertising %= Earns revenue or government since it is essential Conclusion -ain point is that government does not want to ris. anything 'ecause electricity and similar services are so essential !I+IC Kuantity 3 ,+ -+ -C !m !c Km Kc ,C %1 Chapter >: 7o!ernent 1nter!ention in the /ar0et 11 1" +egulation o Gatural -onopolies -C pricing: monopoly charge a price that is e?ual to -C in order to achieve allocative eiciency 8ut monopoly incurs a loss A shut down A pu'lic deprived o vital service Geed to 'e supplemented with government su'sidies: costly to government, 'urden on taxpayers 2-tier pricing: consumers pay a ixed sum o money or access to service and price per unit consumed to cover marginal cost Eg" electricity, gas !roducer meets all CO! and minimi7es loss o social welare ,C pricing: monopoly charge a price e?ual to ,C A lower price and greater output A increase in society:s welare Gormal proits A via'le in long run Still not allocatively eicient 4irms no incentive to .eep costs low since price is at whatever ,C they are at !ro'lems $iicult to o'tain accurate inormation on demand and cost estimates: irms tend to overstate cost, mar.et conditions change constantly, costly to ac?uire new inormation +egulatory lag: irms may have to operate at a loss during time lag Costly to administer 2" 6axation >ump-sum tax on monopolist:s excessive proits A shits ,C curve upwards A proits reduced A normal proits +edistri'ute income rom producer to consumer @se tax revenue to su'sidise welare schemes I production o merit goods -ay create disincentive or monopolist to 'e cost-eicient -onopoly can pass 'urden to consumers due to price inelastic demand $ynamic eiciency compromised 3" >egislation ,nti-trust laws: ,nti-trust ,ct <@S= I Competition >aw <Singapore=: 'rea. up monopoly Eg" -icrosot Corporation: one irm own &indows operating system, the other will own applications -ay not 'e applica'le to natural monopoly I monopolies with great incentives to underta.e r;d 4or'idding certain practices: eg" predatory pricing: setting price 'elow CO! to eliminate competition %2 /mposing standards o provision eg" !u'lic 6ransport ,uthority in Singapore governs standards o pu'lic transportation to ensure guaranteed ?uality o product /nsisting on certain levels o competition in industry: Singapore government increasingly deregulates monopoly #" Gationalisation 5rowth /ndustries with maDor investment eg" steel and coal industry, large spending on r;d re?uired @nair competition o state-owned enterprises with private sector Eiciency Gatural monopoly, presence o positive externalities, eliminate wasteul duplication >ac. o competition pressure A lac. o incentive A E-ineiciency 8ureaucracy A heavier 'urden on tax payers Sunset industry $ecision may 'e made or political rather than economic reasons eg" Dust to .eep employment igures high E?uity Special pricing policies eg" ree 'us rides or pensioners Service which would otherwise not 'e provided eg" 'us route to remote areas State monopoly no less disadvantageous to consumer than private one A no higher authority to maintain chec.s and 'alances Sta'ility 4or strategic reasons eg" national deence Seen as a move towards communism %" !rivatisation Competition /ncreased competition A cost eiciency ; 'eneits or consumers eg" lower prices, wider choice, improved ?uality @nair competition o state-owned enterprises with private sector Could 'e worse outcome / state monopoly replaced with private monopoly, possi'ly lower output and higher price / high 86E %3 Eiciency 5reater eiciency Commercially sounder decision ma.ing eg" higher returns on investments 5reater accounta'ility to pu'lic A constantly need to perorm well or ris. ta.eover 'y another irm Gatural monopolies, externalities, e?uity issues +evenue +evenue rom selling state assets 2igher corporate tax receipts i privati7ed company is proita'le >ong term loss o revenue had the privati7ed irm 'een proita'le %# No. Title Page No. 21 Chapter 1: Rey Economic /ndicators %3-%1 33 2ow ar can this inormation lead you to conclude that there is a rising standard o living in Singapore( %2-%3 31 $iscuss the actors that contri'ute to economic growth in a country" %# 32 Chapter 13: /ncome and Employment $etermination %%-%0 33 Explain what inormation an economist would re?uire to decide whether the @S needed 9an economic stimulus:" %1 3# Explain what is meant 'y the e?uili'rium level o national income" %1 3% ,nalyse the eect on the e?uili'rium level o income o an increase in the level o savings and an increase in the level o exports" )3 3) $iscuss the extent to which the @S iscal stimulus might lead to a sustained increase in national income" )1 3* &hat are the main causes o Singapore:s recessions( )2 30 Chapter 11: /nternational Economics )3-)) 31 Explain the theory o comparative advantage" )* #3 6o what extent does the theory o comparative advantage explain the pattern o trade 'etween Singapore and the rest o the world( )0-)1 #1 $iscuss whether protection oers any advantages over speciali7ation" *3-*1 #2 Explain the rationale or ree trade and discuss the extent to which 46,s are 'eneicial" *2-*# #3 6o what extent can economies 'eneit rom glo'alisation( *%-*) ## $iscuss the opportunities and threats o glo'alisation or Singapore and other ,sian economies" ** #% Consider the eects, other than on the general price level, o Singapore:s changing tax structure" *0 #) !olicies to remedy Singapore:s recession *1 #* Evaluate methods the -alaysian government might use to slow down import growth and increase new export 'usiness" 03 #0 S6o 'e considered successul, an economy needs to achieve low unemployment, low inlation and sta'le economic growth"T 2ow ar do you agree with the statement( 01 #1 S6o 'e considered successul, an economy needs to achieve low unemployment, low inlation and sta'le economic growth"T Explain this statement" 01 %3 $iscuss whether iscal policy is the most eective way or Singapore to sustain a successul economy" 02 %1 /n the ourth ?uarter o 233#, Singapore:s unemployment rate rose to 3"*L" $iscuss whether supply-side policies are the 'est way o achieving ull employment in Singapore" 03 %2 &hy Singapore does not use interest rate policy 0# %3 !ro'lems with exchange rate insta'ility 0# J+ Topics %% Chapter ?: @ey Econoic 1ndicators 1" Rey -acroeconomic ,ims Strong sustained economic growth >ow inlation >ow unemployment rate 2ealthy 8O! 2" Gational /ncome Statistics 5ross domestic product: value o all inal goods and services produced within a given country during a given period o time -easure economic growth >imitations @nderstate nation:s output: omission o non-mar.et activities <voluntary welare services= and underground economy $iiculties in measuring SO> >eisure time Externalities !roduction does not e?ual consumption: expenditure could 'e or potential growth /ncome distri'ution Other social actors: eg" crime rates, reedom /nternational comparisons $ierence in account procedures and items included Exchange rates: need to use !!! !opulation: need 5$! per capita $ierence in climate and culture: dierent needs A dierent costs $ierence in underground economy: Sweden:s underground economy 13L o 5$! ,lternative measures o SO> 2$/: lie expectancy, education, 5$! per capita at !!! rates -E&: leisure, 5$! per man hour 5ross national product: value o all inal goods and services produced 'y residents o a country, regardless o the location o production, during a given period Get national product: 5G! A depreciation Gominal: at current prices vs" real: at constant prices %) 3" /nlation +ate C!/: measures change in price o ixed 'as.et o goods and services commonly purchased 'y households in a speciied time period >imitations Got an accurate measure o CO> Su'stitution 'ias: consumers su'stitute toward goods that have 'ecome relatively cheaper A overstates CO> Kuality adDustment: C!/ increase might 'e due to ?uality adDustments A overstate inlation Gew products: price declines sharply a ew years ater introduction A not added to mar.et 'as.et until years ater introduction A price declines not recorded #" @nemployment +ate @nemployed: people aged 1% and over who are without wor. 'ut were availa'le or wor. and were actively loo.ing or a Do' 4rictional unemployment: unemployment 'ecause time ta.en or wor.ers to search Do's and or irms to search or suita'le wor.ers Structural unemployment: wor.ers do not have the s.ills needed to o'tain long-term employment Cyclical unemployment: unemployment during recession %" 8alance o !ayments +ecord o country:s international transactions Current account Misi'le: imports and exports o goods and services A 8O6 /nvisi'le: proit repatriation, interest, dividends, unilateral transers Capital account !ortolio: 'onds, shares, money in 'an.s $irect: 4$/ 4inancial account: something li.e 'an. reserves %* Singapore has en4oyed another year o" ro)ust growth in +$$;, and the real 7&P growth was ;.'A "or the year. . record 1;+$$$ 4o)s were created in the "irst , Buarters. 2owe!er, in recent onths, in"lation has pic0ed up and the in"lation rate "or the onth o" No!e)er alone was 5.+A. 2ow "ar can this in"oration lead you to conclude that there is a rising standard o" li!ing in Singapore* #+'% /ntroduction SO> A material and non-material well 'eing o each citi7en 8ody ,= -aterial well 'eing +eal 5$! per head: on average how much goods I services each citi7en gets to consumer +eal: adDusted or inlation as converted to constant prices 2igh or a developed country >imitation: does not show eect o changes in population si7e !er head: eect o population si7e eg" i 5$! increases 'y *"%L 'ut population increases 'y 1L, 5$! per head alls Singapore: over 1 year: changes in population si7e little 'ut could have 'een some increase due to open-door policy /ncome gap A 5ini coeicient 5ini coeicient glo'ally used as a measure o income disparity, with 3 indicating perect e?uality and 1 perect ine?uality Singapore: 3"%2 in 233) /ncreasing gap in Singapore due to glo'alisation: displaced 'y machines, structural changes, inlux o oreign wor.ers, outsourcing 6ype o spending Capital vs" consumption goods 5overnment spending $eence vs" spending that directly increases SO> 1*2333 Do's 2igh incomes A increase consumer spending which increases demand or goods and services, generating more Do's and employment $ue to investments 'y oreign companies eg" in 233* plant speciali7ing in harnessing solar energy set up in Singapore A indicates investor conidence >imitations: )3L Do's went to oreigners, num'er o Do's destroyed vs" num'er o Do's created, si7e o la'our orce may have changed so it is not that unemployment rates ell, composition o Do's <or lower-s.illed wor.ers(=, ratio o dependants to wor.ing population %0 /nlation rate +eal: adDusted or inlation Cause: mainly cost actors li.e high imported oil price, imported ood shortages, partly 5S6 >ower-income group suers more in the ace o urther increase in prices I income gap 8= Gon-material well 'eing Education A literacy rate Singapore: high literacy rate due to compulsory primary education, heavily su'sidi7ed 5overnment emphasis on upgrading o s.ills and training su'sidies to irms or such purposes 2ealthcare A inant mortality rate I lie expectancy Singapore: individual responsi'ility ; government spending A 3- ramewor. A -edisave, -edishield, -ediund ,void excessive 'urden on state and tax payers &ith increasing medical costs ; ageing population, KO> o some <lower-income group(= may 'e aected -eans-testing >eisure: 5$! per man hour Others: negative externalities eg" pollution Conclusion Other indicators: 2$/, -E&, 5G! %1 &iscuss the "actors that contri)ute to econoic growth in a country. #1+% /ntroduction Economic growth measured 'y 5$! growth rate and is the means to improve living standards 8ody 1= Kuantity and ?uality o resources Kuantity and availa'ility enhance growth potential >and: includes natural resources li.e mineral deposits and oil eg" oil- rich Saudi ,ra'ia >a'our A la'our-a'undant countries li.e China and /ndia Entrepreneurship A availa'ility o talents and ris.-ta.ing individuals eg" sel-made entrepreneurs in 2ong Rong Kuality can 'e enhanced through government eort and policies /ncrease la'our productivity through training and education Entrepreneurship Capital A government eorts to ma.e it more conducive or ixed capital ormation 2= +ole o government ,ugment ?uality o la'our through education and training Strategise economic direction eg" change structure o economy in ace o loss o comparative advantage and nurture comparative advantage in new areas Conducive environment or 'usiness !olitical sta'ility !rice sta'ility: relection o good macroeconomic management 'y government, competitive price and lowered CO! A a'ility to attract 4$/ due to lower wages Eicient inrastructure ,ttractive corporate taxes >ess 'ureaucracy and red tape ,'ility to explore new mar.ets I help 'usinesses go glo'al 3= >evel o consumption, investment and government spending in economy 2igh consumption conducive when economy has unutili7ed resources while high savings conducive when economy near or at ull employment Savings provide investment unds necessary or growth 5overnment iscal and interest rate policies 2igh export revenue due to competitiveness )3 Chapter 1$: 1ncoe and Eployent &eterination 1" ,ggregate $emand 6otal level o spending in an economy ,$ curve slopes downwards 'ecause &ealth I real 'alance eect: 5!> higher A purchasing power o inancial assets alls A discourages domestic consumption A lower level o output /nterest rate eect: higher 5!> A increase demand or money rom households and irms ; might shit wealth out o inancial assets A decreasing supply o loana'le unds A increase in interest rates A more expensive to purchase goods and services on credit A households purchase less goods ; 'usinesses invest less A lower national output /nternational su'stitution eect: higher 5!> A locals 'uy more oreign goods ; oreigners 'uy less domestic goods A net exports all A lower national output 4actors that cause a shit Changes in expectations: income and proits, real wealth, inlation Changes in government policies Changes in world economy: income a'road, oreign price level, exchange rates 2" ,ggregate Supply 6otal output o goods and services that irms as a whole would li.e to produce and sell at each possi'le price level Shape 2ori7ontal: producers can produce all they want due to a'undant resources @pward sloping: output rises 'ut pressure on prices Mertical: need time to adDust to new cost structures 4actors that cause a shit Change in input prices Change in ?uality o la'our input Change in expected rate o inlation Change in technology 5overnment policies <local and oreign= )1 3" Consumption 4unction ,ct o using income or the purchase o goods and services to satisy current wants C B a;'F a represents autonomous consumption: level o consumption that does not vary with income A still need to consume even though no income 'F represents induced consumption: household expenditures that vary directly with income ': -!C B change in C I change in F Gon-income determinants &ealth: amount o money, ixed assets and inancial assets households have Expectations o uture prices and income $istri'ution o income /nterest rate and availa'ility on credit 6astes and attitudes #" /nvestment ,ct o ac?uiring new ixed capital assets and accumulating stoc.s and inventories ,utonomous: not inluenced 'y national income vs" induced Expected rate o return P rate o interest A will invest 4actors that cause shit 8usiness conidence and expectations Cost and availa'ility o capital goods +ate o change o income: accelerator eect 5overnment policies Change in technology Consumption Income Y = C C = a + bY W X Z W = dissavings, X = breakeven point, Z = savings )2 )3 %" E?uili'rium >evel o /ncome ,t OF1 ,E B aF, F B 'y ,E Q F unplanned inventory investment a' next period irms reduce output F1 alls to e?uili'rium F3 ,t OF2 ,E B dF2, F B cF2 ,E P F excess demand, irms draw on stoc.s unplanned disinvestments cd next period irms increase output F2 rises to e?uili'rium F3 )" 6he -ultiplier Eect , change in any component o aggregate expenditure <ie" C, /, 5 or E= will wor. through the multiplier to change the national income more than proportionately" Interest rate Investment AE National output Y = AE Y c d b a Autonomous consumption Y! , 8 )# ,s shown in the diagram 'elow Nreer to diagram a'oveO, an increase in ,E will cause the ,E curve to shit rom ,E3 to ,E1" ,t the original level o national income F3, since ,E is now greater than actual national output, there is an unplanned all in stoc.s o ,8" /n the next period, irms would increase output, causing the level o national income to rise eventually to F1, where the new ,E e?uates the national output" 6he initial rise in income due to <any rise in component: depends on ?uestion context= will induce consumption 'y recipients o the income" ,s one man:s spending generates income or the next person, the national income will eventually rise 'y a multiple o the initial rise in the ,E" ,ssuming an initial inDection o U133m and a constant -!C o 3"%, the national income will eventually rise 'y 2 times the initial inDection" /n short, the multiplier measures the change in national income as a result o the change in ,E" /t has a direct relationship with the -!C, expressed as .B1I<1- -!C=" Evaluation -agnitude o increase in GF depends on si7e o multiplier >arger the -!&, smaller the multiplier -ay lead to demand-pull inlation i near or at ull employment 8O! A inlation aects price o exports and may have adverse eect on 8O6 *" /nlationary I $elationary 5ap ,mount o ,E that alls short o <cd=I exceeds <a'= the level necessary to achieve 4E )% Explain what in"oration an econoist would reBuire to decide whether the CS needed <an econoic stiulus=. #1$% /ntroduction &ea. economy A assume pending recession A all in 5$! or 2 consecutive ?uarters <negative 5$! growth= $evelopment 4all in real 5$! Components o ,$: all in ,$ A all in 5$! Consumption level o households: due to all in income I saving in ear o retrenchment 4all in investment: 'usiness pessimism, induced: all in 5$! A all in investment /nlation: all in 5$! A all in ,$ A all in 5!> I all in inlation rate Geed inlation rate to arrive at real 5$! 4irms and 'an.ruptcy, irms and decreasing proits Stoc. mar.ets: indices all A conidence all O+ 4all in real 5$! &hat causes all: CI/I5IE--: 8O6: more relevant or Singapore since Singapore:s recession mainly due to 8O6 5$! A income, wages and proits, 'an.ruptcy /nlation: all in 5!> 'ut staglation <economy wea.ening 'ut price increasing= A price increase in @S not due to recession: not ,$ actors 'ut ,S actors @nemployment rate A rough guide: #L - cyclical A no Do' A demand deicient unemployment Explain what is eant )y the eBuili)riu le!el o" national incoe. #1$% GF: as measured 'y 5$! <deinition= E?uili'rium: no tendency to move rom that e?uili'rium $escri'e 'riely components o ,E C <households=: shape o ,E ollows shape o consumption unction CBa;'y Simple explanation o components Sign o #% degree line: every point is an e?uili'rium point where ,EBF E?uili'rium level o GF: planned ,E B F" ,E curve cuts #% degree line ,dDustment to e?uili'rium Conclusion: when economy is in e?uili'rium, may not 'e at ull employment I recession )) .nalyse the e""ect on the eBuili)riu le!el o" incoe o" an increase in the le!el o" sa!ings and an increase in the le!el o" exports. #1'% ," Savings F B C ; S /ncrease in S A all in C A ,E alls A ,E curve shits rom ,E1 to ,E2 Show adDustment to e?uili'rium Summation: increase savings A all in C A wor.s through multiplier A all in GF 'y a ew multiples Evaluation Savings can 'e good or economic growth A increase supply o loana'le unds A interest rate alls A cost o 'orrowing alls A increase / A increase productive capacity A increase ,S A increase GF Summation: S decreases actual growth 'ut increases potential growth 8" Exports /ncrease E A increase ,E A ,E curve shits rom ,E2 to ,E1 Show adDustment to e?uili'rium Evaluation /ncrease E A i have unemployed resources A increase GF /ncrease E A i near I at 4E A GF may not increase as ast I demand- pull inlation $iscuss multiplier process in detail Conclusion -agnitude o change in national income depends on si7e o multiplier >arger -!&, smaller R Eg" Singapore )* &iscuss the extent to which the CS "iscal stiulus ight lead to a sustained increase in national incoe. #1'% /ntroduction 4iscal: increase 5, decrease 6 Sustained: actual ; potential growth $evelopment 2ow iscal stimulus wor.s: lower taxes <increase CI increase /= ; increase 5 A increase ,$ A increase GF: actual growth, cannot sustain -ultiplier in detail Evaluation: depends on si7e o multiplier @S, A -!- could 'e high 'ecause hug e trade deicit A may reduce si7e o . Crowding out eect: increase in 5 i 'orrowed rom pu'lic A decrease in supply o loana'le unds A increase in interest rate A crowd out CI/ A cannot sustain Eects o taxes on C and / unpredicta'le due to pessimism +eaches 4E: cannot sustain 6hereore need supply-side measures to increase ,S or sustained growth A potential growth I increase in productive capacity /ncrease in 5 on inrastructure A acilitates 'usiness A increase ,S 6ax A increase GF <potential= $ecrease personal taxes A increase incentive to wor. A increase ,S $ecrease corporate taxes A increase / A increase >+,S Condition: i re'ates are permanent 'ut according to pream'le, re'ates seem to 'e one-o Conclusion -ore policies to 'oost ,S A education and training A increase productivity A increase >+,S )0 (hat are the ain causes o" Singapore=s recessions* #1$% 1= 4actors leading to all in ,$ External actors A pessimism eg" 111, S,+S <only caused a slowdown in Singapore:s economy=, 111* ,sian crisis A CI/ all 6rade deicit: value o E ell due to 111 >ose C, A goods more expensive 4all in income o trading partner 2= External recessions @S recession A @S 5$! all A 'uy less Singapore goods A Singapore:s E alls A ,$ alls A 5$! alls <multiplier eect= Singapore may not 'e that aected A can ride on growth o China I /ndia 8ut China huge trade partner o @S, Singapore: international momentum Extension o -+6 A increase 5 A . A increase GF /+: increase / A increase GF ; tourist revenue FO5: tourist revenue Cannot sustain since . is small 3= Supply-side actors Supply shoc.s: 11*3 oil crisis A increase CO! A all in ,S 8ut overwhelming cause is due to ,$, 'ut recogni7e that all in ,S can also create a recession )1 Chapter 11: 1nternational Econoics 1" 6heory o /nternational 6rade Exchange o goods and services 'etween countries, involving the use o dierent currencies and crossing international 'orders 6heory o comparative advantage: produce good at lower opportunity cost than another country Sources $ierences in actor endowments that can change over time $ierences in technology $ynamic comparative advantage ,dvantages o trade 5reater world output and higher consumption o goods and services <possi'le at previously unattaina'le levels= +eduction in unit cost o production: EOS, countries gain experience over time Stimulate economic development and growth: enlarge mar.et, increase competition in home mar.et 4acilitate transer o technology and ideas: increase eiciency o production A economic growth, help developing countries leap rog stages !romotes 'eneicial political lin.s 8eneits consumers: more choice and higher satisaction levels, lower prices compared with local products, 'etter ?uality products $ynamic gains rom trade: gains grow larger over time $isadvantages o trade @nair competition and dumping I unnecessary government su'sidies Over dependence on other countries /mport harmul goods 6erms o trade: rate at which country exchanges its exports or imports 4actors Change in demand conditions: population, income, availa'ility o su'stitutes Change in supply conditions: technology, depletion o natural non-renewa'le resources Conse?uences o change in 6O6 Change in 8O6 and SO>: dependent on !E$ o exports and imports, cause o change, responses that ollow +eallocation o resources Change in consumption patterns *3 2" 8arriers to 6rade Gatural 2igh transport costs A raises CO! and lowers relative eiciency >ac. o mo'ility o actors /ncreasing CO! due to >$-+ 'eyond certain level o output Other mar.et imperections: imperect inormation and mar.et conditions A may not speciali7e to extent that theory suggests ,rtiicial: protectionism 6ari: custom duties imposed on imports o goods and services 'y government $epends on !E$ o imports and how much oreign suppliers are willing to a'sor' A may not protect domestic producers, Dust a source o government revenue Cuts volume o imports A improve 8O6 A exchange rate appreciates A exports more expensive a'road A reduce exports in the long run Gon-tari: import ?uotas 5reater certainty o protection since revenue earned 'y oreign suppliers may not 'e as 'adly aected as tari Export su'sidies: cash grants 'y government to local producers +educes CO! A sell more o good at prevailing price -ay induce complacency $rain on government unds 4oreign exchange control: government control over sale and purchase o oreign exchange 4inancial ?uotas, charges made on people purchasing oreign currencies -alaysia used this method to recover rom 111* ,sian inancial crisis $iicult to enorce and might result in 'lac. mar.et or oreign exchange &or.s 'est in communist countries 'ecause government monopolises money conversion Others: em'argo, trade agreements, international cartels Gew protectionist measure: technical speciications and standards which discriminate in avour o domestic producers ,dministrative regulations regarding import procedures to delay and reduce volume o imports Moluntary export restraints <ME+=: exporting country voluntarily reduces its exports under threats o all-round trade restrictions eg" @S automo'ile industry vs" Japan:s *1 3" ,rguments or !rotectionism Economic !rotect inant industry eg" Singapore had protective duties covering V333 items in 11)3s $iicult to identiy currently unproita'le industries that might ac?uire comparative advantage in the long run $iicult to decide when industry can 'e independent o protection Encourage ineiciency +educe 8O! deicits $ependent on !E$ o imports and exports Geed to loo. at root causes /nvite retaliation A reduced exports A reduced total volume o world trade !revent unair trade practices $umping A distorts mar.et A Dustiia'le / consumers 'eneit in the long run rom lower import prices A not Dustiied $iversiy economic structure -ay not support theory o comparative advantage !attern o comparative advantage can change over time naturally <discovery o new raw materials= I through deli'erate policies !rotect mature industries 6rade unions -isuse o resources since protectionism will not increase total employment +etaliation !rotect against low-wage oreign la'our +eDection o theory o comparative advantage Could shut down industries and divert resources to more productive ones Consumers denied opportunity to 'uy rom cheaper source A 'eneits o trade lost /ncrease domestic production: counter-cyclical measure /ncrease government revenue 6o 'e eective, should 'e imposed on goods which are price inelastic +etaliation +etaliation @nhealthy or word trade and ineective $istort and reduce dierences in comparative advantage &elare loss -isallocation o resources: irms unnecessarily retained *2 $iicult to remove protectionist measures once in place Other industries may demand or protectionism 8etter alternative: stimulate export competitiveness 'y increasing ,S !olitical Essential to produce on military weapons in case o crisis A su'sidies industry to ensure continuous supply eg" @S 1103s semiconductor industry or high-tech weaponry vs" Japan:s Gation poorer 'ut value o national security higher 6rade as weapon o oreign policy eg 5ul war: @S imposed trade sanctions against /ra? Social Su'sidise agricultural sector to avoid urther depletion o population in rural areas I prevent urther rural-ur'an migration to overpopulated cities +estrict import o harmul goods #" 6ari $iagram >oss in consumer surplus B a ; ' ; c ; d a 'ecomes producer surplus, c 'ecome tax revenue, ' ; d 'ecomes deadweight loss Consumption eect: " +educe consumption rom OK# to OK3 " +educe consumption o imports and switch to domestically produced su'stitutes " !ay extra amount <!2 A !1= " Consumer surplus alls !roduction eect: *3 " Expand production rom OK1 to OK2 " /ncrease revenue " !roducer surplus increases 5overnment revenue eect: - +eceives as tax revenue extra amount paid 'y consumers or the imported ?uantity *# Explain the theory o" coparati!e ad!antage. #1$% /ntroduction Comparative advantage: speciali7e 'ased on lower opportunity cost A less o the other good oregone 8ody ,ssumptions: 2 countries 2 goods, no transport costs, constant returns to scale: >+,C remains constant ,ssume @S, and China each has 23 units o resources, initially use 13 units to produce each good 6a'le 1: 8eore speciali7ation Cars 6extiles Opportunity Cost @S, 133 )3 1C: 3")6 China % 13 1C: 26 6otal 13% *3 @S,: C, in production o cars A give up less textile China: C, in textile A give up less cars @S, devotes 1I13 more to car, China complete speciali7ation" 6a'le 2: ,ter speciali7ation Cars 6extiles @S, 113 %# China 3 23 6otal 113 *# &orld output increases 6erms o trade: mutually 'eneicial 3")6 Q 1C Q26 A 1C traded or 16 @S, exports 13 cars, gets 13 textiles 6a'le 3: ,ter trade Cars 6extiles @S, 133 )# China 13 13 6otal 113 *% 5ains rom trade: higher level o consumption Conclusion Comparative advantage A gains rom trade, more choices, increase growth >imitations o C,: relax assumptions *% To what extent does the theory o" coparati!e ad!antage explain the pattern o" trade )etween Singapore and the rest o" the world* #1'% /ntroduction Singapore:s constraints A lac. o natural resourcesH small geographical si7e and population A human capital our only resource Singapore:s relative strengths A good geographical location Our constraints and strengths determine where our C, lies !attern o trade: type o exports and imports o goods and services 8ody ,= Fes 6ype o exports C, 11*3s 6extiles and simple manuactured products >a'our-intensive industries: Cheap, uns.illed and surplus la'our 1103s -ove towards higher-end products and electronic productsH moving towards services li.e 'an.ing and inance, tourism Capital-intensive industries: -ore educated wor.orce and improved technology >oss o C, in la'our-intensive industries to countries li.e -alaysia and /ndonesia which have huge la'our orce 1113s and 'eyond Electronics, pharmaceuticals, telecommunication e?uipment, dis. drives, integrated circuits Services: 'an.ing and inance, tourism, educational hu', medical hu' 2igh value-added, .nowledge- intensive, technology-intensive industries: 2ighly ?ualiied la'our orce, r;d inrastructure Continue to lose C, in manuacturing industries to countries li.e China and /ndia 6ype o imports >ac. o C, /mports: consumer items, ood, raw materials, capital goods or development and inrastructure 'uilding >ac. o natural resources especially lac. o land or agriculture and to support huge export 'ase *) 8= Go, there are other actors 6rade 'ased on world demand C, only gives rationale or trade 'ut countries try to augment and develop C, in industries with world demand 4or country to develop and provide opportunities or its population o diverse talents, needs to have spectrum o industries $iversiication to reduce negative conse?uences o over-dependence $esire not to rely on oreign supplier or essential goods Gational pride I security eg" Gewater +e-exports ** &iscuss whether protection o""ers any ad!antages o!er speciali9ation. #1,% /ntroduction !rotectionist measures ,dvantages o speciali7ation 'ased on C,: gains rom trade, increase E A economic growth, wider choice, EOS A all in >+,C A competitive prices, eiciency in resource allocation in the world, welare gain i world price cheaper than domestic price 8ody /nant industries +ationale: G/E, reasons o economic diversiication A impose ?uotas I taris A allow new industries to grow and develop EOS S+ implications: applies or all reasons to protect as long as use ?uotas I taris Society: $&> Consumers: increase price Other irms <some extent=: increase CO! i good protected is important input eg" steel >+ implications 5row A enDoy EOS A lower >+,C A lower price o exports A a'le to compete internationally A 8O6 improves i demand is price elastic A increase in total revenue rom exports A increase exports A increase GFIG / do not grow / government su'sidi7ing A waste o resources A could have 'een used elsewhere A education I healthcare I develop inrastructure Consumers and society continue to suer rom ineiciency A higher prices Shut down A massive retrenchment Summation: 6o the extent that inant industries grow" 2owever, the inant industries normally do not grow and may 'ecome ineicient due to government su'sidies" !rotectionism cannot 'e long term" /neicient industries Eg" @S steel industry, textile: 9slap: taris I ?uotas on Chinese textiles I imported steel A allow ineicient irms to eventually 'e a'le to 'e more eicient A develop new technology I adDust cost structures Eg" steel A aects CO! in many other industries eg" housing, cars A cost-push inlation A aects domestic mar.et and erodes export competitiveness Summation: protect Do's in ineicient industries 'ut more Do's lost elsewhere eg" car industry *0 ,lternative solution: develop C, in new industries: capital-intensive, technology-intensive, services, training *1 $umping 4oreign country selling goods 'elow its actual CO! A local irms driven out A eventually oreign country gains monopoly power $iicult to ascertain i it is dumping I country really has C, in production o these goods A Chinese textile ; a'undance o cheap la'our Could 'e 'aseless accusation Solution: orce irms to 'e more cost-eicient <don:t protect=, training <su'sidise irms or training=, su'sidise r;d Economic diversiication +educe over-dependence on a ew .ey products I industries Eg" Wam'ia: copper exports A what i world demand alls 8alance o trade deicit A value o imports P value o exports Eg" @S huge trade deicit A @S, consumes a lot, including on imports A 'reed urther ineiciency ,lternative solution: increase interest rates A encourage people to save ; discourage consumption >+: high C A low S A low investment A aects productive capacity A low >+,S <ineiciency= Gational security Eg" steel A war weapons Conclusion / country protects, other countries retaliate A world ineiciency 03 Explain the rationale "or "ree trade and discuss the extent to which 6T.s are )ene"icial. #+'% /ntroduction 4ree trade A 'ased on C, A lower opportunity cost ratio A gains rom trade 46, A remove tari and non-tari 'arriers A in theory A in practice eg Singapore:s 46,s A also include investment $evelopment ,= Expounding theory o C, A dierence in actor endowments ,ssumptions 3 ta'les Summation: gains rom trade, increase choice I increase society:s welare, increase economic growth and SO> 8= ,re 46,s 'eneicial On trade /ncrease E A . A increase GF I G A associated 'eneit o large-scale production A EOS A all in >+,C A a'le to price goods more competitively A may improve 8O6 Singapore: small domestic mar.et China: may not 'e as dependent on E revenue 'ecause people are getting more aluent" C increase can sustain itsel 'ased on internal economy Cam'odia I Mietnam: G/Es 'ecause people are poor 8ut increase E A demand-pull inlation when near I at 4E A price o exports increase A volume o exports A may aect 8O6 A GF alls aects economic growth /nlation ,ccess to cheaper consumer goods ; raw materials I inputs A all in CO! A all in price o exports A E increase A may increase 8O6 4all in CO> A extra savings can 'e used to 'uy domestic goods A increase C I GF !rice o consumer goods Kuantity o consumer goods Sdom $dom !w ! c 13 3 33 %3 a ' 01 a;' B welare gain a: production eect, ineicient domestic irms orced to reduce output rom 33 to 13 ': consumption eect: increase C rom 33 to %3 4rom diagram, irms orced to 'e more cost-eicient A cut costs in order or proits not to 'e eroded since ! is at !w 6rade creation I diversion Creation: increase volume o trade A rom high-cost producer to low- cost producer A increase welare o people $iversion: rom low-cost non-mem'er to high-cost mem'er A away rom optimum allocation o resources $raw diagram to illustrate eects Jo's: increase in E A increase G 8ut loss o C, A orced to restructure A move towards C, A structural unemployment Outsourcing A irms 'eneit 'y relocating A increase 8O6 A increase 5G! 8ut cost Do's in previous country On 4$/ Outward investment to China rom Singapore /ncrease investment A increase productive capacity A increase ,S /ncrease investment A increase ,$ A increase G I GF 6ranser o technology @seul or G/Es A lac. wealth I local entrepreneurs eg" Singapore depends on -GCs 8ut ootloose 8ut local irms cannot compete Others Mulnera'ility to external shoc.s due to over-dependence A recession I imported inlation /nterdependence: economies 'ecome intertwined eg" @S, recession A Singapore recession, worldwide ood prices increase Conclusion !ossi'ility o une?ual gains Singapore -ore S6 capital outlow to China 'ut >6 proits A increase 5G! >oss o Do's as companies go to China Shited ocus to capital-intensive I technology-intensive A ocus on services 5ain A education: Chinese students come here to study 02 @S, @S, spend a lot 'ecause lost C, in lots o goods A need to 'uy more imports A worsen trade deicit A less savings A less investment A reduced productive capacity /ndia $emand or capital goods Summation 46,: macroo'Dective A increase GF A increase SO>, all in price A increase 8O6 6rade creation P trade diversion C46, means reer trade A no restrictions among countries vs" ree trade, so arguments similar, only dierence is trade creation I diversion 03 To what extent can econoies )ene"it "ro glo)alisation* #+'% /ntroduction 5lo'alisation A ree movement o goods and services, capital, la'our Economic integration: 46,, customs union $evelopment ,= 5oods and services 6rade 'ased on C, A gains ; EOS !oor A G/Es ; Singapore <small domestic mar.et= A increase E A increase GF I G A increase SO> ,ccess to cheaper goods Consumer goods A lower CO> +aw materials A Singapore I 2ong Rong Capital goods or inrastructure A Cam'odia I Mietnam A increase societal welare ; potential growth $raw in ree trade diagram and illustrate gains 6rade diversion vs" trade creation: diagram >oss o C, eg" @S, steel and textile industry, Europe car industry A 'ut restructure and move towards new C, /nter-dependency eg" @S, aect China I /ndia Over-dependency due to C, and complete speciali7ation A that:s why countries tend to partially speciali7e I diversiy their economies Eect on prices A imported inlation 6aris due to protectionism: draw in diagram 8= Capital <associated technology= A 4$/ <inward and outward= +eceiving country /ncrease inward investment A increase ,S I ,$ A increase GF I G 5rowth o local supporting industries 6ranser o technology 4ootloose A may cause massive retrenchment i suddenly leaves >ocal industries cannot compete A lac. o S-Es Source country S+: loss o Do's S+: outlow o capital >+: restructuring >+: -ore companies internationally A increase 5G! >+: Create Do's 0# C= >a'our 4or >$Cs, provide Do's or la'our A cheap -ay 'e S+ exploitation A 'ut vs" no Do's Eg" Mietnam A inlation V11L - lower income wage rise Q price rise 4ree low o la'our A inlux o oreign wor.ers A depress wages in Do's where supply elastic <a'undant supply o manual wor.ers= A no s.ills Eg" Singapore I E@ A inlux o wor.ers into @R Solution: provide training 8rain drain /ne?uity issue -anual wor.ers wages all S.ills demanded glo'ally A increase demand or wor. A increase wages or s.illed Do's $ual economy Caters to international mar.et A people grow richer Caters to domestic mar.et A people do not really get richer 0% &iscuss the opportunities and threats o" glo)alisation "or Singapore and other .sian econoies. #1+% 5lo'alisation: high degree o reedom o movement o goods and services <trade=, capital, technology <-GCs= and talent <la'our= 1= 5lo'alisation and ree trade Opportunities Export revenue and higher rate o economic growth /ncrease in E A . A increase G I GF /ncrease - o capital goods I raw materials eg" Mietnam I Cam'odia I Singapore 6hreats Competition causes countries to lose C, Singapore lost C, in la'our-intensive industries in mid-03s to G/Es li.e China and /ndonesia S+: structural unemployment >+: eorts may pay o i country reali7es C, in new industries Singapore shited to capital-intensive then .nowledge-intensive Specialisation and over-dependency on ew maDor products / some countries adopt protectionist measures, trading partners could 'e adversely aected /nterdependency o countries Economies o maDor trading partners ta.e a slide, countries will 'e aected eg" 111, @S recession 2= !resence o -GCs and out-sourcing Opportunities /nlux o -GCs in ,sian countries helped their economies grow Creation o Do's and contri'ution to 5$! 6ranser o technical .now-how Outsourcing eg" @R /6 companies phone service operations to /ndia 6hreats 4ear o over-dependency: -GCs ootloose A i pull out, adverse eect on Do's and economic growth $earth o local irms 3= /nlux o talent /ncrease ?uantity o resources A shit !!C outwards 8ut cheap oreign la'our A wages in city all A lower income 0) Consider the e""ects, other than on the general price le!el, o" Singapore=s changing tax structure. ,= /nlation Eect o increased reliance on indirect taxes A deinite inlation A shit in S+,S /ncrease indirect taxes A increase CO! or all irms A all in ,S A all in GF <contractionary= ; rise in 5!> A cost-push inlation A 8O6 may worsen <depending on !E$= Eect o decreased reliance on direct taxes A may or may not have inlation A shit in >+,S and ,$ 4all in direct taxes A CI/ increase A ,$ increase A GF increase <growth= I G increase A i near I at 4E: demand-pull inlation <a little may 'e desira'le 'ecause increase output= A 8O6 worsen <depending on !E$= >ower income taxes A income I su'stitution eect A may increase incentive to wor. A increase ,S A increase GF A all in 5!> A 8O6 improves >ower corporate taxes A increase / A increase GF A all in 5!> A 8O6 improves Singapore: .eep I attract talent A increase eiciency ,ttract -GCS A increase 4$/ A increase ,$ <increase G= and increase ,S <increase productive capacity= 8= E?uity /ncome taxes <direct= A progressive A higher the income, the higher the percentage to tax A reduce income gap /ndirect taxes A regressive A lower the income, the higher percentage to tax A increase income gap A aects poor more Cost-push inlation A increase CO> A aects poor more >ower direct taxes A increase income gap 'ecause rich pay proportionately less <usually reduce the percentage tax o rich more= Corporate taxes ixed at 10L: neither progressive or regressive C= 6ax 'ase /ncrease indirect taxes A widens tax 'ase A 'etter to rely on due to ageing population A increase num'er o dependants I decrease in si7e o la'our orce $ecrease direct taxes: on wor.ing population and irms $= ,'ility to evade /ndirect taxes: diicult to evade $irect taxes: can evade 'ut not in Singapore <Dailed= A can under-declare 0* 00 Policies to reedy Singapore=s recession +ecession in Singapore: externally induced: all in E 1" 4iscal !olicy /ncrease 5 to reduce 'usiness costs ; training A need to su'sidise irms and training grants 4all in CO! ; increase productivity A increase >+,S A all in 5!> A price o exports all A volume o exports increase Evaluation: 'uy only i they recover rom recession 8ut increase 5 to 'oost increase in GF limited eect in Singapore Small . A need huge increase in 5 !rudent &hy not increase 5 on pu'lic wor.s >imited land 2" -onetary !olicy &hy not policies to directly increase E with exchange rate management Short run solution: depreciation o SU - price o exports all in oreign dollars A volume o E increase 5overnment preers sot option !rice o imports increase in SU - import all raw materials A CO! increase A goods more expensive >ong term policy stance: gradual and modest appreciation o SU - price o imports lower or SU - import raw materials more cheaply A CO! alls A prices more competitive -odest: small increments A export competitiveness not drastically eroded in the immediate period 5radual: irms can have time to adDust their cost structures A ind ways to 'e more cost-eicient $eals with cost-push inlation 3" Other &ays Explore new mar.ets through trade missions and signing o 46,s A reduce over dependence on a ew trading partner >ong term measure Conclusion 4all in E is 'eyond our control -easures can only 'e long run or interim ones 01 E!aluate ethods the /alaysian go!ernent ight use to slow down iport growth and increase new export )usiness. ," Slow down import growth $evaluation A wea.en ringgit !rice o exports all in oreign currency A volume o exports increase A total revenue rom exports increase !rice o imports in ringgit increase A volume o imports all A total expenditure on imports all 8O6 improves $epends on price elasticity o demand or E and - A -alaysia demand or imports o capital goods could 'e price inelastic A CO! rises Can only 'e short term i -alaysia needs to import capital goods and raw materials !ersistent devaluation can lead to loss o conidence in economy 6ari A tax on imports A price o imports rise A volume o imports all A total expenditure on imports all /ncrease in CO> $eadweight loss to society +etaliation Contractionary policies: interest rate rise A investment and consumption alls A ,$ alls A . A all in GF A all in demand or imports -alaysia may have small multiplier -alaysian irms may want to 'uy capital goods -alaysia still developing, cannot aord to have all in rate o growth @se only i overheating 8" /ncrease new export 'usiness Su'sidies to export irms CO! alls A increase ,S A 5!> alls A price o exports all /neiciency, 'urden on government and taxpayers 46, I 6rade missions to new countries A increase E A . A increase GF +educe over dependence on Dust a ew maDor trading partners 6a.es time A long term 4irms may not want to ta.e the ris. A uncharted territory A 'usinessmen may 'e ris. averse Supply-side Education and training A increase productivity A increase >+,S A all in 5!> A price o exports all 8est measure, yield results in the long run 13 DTo )e considered success"ul, an econoy needs to achie!e low uneployent, low in"lation and sta)le econoic growth.E 2ow "ar &3. with the stateent* #1+% ,nti-thesis 2ealthy 8O!s A especially open economy A macro o'Dective E?uity in distri'ution A micro o'Dective Eiciency in resource allocation A micro o'Dective DTo )e considered success"ul, an econoy needs to achie!e low uneployent, low in"lation and sta)le econoic growth.E Explain this stateent. #1+% ,= >ow unemployment A success Nany 2 well-discussedO -aximise use o resources A reduces loss o potential output due to unemployment 8urden on government >ess tax revenue collected -ore unemployment 'eneits /ncrease 'udget deicit, opportunity cost A less or other areas A healthcare, education Singapore: 5S6 oset pac.age, growth dividends, Singapore shares, one-o re'ates >ow unemployment A people have Do's A higher C A uels growth Social pro'lems A crime rates A social unrest A loss o man hours ; deters investment <conidence= 8= >ow inlation A success Ninternal and externalO /nternal: stimulates output, induces conidence, increase investment due to certainty, increase 4$/, encourages savings A increase investment in the long run External: 8O6 improves N!E$O C= Sta'le economic growth A success Nany 2 well-discussedO Sustained growth: actual and potential growth: increase ,$ and ,s A continual increase in SO> Conidence A increase investment ; 4$/ A good macroeconomic management o government &hy unsta'le growth undesira'le ,$ .eeps increase may cause overheating A demand Apull inlation A increase CO> ; aects 8O6 A insta'ility / economy lapses into recession: negative growth A hardship A all in SO> 11 Conclusion 8rie mention o other criteria or success Conlict 'etween growth and inlation: relentlessly pursues growth A demand- pull inlation: sta'le growth vs low inlation &hich criteria most important: low inlation A price sta'ility A Singapore 12 &iscuss whether "iscal policy is the ost e""ecti!e way "or Singapore to sustain a success"ul econoy. #1,% /ntroduction Sustaina'le ; sta'le growth ; low inlation A one o the .eys to sustaina'le growth $evelopment ,= 2ow 4! wor.s to attain growth /ncrease 5 ; decrease 6 A increase ,$ A . A increase GF R 'rie ; diagram Evaluation Si7e o . A small . A huge lea.ages A high savings I - A need huge increase in 5 A prudent: 'udget surplus Small C I / 'y domestic irms A need export revenue A policies should target E Crowding out: increase 5 inanced 'y 'orrowing rom pu'lic A increase interest rate A crowd out CI/IE -ay not need to 'orrow A huge reserves A reserves can 'e depleted -ore concerned a'out all in E 6ime lag: recognition, implementation, response Small A shorter time lag 6axes A unpredicta'le eect on CI/ A . wor.s only on the extra disposa'le income that is spent Expectations: pessimism I optimism 4all in direct taxes A rely more on indirect taxes <5S6= <increase CO>= A regressive A increase income gap 8= Summation: 4! in Singapore A limited role / economy wea.ens <all in 5$!= A usually due to external actors li.e all in E eg" 111 @S recession A policies should target E !olicy exchange rate management A sustaina'le growth 5radual and modest appreciation o SU !rice o imports all in SU - chec. imported inlation <low inlation= ; Singapore depends a lot on imported raw materials A lower CO! A >6 a'le to price competitively A sta'le growth A 8O6 increase <!E$= !rice o E increases in immediate period 5radual: Singapore irms to ind other ways to reduce cost -odest: not to totally erode export competitiveness Supply-side policy: education and training, welare 'eneits, taxation incentives 13 Conclusion 4! in Singapore limited eect on ,d, serves as supply-side measure to increase GF over long term ; exchange rate management A to 'oost long term export competitiveness 1# 1n the "ourth Buarter o" +$$5, Singapore=s uneployent rate rose to ,.;A. &iscuss whether supplyFside policies are the )est way o" achie!ing "ull eployent in Singapore. #+'% /ntroduction 4ull employment: natural <rictional= rate o unemployment <some structural= Cause or concern <very 'riely=: i structural severe, i cyclical $evelopment ,= Supply-side Education and training A 8udget 30 Schools and vocational institutes gear Singapore wor.ers or the challenges o new economy A grants, scholarships, places in university A ocus: 'iomedical A increase employa'ility Su'sidise irms or wor.ers training A S.ills $evelopment 4und A upgrade s.ills A reduce structural unemployment >ie-long learning A .nowledge can 'ecome o'selete A constant upgrading o s.ills A reduces prospect o 'eing structurally unemployed >ong term and may not yield results /ncrease employa'ility and attracts -GCs &elare 'eneits Singapore no unemployment 'eneits A reduce rictional unemployment 4orced to upgrade s.ills A reduce structural unemployment +educe power o trade unions G6@C: government 'ody A harmonious relations A no la'our unrest: attracts investment <4$/= G&C: wage recommendations A wage increase Q productivity increase A .eep CO! low /ncrease employa'ility o wor.ers 8= !olicies to deal with cyclical unemployment: all in ,$ Supply-side A structural, cannot solve cyclical 4!: increase 5, decrease 6 'ut small ., external actors Exchange rate management +ecession due to all in E: depreciation I appreciation $epreciation: price o exports all A immediate solution 'ut Singapore cannot aord to A price o imports increase A CO! increase A later price o exports increase <growth cannot sustain= Singapore:s choice: gradual and modest appreciation <long term solution= 1% Conclusion /ncrease 5 on education and training ; taxation incentives A supply-side policies A eect on ,$ and some eect on cyclical unemployment A limited role in Singapore due to small . 1) (hy Singapore does not use interest rate policy Mery dependent on overseas unds A small Eg" i Singapore:s interest rate alls to cur' recession A 9hot: money outlow - U in Singapore 'an.s all A -S alls A interest rate increase A no control $iscuss interest rate only i not Singapore Pro)les with exchange rate insta)ility Exchange rates determined 'y 6rade and investment 'etween trading partners Speculation 5overnment management I manipulation o exchange rate eg" 'uy @S 'onds to .eep @S$ up 1= 6rade ,ects 'usiness planning: need or certainty to orecast proits Eg" / SU depreciates !rice o Singapore exports all in oreign currency A volume o exports increase !rice o imports increase in SU: dependent on raw materials <same or developing countries which need capital goods= Eg" / SU appreciates A price o exports increase in oreign currency A aects export earnings 2= /nvestment !ersistent depreciation A loss o conidence in economy A all in investment 3= $eveloping countries 4oreign loans in @SU denomination A i your currency depreciates A pay 'ac. more in your country:s U 1*