(2018) 8823 H1 Econs Paper CSQ 2 Suggested Answers by Mr Eugene Toh (A Level Economics Tutor)
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a(i)
The Gini coefficient measures inequality within a distribution, such as income or wealth distribution. It is calculated as the ratio of the area between the line of perfect equality (diagonal line from bottom left to top right) and the Lorenz curve over the total area under the line of perfect equality. The Lorenz curve plots the cumulative income received by a cumulative percentage of the population (both ranked from lowest to highest).
The Gini coefficient ranges from 0 to 1, where 0 represents perfect equality (everyone has the same income) and 1 represents perfect inequality (one person has all the income while others have none). Therefore, the higher the Gini coefficient, the greater the degree of income inequality in a country.
aii.
GDP per capita: Singapore's GDP per capita is significantly higher than Australia's, almost double. This would suggest that, on average, material living standards are higher in Singapore than in Australia. GDP per capita is often used as a proxy for living standards, as it measures the average economic output per person.
Gini Coefficient: However, Singapore's Gini coefficient is also significantly higher than Australia's (0.464 compared to 0.303). The Gini coefficient measures income inequality, with higher values indicating greater inequality. This suggests that income is more unevenly distributed in Singapore compared to Australia. Therefore, despite having a higher average GDP per capita, the benefits of Singapore's GDP may not be distributed as evenly as in Australia, potentially leading to disparities in living standards within the population.
HDI rank: When considering the Human Development Index (HDI), a more comprehensive measure of living standards that incorporates health, education, and income indicators, Australia ranks higher than Singapore (2nd compared to 11th). This suggests that despite Singapore's higher GDP per capita, Australia may offer better living standards when other factors like health and education are considered.
In conclusion, while Singapore shows higher economic output per person, Australia may have a more equitable income distribution and better overall living standards, considering factors beyond just income.
b.
Short-run Impacts on the Australian Economy
In the short-run, the components of Aggregate Demand (AD), which include Consumption (C), Investment (I), Government Spending (G), and Net Exports (X-M), play a critical role in the economy's performance. Given that 'rising exports have more than offset weakness in investment,' it suggests that the increase in net exports has compensated for any fall in investment. Consequently, AD would increase, shifting the AD curve rightward from AD0 to AD1.
The rightward shift in AD will stimulate an increase in real GDP, thereby boosting economic growth. As businesses ramp up production to meet the heightened demand, they are likely to hire more labor, potentially reducing cyclical unemployment. Moreover, an improvement in net exports will enhance the current account balance, leading to favorable outcomes for both Australia's balance of trade and balance of payments.
Long-run Impacts on the Australian Economy
Over the long run, investment's role in influencing the economy's productive capacity becomes crucial. The 'weakness in investment' could mean either stagnation or a decline in investment expenditure.
In the scenario of stagnant investment, the economy might be hindered from achieving sustained economic growth. Without additional investment in capital goods, the productive capacity remains unchanged, causing the Long-Run Aggregate Supply (LRAS) curve to remain stationary. If AD continues to rise, reaching AD2, the economy will eventually operate at full employment. However, without a corresponding increase in aggregate supply, the real output will not increase beyond the full employment level (Yf).
Alternatively, if there's a fall in investments, the LRAS may shift leftwards from AS0 to AS1, indicating a contraction in the economy's productive capacity. This could lead to a decrease in both the real output and potential output (full employment level).
In conclusion, while the rise in exports might boost Australia's short-term economic performance, sustained weakness in investment could have adverse long-term implications on its productive capacity and potential economic growth.
c.
Why Australia was expected to further reduce interest rates
Despite Australia's economy expanding at 3.3% in Q2 2016, inflation remained low at 0.3%. Central banks, including the Reserve Bank of Australia, typically target an inflation rate between 2% and 3%. The current inflation rate indicates that the economy may not be operating at or near full employment. Furthermore, slow growth in consumer demand was noted.
To stimulate the economy, reducing interest rates could be beneficial. This decrease in rates would lower the opportunity cost of spending, thus boosting Consumption (C). Simultaneously, firms would find investing more appealing due to lower borrowing costs, leading to an increase in Investment (I). The consequent rise in both C and I would increase Aggregate Demand (AD), promoting higher economic growth and lower unemployment. Given the economy's current state, Australia is unlikely to experience a sudden inflation surge. Any inflation increase should remain within the 3% target, considering its current low level.
Why Singapore announced no change in the current zero appreciation policy
Singapore's economy is projected to grow at a rate of 2.1%, falling short of its forecast. This slowdown is attributed to a weakening global outlook, which can negatively affect consumer expectations and, in turn, dampen demand for Singapore's exports.
Typically, under such circumstances, one might expect the Monetary Authority of Singapore (MAS) to devalue the SGD to boost the competitiveness of its exports. However, MAS has chosen to maintain its current zero appreciation policy. There are primarily two reasons for this decision:
MAS anticipates that core inflation will rise gradually towards the 2% target rate, implying no immediate need for further intervention.
While a weaker SGD could enhance the demand for Singapore's exports, it could also make essential imports, like food, more expensive. The increased cost of imported inputs could lead to cost-push inflation, while more expensive imports overall would cause imported inflation. Given these potential inflationary pressures, maintaining the current policy appears to be the most suitable course of action.
d.
Effects of Increased Labour Productivity on Living Standards
Increased labour productivity, brought about by improved education and training, can have a significant impact on the standard of living.
Impact on Economic Growth and Material Living Standards
Increased labour productivity means higher output per unit of labour. This shift enhances the economy's production capacity, moving the Long-Run Aggregate Supply (LRAS) curve to the right, from AS0 to AS1. As the economy's potential output expands, individuals can consume more goods and services, improving their future material standard of living.
Furthermore, if the Aggregate Demand (AD) is close to or at full employment, the rightward shift of LRAS will also drive actual growth. This shift translates into an increase in real national income from Y0 to Y1, enabling individuals to afford more goods and services, thus raising the material standard of living.
Reduction of Income Inequality
Suppose the initiatives for education and training particularly target low-skilled or low-income individuals. In that case, these policies can lead to higher wages for these workers as their productivity improves, reducing income inequality. Such a process ensures economic growth is more evenly spread across income groups, further enhancing the material standard of living.
Limitations and Alternatives for Improving Living Standards
While improved education and training can enhance living standards, this approach takes time to develop. Education and training courses, such as diplomas, degrees, or certifications, can take years. Therefore, productivity increases may not be observed in the short run.
For quicker improvement in living standards, expansionary demand management policies, like fiscal or monetary policy, could be employed to spur economic growth. For example, increasing government infrastructure spending can stimulate economic growth and reduce unemployment by increasing AD and real national income. This increase can boost individuals' purchasing power, enhancing the material standard of living.
Improvements in the non-material standard of living can also contribute to better overall living standards. For instance, by making healthcare more accessible and affordable, more individuals can utilise these services. This could be achieved through subsidised healthcare or transfer payments. Similarly, better transport infrastructure could reduce commute times, increasing individuals' leisure time, and thus improving the non-material standard of living.
e.
Economic growth refers to the increase in the quantity of goods and services produced over a period of time, usually measured by the increase in a country's gross domestic product (GDP).
Case for Government Policy to Aim at a High Rate of Economic Growth
Boosting Living Standards: Economic growth improves living standards as a growing economy will produce more goods and services, leading to higher incomes and increased consumption. This can lead to an improved quality of life, as people can afford more consumer goods, better healthcare, and more leisure time.
Reducing Unemployment: Higher economic growth often leads to higher demand for labour as firms increase production. This can result in lower unemployment rates, leading to further improved living standards.
Promoting Innovation and Technological Advancement: High economic growth rates often go hand-in-hand with increased investments in research and development. This leads to technological advancement and innovation, which can drive productivity and efficiency gains, contributing to economic growth.
Improving Public Services: Economic growth expands the tax base, providing the government with additional revenue for public services like education, healthcare, and infrastructure. This can further enhance living standards and societal welfare.
Possible Adverse Consequences of High Economic Growth
However, the pursuit of high economic growth can also have adverse consequences.
Inequality: Economic growth can lead to income inequality if the benefits are not evenly distributed. Those with higher skills and capital may benefit more from growth, while those with fewer skills and less capital may be left behind.
Environmental Impact: High rates of economic growth often involve increased exploitation of natural resources and higher levels of pollution, leading to environmental degradation and contributing to climate change.
Overheating and Economic Instability: If economic growth is too rapid, it can lead to inflation, causing a decrease in the purchasing power of money. It may also lead to asset price bubbles, which when burst, can result in severe economic recessions.
Mitigating the Adverse Consequences of High Economic Growth
While the pursuit of high economic growth can bring about certain challenges, it is not to say these challenges are insurmountable. Government policies can be implemented to manage and mitigate some of these adverse consequences.
Addressing Inequality: Measures can be taken to ensure the benefits of growth are more equitably distributed. For instance, progressive tax systems can be adopted, where high-income earners are taxed at a higher rate, and these revenues can then be redistributed to lower-income groups through transfer payments. In Singapore, a scheme known as the Workfare Income Supplement (WIS) provides additional income to older, lower-wage workers, helping to mitigate income inequality.
Tackling Environmental Issues: With higher tax revenues from economic growth, the government could invest more in green technology and sustainable infrastructure. This could include policies that promote renewable energy, energy-efficient technologies, and sustainable transport. These initiatives can help to offset some of the environmental impacts associated with economic growth.
Managing Economic Stability: The risk of overheating and economic instability can be managed through careful monetary and fiscal policies. For example, macroprudential policies could be implemented to prevent asset price bubbles and to ensure the stability of the financial system. In Singapore, the government has employed cooling measures in the property market to prevent a housing bubble.
To sum up, the pursuit of high economic growth need not inevitably lead to adverse consequences if appropriate policies are put in place. The key is to balance the pursuit of growth with the management of its potential negative impacts.
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