P-Cube

Session 1
Objectives of P-cube
Not a revision of content
Skills based
To benefit from the programme
Students have to be prepared and willing to ask questions
Independent learning
I dont know what to write.
I have all/most of the points. Why
did my teacher give me L2?
Todays objectives
1. Crash course on essay writing
2. Understand the 2 practice questions
requirements
3. Common errors for the 2 practice questions
Essay writing
Answer the question
Best gauge can I guess the question by reading
your answer?
Technique 3Cs
Command, Content, Context
Also helps to paraphrase the question
Essay writing
Balance
Recognise assumptions
Applied to real life eg.
Should I attend P-cube lectures?
Applied to real life eg.
Yes I should No I shouldnt
Attending P-cube will help
me improve my grades
I have other things to do.
My girlfriend/boyfriend will
leave me if I dont spend
enough time
What assumptions have you made here?
What evidence do you have to suppor t this view?
Essay writing
Your essay must stand out
Have evaluative comment i.e. smar t comments
Essay writing
Most impor tantly
Content must be accurate
Syllabus assessment
objectives
9732 Economics Syllabus
To do well
You need content and skills
Like playing soccer you need the ball and skills.
Without either one you will not become a good
player.
Essay skills package
More tips and pointers
Do read through and practice
2011 Promos essay
question 3
In any economy, the right answer to unemployment is to create
more jobs.
a) Consider why governments around the world should be
concerned with the different types of unemployment. [10]
b) To what extent do you agree with the statement above? [15]
Spot the difference
(a) Consider why governments around the world should be
concerned with the different types of unemployment. [10]
Consider why governments around the world should be
concerned with the problem of unemployment.
Dissecting the question
a) Consider why governments around the world should
be concerned with the different types of
unemployment. [10]
Dissecting the question
In any economy, the right answer to unemployment is to
create more jobs.
b) To what extent do you agree with the statement above?
[15]
Schematic plan (3a)
Introduction
Body
Costs of unemployment
Types of unemployment (demand-deficient, structural, frictional)
Comparison of which type of unemployment is more of a concern for
governments.
Common mistakes
Avoid these mistakes
Reducing unemployment increases productive capacity
Use increase productivity in place of Increase
production
Schematic plan (3b)
Introduction
Body
Thesis - Creating more jobs will
help reduce unemployment
Explain how this is done using
analysis
Anti-thesis - Creating more jobs will not help reduce
unemployment
1. Who gets the jobs created?
2. What is the cause of unemployment?
3. Other policies might provide a better answer to
unemployment
Synthesis & Conclusion whether creating jobs is the right answer to unemployment depends
on the type of unemployment. Even then there are other answers to unemployment
Common mistakes
Avoid these mistakes
Creating jobs?
Using SG eg. without recognising the limitation
2011 Promos Question 4
(a) Explain the most significant causes of increase in investment
in Singapore in recent years. [10]
(b) To what extent do you agree that the Singapore
government should continue to encourage this increase in
investment? [15]
Dissecting the question
(a) Explain the most significant causes of increase
in investment in Singapore in recent years. [10]
Dissecting the question
(b) To what extent do you agree that the Singapore
government should continue to encourage this increase in
investment? [15]
Schematic plan (4a)
Introduction
Body
Explain MEI
Explain factors (Singapore) which causes MEI to shift
Schematic plan (4b)
Introduction
Body
Thesis Benefits of
increasing investment on economy
1. EG
2. Employment
3. BOP
Anti-thesis Costs of increasing investment on
economy
1. Inflation (SR)
2. Unemployment
3. Opp Cost
4. Negative impact on environment
5. BOP worsen (LR)
Synthesis & Conclusion Investment is extremely impor tant for Sg but need to balance and
mitigate the negative effects
Common mistakes
Avoid these
Investment is thought to be on consumer goods and capital
goods
Because of small multiplier, increase I will have a small impact
on NI and hence it is ineffective
1
SECTION B

QUESTION 3
In any economy, the right answer to unemployment is to create more jobs.
(a) Consider why governments around the world should be concerned with the
different types of unemployment. [10]
(b) To what extent do you agree with the statement above? [15]

Examiners comments
Majority of students attempted this question and did well average of 12.4 (compared
to other questions). However there were some students with serious misconceptions
and inappropriate approach used by some students. For example a handful of
students treat the question as a whole 25-marks question and did not label part a or
b. This is inappropriate. Although they are linked, the marks are allocated separately.
Please refer to the general breakdown of marks in the Essay Skills package.
(a) Students who explained the costs of unemployment and then justify that
unemployment is a concern when it is high and due to cyclical and structural
reasons scored well. The best answers also gave appropriate exemplification.
Quite a number of students chose to explain some costs of unemployment
under the various types of unemployment. Very often this approach gave the
impression that those costs only applies to that particular type of
unemployment, which is not accurate.
(b) Answers which showed clear explanation of expansionary fiscal / monetary
policy and evaluated why it will and will not solve unemployment with
exemplification scored well. Many gave one-sided arguments or did not use
economic analysis. These answers are awarded only level 1 marks.

SUGGESTED OUTLINE
(a)
Suggested outline Common
mistakes/problems
Introduction
Unemployment refers to a situation where people in an
economy who are of legal working age, and are willing and
able to work at the current wage rate, are unable to find work.
Whether unemployment is a concern depends on the severity
of the situation and the type of unemployment.
1. There was no
introduction!!!
2. Definition of
unemployment was not
accurate.

2
Body
Cyclical unemployment, also known as demand-deficient
unemployment, is related to the business cycle, during the
downswing (recession or depression), aggregate demand
decreases and firms find they cannot sell all their current
output, and stocks pile up. Firms will then adjust to the
deficiency of demand by cutting back on production and
reduce workers, leading to an increase in cyclical
unemployment.
Sometimes job vacancies and unemployment coexist. The
reason is that unemployed workers often do not have the
skills demanded by employers. Structural unemployment
arises when changes in technology or international
competition change the skills needed to perform jobs or
change the location of jobs. People are made redundant in
one sector of the economy cannot immediately find jobs
elsewhere because they either do not have the necessary
skills or unwilling to move to another area/region where
prospects are better (occupational and geographical
immobility of labour respectively).
Frictional unemployment arises because of imperfect
information in the labour market as it takes time for
workers to be matched with suitable jobs. It is also known
as search unemployment. The unending flow of people into
and out of the labour force and the process of job creation
and job destruction create the need for people to search for
jobs and for firms to find suitable employees. Since both
employers and employees spend time searching what they
believe will be the best match available, frictional
unemployment arises.

Policy makers are not that concerned with frictional
unemployment. Frictional unemployment usually does not
last long. Sometimes this is good for the economy because
a better match between workers and jobs after some
deliberation would mean the economy becomes more
efficient. So to achieve low unemployment rate, the focus
is to keep structural unemployment low and cushion the
negative impact on employment during business
downturn.





1. Completely left out by
some candidates.
2. Or briefly mentioned by
some.
3. Some made serious
errors here by
confusing the different
types of unemployment.
4. Indiscriminate use of
productivity. When we
say there is a fall in
productivity it means for
the same amount of
input there is less
output. Many a times
students meant fall in
production in the
economy and used the
term productivity
instead.
5. Similarly, the term
productive capacity
was used loosely.
Some students
associated a decrease
in unemployment with
an increase in
productive capacity.







6. Some students point out
this but dont elaborate why.




7. This is often left out but is
important.











3
High unemployment imposes significant costs on the
economy. (Explaining 3 points is sufficient)
Loss in Production and Income: The loss of jobs brings
about reduction in production and income. As a result,
purchasing power may be reduced and hence standard of
living is lowered. With unemployment, the economys actual
output may be significantly less than its potential output.
Loss in Human Capital: Prolonged unemployment may
cause a person to lose touch of the skills and knowledge he
once possessed. If they stay out of the job market for too
long, they may face increasing competition with the fresh
graduates whose human capital are intact and are also
cheaper to hire. In addition, workers without regular
employment not only lose their financial security, if for long
periods, they will suffer from loss of self-esteem, stress,
discouraged and demoralised which often result in suicides
and mental illness. The loss in human capital hampers the
economys productive capacity affecting potential growth.

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

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



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

Note that while there might
be a loss of human capital, it
will most definitely not shift
the LRAS to the left. That
only happens when factors
of production are destroyed.
Loss in human capital in this
case only means that the
potential growth rate is
slower.



9. Many students point out
the loss in tax revenue but
fail to elaborate on the
implications.








10. Dont focus on
political/social/psychological
aspects. Have to link back
to the economic costs
incurred.
Conclusion









4

(b) In any economy, the right answer to unemployment is to create more jobs.
To what extent do you agree with the statement above? [15]

Introduction
Low unemployment /full employment is one of the macroeconomic goals of any
government. In this essay we will discuss the extent to which creating more jobs
helps to achieve low unemployment / full employment.
Body
Thesis - Creating more jobs will help to
improve unemployment situation

Creating more jobs can be done with
expansionary demand management policies to
stimulate the economy. Fiscal and monetary
policies are demand management tools.

Explain using expansionary Fiscal /monetary
policy
Fiscal policy is defined as the use of
government spending and/or taxation to
influence the level of economic activity through
the aggregate demand.
This has been adopted by various governments
the world over during periods of recession and
high unemployment. This policy works by
increasing government spending as illustrated
by the Singapore governments 2009 budget of
S$20.5 billion and the US$800 billion fiscal
stimulus in the USA in 2008.
As government spending is a component of
aggregate expenditure (AE), this increases
the level of AE and leads to an unplanned
decrease in stocks. As firms increase
production to increase their stock levels back
to desired levels, they hire more workers (as
well as other factors of production),
employment and hence national income
increases. Through the multiplier effect, the
higher income induces an increase in
consumption. This leads firms to hire more
workers again to meet the rising demand for
goods and services and national income rises
a second round. This second round increase in
national income induces another round of
consumption, leading to a third round increase
in national income. With each successive
round of increase in income, the amount of
Anti-thesis 1 Creating more
jobs will not help to improve
unemployment

If prevalent unemployment is due
to structural unemployment,
creating jobs will not work to
reduce it as the cause of the
unemployment is that the
unemployed do not possess the
required skills. Supply-side
policies like providing re-skilling to
ensure the unemployed now
possess skills which match the
requirements of the economy.

Evaluation
This is assuming jobs created do
not match the skills possessed by
the unemployed. This is a valid
assumption as government will not
encourage job creation in areas
where the economy has already
lost comparative advantage.

Anti-thesis 2 - Creating more
jobs may even worsen some
types of unemployment

Frictional unemployment may be
worsened as there are more jobs
available now, implying that it will
take a longer time to pick out jobs
which are suitable.

Anti-thesis 3 other solutions?

In addition to creating jobs,
government can reduce the
5
leakages, in terms of savings, taxes and import
expenditure, also rises. This process will
continue until the leakages have risen by the
same amount as the initial increase in
investment/autonomous consumption/net
exports, by which time, national income would
have increased by a multiple and employment
would also have risen significantly.

Draw diagram and make reference to it.

Common mistakes / problems:
1. Creation of jobs is done miraculously and not
through the policies of the government. Hence
they see FP / MP as alternative policies instead.
2. Lacking in economic analysis. Did not draw
diagrams or if diagrams are present, did not
make reference to it.

Evaluation
Hence if cyclical unemployment is prevalent,
where there is a deficiency in demand leading
to the lack of jobs available, creating more jobs
through the use of expansionary demand
management tools can help the situation.
However, we must also note that jobs created
do not necessarily mean that they will be taken
up.
1. New jobs created may require skills not
possessed by the unemployed.
2. These jobs may instead be filled up by
foreign workers.
3. Immediately, unemployed may not be able to
sieve through and find employment.

(also accepted can help seasonal
unemployment if jobs created helps to diversify
the economy)
destruction of jobs by lowering the
cost of production for firms when
the economy is suffering from a
recession. During a downswing,
workers are retrenched as stocks
pile up with the fall in aggregate
demand. With the cut in cost of
production, firms might be able to
avoid retrenching workers to stay
profitable.

Common mistakes / problems:
1. Although it is heartening to see
that students are making the effort
to exemplify, the problem is all the
examples given are in Singapore
context. It is like students are
answering a question on
Singapore. This is a problem
especially when students write
when there is cyclical
unemployment the governments
can cut employers CPF
contribution without even
stating that this is an example of
what Singapore government can
do. Since the question is general,
does that mean governments in all
countries have this option?
2. Surprisingly, quite a number of
candidates did not link measures
for reducing structural
unemployment to Supply-side
policies.
Conclusion
Ultimately, whether unemployment can be solved depends on whether there are jobs
available hence the government role is definitely to ensure that there is no demand
deficiency and sufficient jobs are created for the workforce. However, with increased
competition from other countries there is a constant restructuring of the economy and even
as jobs are created, the skills required are very different. Hence there is also a need for
supply-side policies to ensure the skills of the workforce are up-to-date.

Note: A significant number of students began the essay by stating that
governments have 3 macroeconomic goals (Sustained EG, FE, price stability)
6
instead of 4 (and favourable BOP). In Timed Assignment 3 it was the case
because it is the context given. In general there are 4 macroeconomic goals.
QUESTION 4


(a) Explain the most significant causes of increase in investment in
Singapore in recent years. [10]
(b) To what extent do you agree that the Singapore government should
continue to encourage this increase in investment? [15]

Examiners comments:
Answers generally showed that candidates know the events happening in
Singapore and what is causing the increase in investment. However, most
candidates did not see the need to use appropriate economic analysis for part a.
Many were happy to list all the events which went on in Singapore in recent
years and make a statement to link all these to increasing investment. This
approach clearly did not demonstrate any form of application of economic
analysis.
Answers to part b again demonstrated students do know the benefits and costs
investment brings to the economy but often lacked sufficient scope to score level
3 marks.



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

1. Did not define
investment / did not
understand what
investment component
in the Keynesian model
refers to. It is
expenditure by firms.
Body
Investment decisions are assumed to be made on the basis
of how the capital good can contribute to the firms
profitability. As such, in considering whether to buy a capital
asset such as a machine or tool, the firm would have to
consider:
Marginal Efficiency of Investment (MEI)
Marginal Efficiency of Investment (MEI) is a concept used
to measure the expected profitability or rate of returns from
an additional unit of investment. Thus, for every additional
dollar spent on buying capital asset businesses need to
know how much yield / returns can be expected from the
money spent.
The MEI shows an inverse relationship between investment
and current interest rates (cost of borrowing for the firm).
Firms will invest up to the point where MEI =r.
The profit maximizing position is illustrated in Fig. 1. As
long as the rate of return is greater than the interest rate,
the firm should invest more. It should stop when the
investment level reaches I
1
.
Fig. 1: The determination of level of autonomous
investment







2. Many referred to
capital flows,
government expenditure
and consumption
expenditure as
investments!
3. As mentioned in the
examiners comments,
this portion is often
ignored. If it is present,
it is often not referred to
later ie. there is no link
between the model and
the events/causes
explained later.
4. Some students
argued that Singapore
government lowered
interest rates and hence
increased level of
investment (movement
along MEI). This is
inaccurate as Singapore
controls exchange rate
and not interest rate as
our part of our monetary
policy.



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

MEI
%
I
1
r =20%


Investment
I
2

r >MEI =15%

r <MEI =25%
I
3


businessmen's expectations of an unknown and possibly
uncertain future. The business sentiments / confidence of
businessmen are perhaps the key determinant of the level
of aggregate demand in the economy. If business
sentiment improves, entrepreneurs will immediately revise
upwards their expectations of future profits and income
streams yielded by the investments they are considering.
Given that the performance of the Singapore economy has
surpassed some of the most developed countries in the
recent years, producers are more confident in our economy
and choose to invest in Singapore.
Firms estimate rates of returns on investments on the basis
of expected after-tax profits. If there is a decrease in tax
rates, we expect a rightward shift of the MEI. This is an
important factor which affects investment decisions
considering that it is one of the tool used to attract
investments (Singapore has one of the lowest corporate tax
rates in the region)
Draw diagram showing rightward shift of MEI and make
reference to it.
(Also accepted low inflation in Singapore which allows
firms to better predict their profits)
Conclusion

Information on Corporate Tax changes in Singapore

Changes
over the
years
1997-00 2001 2002 2003-04 2005-06 2007-09 2010-11
26% 25.5% 24.5% 22% 20% 18% 17%
First Three
Years

Taxable Income (S$) Tax Rate
0 100,000 0%
100,001 300,000 8.5%
300,001 2,000,000 17%
After First
Three Years

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



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

Introduction
Body
Thesis Singapore government should
encourage increase in investments

Benefits of an increase in investments
have on Singapore economy

1. Growth and employment
Explain using AD/AS model how increase
in I helps to increase national income and
employment.

An autonomous increase in investment, it
will increase the level of AD and leads to
an unplanned decrease in stocks. As the
firms increase production to increase their
stock levels back to desired levels, they
hire more workers (as well as other
factors of production), employment. This
will generate income for households
employed by firms in the capital goods
industry. The household will tend to spend
a proportion of the additional income on
consumption, depending on their marginal
propensity to consume (MPC). This
further creates income for households
employed in the consumer goods industry
who will further spend their additional
income on consumption. This cycle of
spending and re-spending on
consumption will continue until the
increase in income becomes negligible.
The eventual increase in national income
is several times the initial increase in
investment. The multiplier, K, represents
how many times the national income
increases with respect to the initial
change in investment.
Anti-thesis Should not encourage
increase in investment because


1. SR inflationary pressure
Too fast an increase in investment leading
to increase in AD faster than the growth of
the economys capacity will result in
overheating of the economy. With the
increase in AD, firms increase their
production to meet the rising demands, but
to do that they will need to acquire more
resources (factors of production) which
may involve competing with others uses of
these resources. Thus, factor prices will be
driven up, driving up costs of production
(shown by the upward sloping nature of
AS
0
), leading to demand-pull inflation.


Evaluation: However, LR LRAS shift
rightwards due to increase in productive
capacity. Hence will be able to achieve
non-inflationary growth and low
unemployment.

2. Employment may not increase
Although with the increase in AD and firms
will need to hire more workers, this does
not necessarily mean that Singaporeans
will be employed. It will depend on whether
Singaporeans have the necessary skills to
take on these jobs and very often these
jobs may be filled up by foreign workers
instead.
Evaluation: There must be supply-side
policies in place to complement the
increase in I eg. Appropriate training or
reskilling programme to help workers meet
Draw diagram and make reference to it.

With economic growth and lower
unemployment rates, there is more
efficient use of resources which results in a
gain in actual output (higher material
standard of living). There will also be less
drain on government revenues for
unemployment benefits, and the
government revenue can be used for other
purposes such as improving infrastructure
development and enhancing the education
system.

2. Improve Balance of payment (not
expected)
With the increase in foreign direct
investments, this inflow improves the
financial account of the balance of
payment, ceteris paribus, balance of
payment will also improve.

Common mistakes / problems:
1. Did not use economic analysis to
explain the impact of increase I on growth
and employment.
2. Explanation is wrong because some
students mistaken I for consumption and
government expenditure.
3. went off track by concentrating solely on
the policies which helps to increase
investment.
the skills requirement and fill up the jobs
created by the influx of I.

3. Opportunity cost of current consumption
If more resources are allocated to capital
goods less will be available for consumer
goods affecting current SOL.
Evaluation: However in the future, more
goods and service can be produced with
the increase in the productive capacity due
to the accumulation of capital goods.

4. Possible negative impact on
environment (not expected)

5. Worsen Balance of payment (not
expected)
Profits of FDI brought back may lead to
worsening of current account on balance of
payment.

Common mistakes / problems:
1. Did not explain why price level increases
with increase in AD when economy is near
full capacity.
2. Quite a handful did not know that I will
have positive effect on LRAS.
3. Some has very strange idea of I on
consumer goods vs I on capital goods.
Investment has to be expenditure on
capital goods isnt it???
4. Some students argue that trade is more
important to Singapore than Investment
hence government should not encourage I
and encourage X instead. But doesnt
investment helps to improve
competitiveness of goods produced by
local firms and hence exports?
5. Many also argued that increase in I will
not help NI because of small multiplier
effect and hence we should not encourage
the increase in I. Going by this argument
then there is nothing the government can
do then?
6. Sustained growth sustainable growth.
Sustained growth there is increase in
both AG and PG.
Sustainable growth has to include the
environment and resource issues.


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