"China’s high-yield agriculture was as much a result of suitable institutions as good natural conditions." Discuss.

Shared master's students economics essays for LSE (London School of Economics and Political Science) MSc. 

EH446 Economic Development in East and Southeast Asia series 

Introduction

This essay aims to analyse the relative importance and impact that good natural conditions and suitable institutions had on China’s high-yield agriculture. In order to discuss the relationship of these factors to agriculture as well as to one another, it is important to first identify the time frame in which to situate the analysis. Throughout the Qin and Han periods, institutions began to take root which would have lasting impact on the period of high-yield agriculture to follow.  A substantial shift in geographical focus to agriculture in the south of China during the Tang period  marks the start of the latter phase considered in this essay, extending into the Song Dynasty to cover the dissolving of large land estates and accompanying migration patterns.  

During this time period, China’s high-yield agriculture was both a result of good natural conditions and suitable institutions. This essay places an emphasis on the suitableness of those institutions to the natural conditions present and their responsiveness to changing circumstances and challenges presented by population growth and limited land capacity as instrumental in promoting China’s high-yield agriculture. The essay will begin with a brief description of the good natural conditions existing in China to promote an agricultural system, followed by an analysis of the institutions that mobilise this sector and the built-in response mechanisms that both contribute to high-yield agricultural sustainability as well as eventually lead to its stagnation. The conclusion offers a summary of the argument that high-yield agriculture in China resulted from a combination of a good natural environment and suitable institutions and their own mutually reinforcing relationship.

Good Natural Conditions

According to J.L. Buck’s Land Utilization in China, such natural factors as climate, topography, soil, and vegetation are important to consider in an analysis of the agricultural sector in China. These factors provided good conditions for high-yield agriculture in China, in part because of their wide variation across the vast territory. Lower elevations tended to be more suitable for large agricultural plots, the best soil could be found on valleys and plains, while rainfall levels varied by region and season. The sheer size of China and its varied geography allowed for a variety of crops and farming techniques to develop over time – from wheat, maize, and soybeans in the north to rice in the south – among many other variations from each and in between.  The challenging conditions in particular regions and seasons did pose some obstacles for farmers, but these could be overcome with developments in fertilizers and seed varieties.  These innovations were sponsored and encouraged by the institutions which developed during the Qin and Han periods.

Institutions

In order to maximize the productivity of the good natural conditions described by Buck, a number of institutions developed. Among these are private property and land ownership, small family farms, the land tax structure, and state investment in technology. There existed an overarching relationship between the state and the farmers in which both parties reaped rewards from the function of these institutions. For the state, agriculture was a “fundamental” cornerstone of the Chinese economy, a symbol of enduring prosperity in which it made ideological sense to invest resources.  There were not only philosophical benefits, but military and economic benefits as well, coming from “well-fed soldiers” and additional revenue.  Peasants depended on land from the state , so they derived benefit from this relationship and the institutions that supported it as well.

Private property and land ownership is important to high-yield agriculture in China because of its early development during the Qin and Han Dynasties. Its emergence gives rise to further patterns such as small farm sizes and tax structures. Under the Han Dynasty, economies of scale did exist for some non-rice crops in northern China, which gave rise to the formation of large scale farm estates. Later, this pattern was reversed, increasing the fluidity of peasant migration in the Tang and Song periods.  

Chao Kang uses the term “atomistic” to describe the many small farms (“production units”) that made their own individual decisions in the agricultural market.  The small family farm system had many benefits to high-yield agriculture in China. The land tax structure privileged small family farms. The state taxed farmers relative to the amount of land they owned, thus encouraging the smaller farms and protecting against rent-seeking behaviour of landlords who would otherwise try to monopolize surplus production.  In general, agricultural taxes were reasonable, Kent Deng notes, supporting the “moral economy of taxation in China.”  

Among one of the most important impacts of the small farm structure was the family’s ability to allow for a surplus population to exist in the agricultural production model. Chao makes a compelling argument that the family effectively shared their income within the same production unit and allowed the marginal product of labour to fall below subsistence cost.  This creates a situation where population growth is allowed to continue, and thus production also continues to grow but at a lesser marginal product of labour rate. 

Technological development responds in a similar manner, adapting to population growth and perpetuating the increase through investment in labour-intensive innovations. As the marginal productivity of labour declines, the system responds by increasing the marginal productivity of land.   Chao traces the technological innovation in China from labour-saving devices such as the shareplow until the 12th century, when this type of innovation comes to a halt in favour of labour-intense techniques such as raising more than one crop within a year and farming on previously uncultivated land.  As the population grew, migration to the southern region allowed a larger labour force to be successful in harvesting labour-intensive crops such as rice and to benefit from such techniques as double cropping and fast growing seeds.  Again, it was a case of the institutions, in this case, investment in agricultural technology, adapting to the constraints of a growing population and diminishing amount of available land.

Responsiveness

The key for good natural resources and suitable institutions to perpetuate high-yield agriculture in China was their compatibility with one another. Since natural conditions are natural, institutions need to be flexible to adjust to these as well as other variables (such as population). For Chao, the critical capability is redistribution. This property is evidenced in the family production unit structure, where the family production utility can be shared amongst the members internally, even though their individual members’ marginal product of labour is below subsistence level.  Thus, the family unit structure responds to the rise in population by allowing it to continue to grow. Similarly, technology and state policies and incentive structures allowed for agriculture itself to adapt and absorb a larger labour force.

The excellent responsiveness of institutions prolonged high yield agriculture in China. However, this institutional adaptability to a growing population on a fixed area of land led to a pattern of path dependency. The small farm structure and growth in labour-intensive agriculture impacted rational choices made by both peasants and the state. Within the family farm, despite the diminishing marginal product of labour, people continued to work and produce a greater total output rather than let the surplus labour sit idle.  Chao’s argument that the institutional ability to fix problems in the short-run contributed to long-run economic stagnation  provides a good explanation for high-yield agricultural success in China, while also acknowledging its shortcomings. Francesca Bray also touches on this stagnation point, dating it to around 1800 when China reached its geographical limits and the population finally surpassed the capacity of agricultural production. 

Conclusion

This essay has argued that China’s high-yield agriculture was a result of both good natural conditions and suitable institutions. The key to these factors’ ability to propel high-yield agriculture was their complementary nature. Having one without the other would not have provided the same rich platform for growth that was created by these conditions together. Institutions have been the focus of this essay because they are the factor over which the population has control. Institutions can be used to maximize the productivity of natural conditions, as they did through technological innovations to increase the marginal productivity of land, and state policies to encourage small family farms and labour-intensive crops. The assessments made by Chao and Bray attach importance to the roles of population and land capacity as constraints on agriculture for which institutions must correct. 

This essay has stressed the importance of institutional responses to these variables of population and land capacity. Institutions are critical to the development of China’s agricultural sector. During the Qin and Han periods, institutions such as private property and favourable tax structures maximize the use of existing good natural conditions (land, soil, and climate). Over time, particularly during the Tang and Song periods, family production units and labour-intensive technological development react to the limitations of natural resources as the population grows and agricultural space becomes constrained. How this responsiveness ultimately created an unsustainable path dependency that limited agricultural growth in the long-run is not the topic of this essay. However, it helps to illustrate the primary importance of institutions in managing good natural conditions in China for high-yield agriculture.

JC Economics Essays - This short series on JC Economics Essays is a set of shared economics essays on economic development, shared by my former classmates KVL and TZ with me when we were reading our MSc. at LSE, London, United Kingdom. We shared essays so that we could gain additional perspectives on how to craft good essays to get a high grade for the Master's degree at LSE, and that was a good way of sharing information and material. All the essays were graded highly by Dr Kent Deng, a very excellent and inspirational tutor and lecturer at the LSE when I was studying there. I hope you find the essays on economic development interesting or useful. Special thanks to KVL and TZ (both from the United States of America) for their kind sharing.

EH446 Economic Development of East and Southeast Asia

Globalisation and international trade have opened up new opportunities in the world. While a globalised international, world economy brings great benefits to the US economy by opening up new markets for American exports, it has subjected American companies and their workers to unfair overseas competition, which justifies protectionism for these affected industries. [25]

What is globalisation? Globalisation refers to the increasing integration and interdependence of the world’s economies arising from increased trade and greater international mobility of factors like capital, labour and enterprise. There have been a lot of benefits arising from globalisation. Globalisation has benefited the American economy vastly as it has enabled ordinary Americans to enjoy greater consumption possibilities and the engine of growth of the world's most powerful economy. However, it can be argued in a sense that the opening of new markets has also subjected American firms and workers to unfair foreign anti-competitive practices like dumping of cheap, low cost goods, and loss of jobs in the secondary sector of the American economy. 

Comparative advantage is the main theory for international trade. The law of comparative advantage states that a country is able to enjoy higher consumption levels if it was to specialize goods in which it has comparative advantage in, and trade for other goods in which it has a comparative disadvantage in. 

[Insert diagram on production possibilities of USA and Mexico]

Trade enables the USA to consume at any point along its consumption possibilities curve, which is beyond its own PPC. At the same time, Mexico also benefits from international trade. Therefore, both countries are able to consume more goods and services. Hence, it can be seen that when the opportunity costs of producing different goods differ between 2 countries, specialization and trade according to comparative advantage is beneficial to both countries. As such, increased exports to new markets would enable USA to have higher consumption possibilities as compared to a situation of autarky. 

[Insert diagram on AD and AS increasing]

Increased exports also allow full utilization of resources, which increases both AD and AS. Increased exports to new markets allow USA to overcome their domestic demand constraints by giving them access to larger world markets. With additional demand coming from exports, greater utilization of otherwise unemployed resources, output, income and employment. Since AD = C + I + G + (X – M), AD shifts out and real output increases, but price level remains unchanged. Rising export demand further stimulates investments, causing the AS to shift to the right in the long run, resulting in greater output and a lower price level, hence ensuring long run, sustained economic growth in the economy.

However, on the other hand, the globalized economy has also subjected American companies and workers to unfair foreign anti-competitive practices like dumping, which refers to the situation where foreign imports are sold below cost because foreign firms are trying to drive out domestic firms to gain market power. This is a situation that seems somewhat unfair to developed economies.

Also, labour unions in developed economies continuously argue that imports from developing countries are cheap because they artificially keep costs down by subjecting their workers to ‘sweatshop’ like work environments and by paying them depressed wages.

Thus, to curb this problem of unfair overseas competition, many in the USA lobby for countervailing duties (i.e. import tariffs) to be imposed to raise import prices so that they are more in line with prices of locally produced goods. This is known as protectionism, defined as the act of imposing economic policies aimed at restricting trade between countries, designed primarily to protect domestic producers and workers from foreign competition. Methods of protectionism include import tariffs, import quotas, subsidies, voluntary export restraints (VER), foreign exchange restrictions, physical barriers to entry, and technical barriers to entry.

However, on the other hand, protectionism results in greater allocative inefficiency as domestic firms have less drive to improve operating efficiencies and minimize costs. Also, protectionism results in a ‘beggar thy neighbour’ effect where exports, output and income of its trading partners are reduced, which then curbs exports, output and employment of the former. All these indirectly harm American consumers and the American economy in general. 

On top of the costs of protectionism, there are actually benefits to be reaped from the competition from imports. Firstly, competition from foreign imports forces local producers to innovate, cut costs and improve product quality. Local consumers thus enable enjoy lower prices and higher product quality form both imports and domestically produced goods, thus putting the majority of the Americans at an advantage, whereas protectionism only benefits the producers. Secondly, countries may be unable to produce some goods domestically because of the lack of key resources. Importing such goods will thus widen consumer choice. Product variety is also increased when intra-industry trade occurs as consumers get to enjoy not only domestic versions but also imported version of a given type of good, thus benefiting the majority of the Americans again. 

In conclusion, while one must admit that the globalized economy had brought about great benefits to the US economy by opening up new markets for US exports, the overseas competition faced by the American companies and workers may not be unfair. In view of the cheap labour argument, the fact that in developing countries, labour is in abundant and thus these countries will have a comparative advantage in producing labour intensive goods, which is why imports from these countries are cheaper. Therefore, this renders protectionism unjustified as protecting these industries would be to produce a good that it has a comparative disadvantage in. Therefore, this comprises the consumption levels of the country, and gradually greater allocative inefficiency as domestic firms become even more productively inefficient because they have less need to improve operating efficiencies. Hence, protectionism may not be justified in the USA.

JC Economics Essays - H1, H2, H3 Economics essays - tutor's comments: This economics essay on globalisation, international trade, and the US economy is quite interesting, well written, crafted under timed conditions, and seems to address the economics question posed rather well to a large extent. There are some developed economic theories and the appropriate essay techniques, such as signposting, are used. The answer is rather clear and generally well developed, and could quite possibly gain a rather good mark from the examiners. The question is: how can this economics essay be made better? The overall quality of the essay answer could be much higher, but the question is - how can that be achieved under examination conditions, when time is scarce? What should have been done, and what should have been done better? Also, what other economic theories should have been brought in to make the answer more complete? Think about how you could write this essay better, and sharpen it further, and stretch the grade with models, theories, and examples. Perhaps this economics paper could have used more examples and empirical data to show good Economics knowledge and materials. 

Examine, with relevant examples, how American car producers might use the price (PED) and income elasticity of demand (YED) concepts to help determine their pricing and output decisions. [15]

This economics essay applies concepts of elasticity to the car market, using real world examples from the USA. Price elasticity of demand measures the responsiveness of quantity demanded of a good to a change in its price, ceteris paribus. It is calculated by taking the percentage change in quantity demanded of a good over the percentage change in price. Income elasticity of demand measures the responsiveness the demand for a good to a change in income, ceteris paribus. It is calculated by taking the percentage change in the demand of a good over a percentage change in income. 

After having defined the two main economic concepts, this essay seeks to explain how they can be used to determine pricing and output decisions with the aid of diagrams before linking them to various car producers and finally evaluating the usefulness of these concepts.

[Insert diagram on price elastic demand showing the loss and gain in revenue when price falls]

With the aim of maximizing total revenue in mind, with a fall in price in a price elastic demand, the firm would gain an area bigger than the area loss. This shows that the quantity demanded will increase more than proportionately, resulting in an increase in total revenue earned by the firm.

[Insert diagram on price inelastic demand showing the loss and gain in revenue when price rise]

Likewise, with the same goal in mind, a rise in the price of a good with an inelastic demand would result in the firm gaining an area bigger than the area loss. This indicates that the quantity demanded will fall less than proportionately, also leading to an increase in total revenue. Hence, by knowing the price elasticity of demand for their goods, the firm would know when to raise or cut prices for its benefit in earning maximum total revenue.

For income elasticity of demand, with regard to positive income elasticity, with an increase in income, the demand rises for the normal good and firms should produce more of them when the country faces strong economic growth. As for negative income elasticity, with an decrease in income the demand rises for the inferior good and firms should produce more when the country is having a recession. With a higher magnitude, the extent of the change in demand increases and the firm should be more responsive in terms of the quantity supplied.

When linking these concepts to various car producers, for price elasticity of demand, the bigger firms such as Ford and Chrysler, experience greater price inelasticity for their cars as they are more luxurious and expensive. For the smaller vehicle firms in the USA whose goods are price elastic, they can reduce this extent through extensive advertising and product differentiation.

For income elasticity of demand, cars might be considered to be as normal goods as they offer more convenience and comfort as compared to taking public transport where it is likely to be more crowded and people have less personal space. In addition, some car companies produce cars of better quality and have established brand loyalty amongst consumers. For these car producers, the income elasticity of their cars is more elastic.

In particular, Ford cars can generally be considered normal goods, and more of these should be produced in a good economic climate. However, if Ford really wants to earn much more, it should produce more of its luxury series, the Lincoln (Lincoln Motor Co. produces what can be considered a luxury American car). However, if Ford produces cheaper, simpler cars, this would only be an effective strategy in an economic downturn because the cheaper, simpler models could arguably be considered inferior goods (relative to the normal and normal luxury goods that Ford produces). 

In conclusion, while evaluating the usefulness of these concepts, price elasticity of demand may not be that effective as the cost involved in production has to be factored in for the car companies to truly earn profits and not merely rely on the demand for them. As for income elasticity of demand, it may not be that useful either as data was taken from past statistics and thus may not be very accurate for today as the economy would have changed.

JC Economics Essays - economics tutor's comments: This part (b) economics essay did make an attempt to answer the economics question posed and in fact used a few American car examples, which is good. It is always a good idea to answer the question directly in Economics examinations. However, this economics paper could have done much better had it given more analysis both in theory and also using more real world examples of American car companies. Overall, it did a good job. Special thanks to A G and T students; the essay was written under examination conditions but has been edited for blog posting. 

The terrorist attack on New York City, USA, on September 11, 2001 precipitated a worldwide recession and an increased fear of air travel, which massively affected the demand for travel by air. This led to the closure of some major airlines in the world. Explain how the worldwide recession and the closure of some of the major airlines affected the market for air travel. [10]

Due to the terrorist attack of 9/11, there were many economic effects - recession and an increased fear of flying would lead to a decrease in demand whereas the subsequent closure of some of the major airlines of the world would lead to a decrease in supply. Recession refers to negative economic growth that affects consumption since economic growth is the key determinant of changes in average household income. Hence, this essay aims to discuss how recession and closure of major airlines affect the demand and supply and thus the equilibrium price and output of the market for air travel. 

Negative economic growth or economic decline causes a decrease in demand as it influences the average household income causing a decrease in level of income and wealth. Income refers to the earnings per time period. A fall in income due to economic decline leads to falling ability to purchase goods, in this case air travel ticket or packages. Decreasing income also leads to fall in disposable income for travelling. Thus, demand falls as a result. 

Economic decline also leads to a decrease in economic activities and hence business activities. With decreasing business activities, the need for business travels fall, contributing to the decrease in demand for air travel, shifting demand curve leftwards.

In addition, in the times of poor economic outlook or situation, the ease of acquiring credit may fall due to the need to maintain the financial stability. Hence, consumer may find it harder to borrow to finance expensive items, including holidays. Thus, demand for air travel may decrease significantly as well. Stringent financing rules that discourage borrowing also contribute to the fall.

On the other hand, closure of some of the major airlines would have a significant impact on the supply for air travel, especially when major firms are usually responsible for a significant proportion of the supply. Closure of major airlines decreases the number of firms in the industry, shifts the supply curve leftwards, decreasing supply. This can also be caused by a decrease in size of existing firms as it decrease the total capacity of the airline industry.

Terrorist attacks causing major closures and financial crisis can be considered as supply shocks, disrupting and reducing the supply of air travel, shifting supply curve leftwards. 

However, the extent of decrease in demand and supply may differ, resulting in differing price and output equilibriums. 

[Insert diagrams of market of air travel to show the difference in the fall of supply and demand causes price and output equilibriums to shift differently]

If the supply decreases to a greater extent since it involves the closure of major airlines, the price increases as supply curve shifts leftward to a larger extent than the demand curve falling. However, if the decrease in demand is a larger extent compared to the decrease in supply fuelled by fear of flying, the price decreases instead.

In conclusion, the extent of shift of demand and supply curves eventually determines the equilibrium price and output. In the long run, a new equilibrium may be reached as the economy recovers and consumers regain their confidence. Hence, this change in price is a short run outcome for the market for air travel.

JC Economics Essays (H2 'A' Level Economics Essay): economics tutor's comments - There are many economics examination questions that make reference to contemporary world events, and 9/11 is one of the major events in the world that students should know about. The focus of this essay question is, however, about the market for air travel, and in particular the economics concepts of demand and supply. How are the factors of demand and supply related to the scenario described? Fundamentally, economics students should be able to link the theoretical model of demand and supply to economics questions during examinations. This ability to link real world examples and context to economic theory is a real skill that should be developed. The usual questions apply - how would you improve this essay to make it more developed? How would you further the arguments? Think of how you would write your economics essay in response to the question. If you are able to recall the factors affecting demand and supply, how would you link those to the concepts? What revision do you need to make this essay excellent, or better? Special thanks to student contributors for this sample essay. 

International Trade Essay: Should America utilise protectionist measures to manage the costs of international free trade?

A globalized world economy opening up markets for US exports refers to international trade which is defined as the exchange of goods and services across international boundaries. This brings about good benefits to the US economy such as higher consumption possibilities and reaping economies of scale. However, US companies and workers also face unfair foreign competition in the form of dumping and the cheap labour argument. 

Increased exports have led to the US economy gaining benefits. One such benefit is higher consumption possibilities. It allows USA to specialize and export goods in which it has a comparative advantage in and import goods in which it has a comparative disadvantage in, whereby comparative advantage refers to the situation where a country has a lower opportunity cost of producing a good as compared to another country. USA is then able to increase the overall consumption of all goods and services as compared to an autarky situation which refers to a situation of no trade but self-sufficiency instead. Hence, increased exports allow USA to enjoy higher consumption possibilities. 

Moreover, economies of scale can be reaped. With greater export demand, US firms are able to expand their capacity, enabling them to reap economies of scale which causes long run average cost to fall in the long run. As firms pass on some of these cost savings to consumers, material living standards increase as consumers get to consumer more goods at lower prices. Lower prices for domestic consumers and higher profits for domestic producers benefits the US economy.

On the other hand, American companies and workforce face unfair foreign anti-competitive practices like dumping, which refers to the situation where foreign imports are sold below cost because foreign firms are trying to drive out domestic firms to gain market power. In such situations, protectionism in the form of import tariffs is justified to be imposed in order to raise import prices so that they are more in line with prices of locally produced goods. However, lower prices could be due to lower demand or lower distribution costs, which indicates that claims of dumping are most of the time merely a disguise to elicit protection for inefficient domestic producer.

In the cheap labour argument, labour unions in developed economies such as America, commonly argue that imports from developing countries are cheap because they artificially keep costs down by exploiting their workers and hence lobby for restrictions against the imports from these developing countries. The fact that being labour abundant, developing countries have a comparative advantage in producing labour intensive goods, resulting in them having cheaper imports, is ignored. In this case, it is not justifiable for America to impose protectionism in the affected industries. 

Conversely, there are costs of increased exports and not simply just benefits. Terms of trade is defined as the ratio of export prices to import prices. With increased exports, the decrease in export prices relative to import prices would result in the revenue earned from each unit of exports to decrease, causing USA to be able to buy fewer imports than before. In addition, if USA’s inflation is lower than its trading partners, its exports become relatively cheaper than its imports especially with an increase in exports, worsening USA’s terms of trade.

Trade also brings about benefits of competition from imports which is in the case of healthy competition and not an unfair one. Competition from foreign imports forces US producers to innovate and cut costs and improve product quality. Local US consumers thus enjoy lower prices and higher product quality from both imports and domestically produced goods. Besides enabling these US companies to be more productively efficient, market power is also kept in check, reducing the extent of monopoly power in economy and ensures that domestic products which are US exports are comparable to foreign imports. Allocative efficiency is increased as well. 

Protectionism refers to the act of imposing economic policies aimed at restricting trade between countries, designed primarily to protect the domestic producers and workers from foreign competition. While imposing protection in the affected US industries might seem ideal, there are costs involved.

Firstly, USA would suffer from lower consumption possibilities. This is due to the fact that protectionism inhibits specialization according to comparative advantage. Protecting domestic firms against imports causes America to produce more of a good in which it has a comparative disadvantage in. 

[Insert diagram on impact of protectionism on consumption possibilities]

With protectionism of its domestic sector from imports, USA would produce some Good X and specialize only partially than completely in Good Y. The consumption possibilities curve thus shift down. USA then consumes at a point that is worse than the free trade outcome. Hence, protectionism limits the extent of specialization, reducing the gains from specialization and trade according to comparative advantage. 

Secondly, protectionism leads to greater allocative inefficiency as it raises the market power of US firms. They also become productively inefficient as the incentive to minimize costs is generally reduced with the monopoly profits. 

Thirdly, engaging in protectionism by America companies creates a ‘beggar thy neighbour’ effect and retaliation from trading partners. Falling import expenditure reduces the export earnings of USA’s trading partners which consequently suffer from reduced output and income, curbing the exports, output and employment of America companies. These trading partners may retaliate and impose their own import restrictions, causing USA’s exports, output and employment to suffer subsequently.

Lastly, it is politically difficult to remove protectionism once it is given. Vested interests are created and the beneficiaries, which in this case, are USA’s affected industries, would inevitably lobby against removal of protectionism. In the long run, there would be over-allocation of resources to declining sectors at the expense of expanding sectors. 

In conclusion, protectionism for the affected American industries is justifiable only in the short run to manage the cost of free trade. However, it is not justified in the long run as more consequences would have to be dealt with, suggesting that supply-side policies might be a better option in dealing with the problem instead.

JC Economics Essays (on globalisation, protectionism, international trade, and the US Economy): Economics tutor's comments - While this economics essay is generally well written, wide ranging, and covers a lot of good, solid, theoretical economic concepts and ideas, it could be further developed by use of relevant real world examples that are specific and targeted to the requirements of the question. Remember that relevant, real world, realistic, and specific examples can get students a higher grade in writing economics essays. Examiners and tutors love it when students can apply broad theories to specific contexts, with real world examples. What can you learn of the art writing from this economics paper? (Also, what can you learn about what not to write in an economics paper from this essay, in a similar vein? Think about this "counterfactual question".) How could you have tackled the question differently, or what approaches could have been taken to address this question? What other economics diagrams, concepts, or theoretical economics models could have been used, and what else could have been to develop this response further? Reflection and the reading of many different economics answers should build up a mental model which would be useful in answering economics essay questions.Thanks for reading, and cheers. Special thanks to NT for her kind and interesting contribution. 

Hints and Approaches to H1 and H2 A Level Economics Essay Questions for Practice

H1 and H2 A Level Economics Essay Questions for Practice (Hints and Approaches)

Essay Questions: Quick Recap and Introduction

These are the promised Economics hints (covering Economics concepts, definitions, ideas, arguments, and logical approaches) for the Economics essay questions for practice posted in my earlier post. 

(Do please see the bottom of this page for the relevant links if you want to refer to that post.)

Suggested Economics Tutor's Hints

Q: "Protectionism is better than free trade.” Discuss. [15]

HINT: Define protectionism, and international trade. List and explain various methods of protectionism (tariffs, quotas, subsidies). Talk about gains from trade, and maybe terms of trade. Thesis argument: protectionism is better than free trade. Why? Think about the infant industry argument and other arguments you could use. Anti-thesis argument: on the other hand, free trade is beneficial. Why? Define comparative advantage, opportunity cost. Show the diagram for the small country case, demonstrating deadweight loss from tariffs. You may discuss quotas too. Discuss other reasons why trade is beneficial. Be sure to give examples from Singapore/China/USA/UK. Conclude with a justified argument – which is better, why, or are both equally important?  

Q: Explain how imperfect information can lead to market failure, using examples from Singapore. [10]

HINT: Define market failure, and imperfect information. Define merit and demerit goods also. Explain how this leads to market failure – overconsumption (in what case?) and underconsumption (in what case?). Draw and explain diagrams. Use examples from Singapore, such as healthcare (Medisave, Medishield), etc. You may bring in other areas if you wish. List other forms of market failures. Other forms of market failures are important too, such as externalities. How would you conclude?  

Q: Explain comparative advantage and why international trade is beneficial for countries. [10]

HINT: Define comparative advantage and international trade. Talk about gains from trade, and terms of trade. Free trade is beneficial. Why? Demonstrate that countries can consume outside their PPC (on the PPC is for the autarky case) when their consumption possibilities increase (the trade case has CPC); draw diagrams. Explain the diagrams. Can also show the diagram for the small country case, demonstrating deadweight loss from tariffs; argue that protectionism is bad. Define and explain protectionism briefly. Discuss other reasons why trade is beneficial. Be sure to give examples from Singapore or China/USA/UK. 

Q: Explain the likely demand and supply factors affecting the oil (petroleum) market. [10]

HINT: Define demand and supply; talk about market prices and equilibrium output and how these are determined. Factors affecting the demand for oil are: derived demand (define), substitutes and complements (define), population changes, expectations, and rising incomes. Which of these is most likely? Factors affecting the supply of oil are: cost of production, expectations on the part of producers, number of firms, and government policies on the part of OPEC producers.  Which of these is most likely? Draw the demand and supply diagram with simultaneous shifts, explain it, and conclude your essay.

Q: Explain the difference between public goods and merit goods, using examples from the United Kingdom. [10]

HINT: Define public goods and merit goods. Define market failure, and say that these are instances of market failure. Why? Public goods are non rival and non excludable – leading to P = MC = 0 and also to the free rider problem, respectively. Give UK examples. Merit goods are goods that have positive externalities or due to imperfect information are underconsumed. Give UK examples (see next question for further hints). What is the difference, based on the explanations that you have written? Which is the most important difference?

Q: Explain using economic theory why in the United Kingdom, entry to national museums and art galleries is free and tickets to the opera are subsidised. [10]

HINT: Define public good and merit goods, and define market failure. The central problem here is underconsumption. National museums and art galleries can be considered quasi-public goods or merit goods. Why (for each of the possibilities), justification? Opera can be considered a merit good. Why, justification? Talk about imperfect information and positive externalities. Talk about a paternalistic state; talk about government intervention. Conclude.

Q: Discuss how the Singapore government deals with negative externalities in Singapore. [10]

HINT: Define market failure, externalities in general, and talk about negative externalities in particular. Focus on car congestion, cigarette smoking for this paper to make it easier. Draw the negative externality diagram and explain why it is a problem. What should the government do? Either impose taxes or quotas. Define those, explain, show. For congestion in particular, talk about ERP and COE. Conclude with the limitations of government policies.

Q: Explain how fiscal policy in the USA can be used to increase the circular flow of income in the USA. [10]

HINT: Define fiscal policy, and circular flow. Draw the circular flow diagram. Explain it. When G is increased, what happens to the circular flow? When corporate taxes are lowered, what happens to I, and in turn what happens to circular flow?  I, G, X are injections, and S, T, M are withdrawals. Talk about net injections and net withdrawals, but focus on injections. Give examples from the USA. (You may also in the course of the essay, define and discuss GDP, national income, standard of living.)

JC Economics Essays - Economics Tutor's Comments: These are some suggested hints (possible approaches, possible ideas/ concepts/ logic/ economics materials) to the Economics essay questions posted earlier (with a few general instructions, ideas, and pointers/tips for students). Do remember to think through them, and see if there are other Economics ideas, concepts, and approaches that you could use in addition to those provided by Economics tutors. 

For the earlier post on JC Economics Essays' questions for practice: H1 and H2 A Level Economics Essay Questions for Practice. 

For ease of reference, here is my List of Economics Exam Questions for Practice. Note that these questions are practical, heuristic, and training questions that test fundamental Economics understanding and fundamental, basic application. Some students have kindly, and rightly, pointed out that these questions in the "List" are for training purposes, and not all are reflective of the rigour of A levels or introductory undergraduate Economics - true!  

Explain the concept of comparative advantage and, using relevant examples from the USA, explain the likely factors that determine the comparative advantage of the United States. (15 marks)

Introduction - International Trade

This Economics essay is about international trade, and discusses the likely factors that determine the comparative advantage in trade for the USA. 

Comparative Advantage

What is "comparative advantage"? Comparative advantage is the idea that a country should trade in a good in which it has the lowest opportunity costs in producing that good. Even if a country has absolute advantage in the production of all goods than another country, the idea of comparative advantage is that the opportunity costs matter and that hence both countries can still trade, and gain from trade.

Generally, trade models built upon the theory of comparative advantage have the following assumptions: Perfect mobility of the FOP (factors of production), which means that resources used in one industry can be substituted for another perfectly; constant returns to scale, which means that doubling the inputs in each country leads to a doubling of total output; there are no externalities arising from production and/or consumption (and by extension there are no other associated market failures); and transportation and other transaction costs are negligible.

Factors Affecting Comparative Advantage

What determines comparative advantage, and in this particular context the comparative advantage of the USA?

Dynamic Concept - Dynamic Comparative Advantage

First, it should be noted that comparative advantage is a dynamic concept, which means that it can and does change over time. Some companies enjoy a comparative advantage in a product they have produced for several years, only to find that eventually they face increasing competition as rival producers from other countries enter the market. For instance, Ford used to be able to sell their cars competitively overseas, but with the rise of Korean cars and Japanese cars - predominantly Japanese cars - now, many people worldwide perceive Japanese and Korean cars as good as, if not better, than American cars.

Factors of Production - Quality and Quantity

Also, the quantity and quality of the factors of production available would definitely affect the comparative advantage of the USA (in particular, the natural resources that a country possesses, the size and efficiency of the available labour force, the productivity of the existing stock of capital inputs, and the skill and organisational talent of its entrepreneurs and risk-taking businessmen). Focusing narrowly instead on labour and capital, to focus this Economics paper, any economy can improve the quality of its labour force and increase the stock of capital available to therefore expand the productive potential in industries in which it has a comparative advantage. In the case of the USA, this means that the US government can focus on improving the productivity of its labour force and raising employment, as well as focusing on their current capital-intensive approach to production.

Industrial Policy and R&D?

In Singapore, in contradistinction to the USA, there has been industrial policy that aims to direct comparative advantage, since after all comparative advantage is indeed a dynamic concept. Investment in research and development can lead to dominance in certain industries, and industrial policy helps to keep this keen and targeted (R&D is very important in industries where patents give some firms significant market advantage, and hence market dominance). In the case of the USA, military firms (once termed the military-industrial complex) can be seen as an area in which R&D served to keep the comparative advantage of the USA in military weaponry and high technological areas.

Yet Other Factors - Inflation, Protectionism, and Non-price Competitiveness

There are also other factors affecting the comparative advantage of countries, which may be important or relevant in the case of the USA. These other factors are inflation rates, protectionist measures, and nonprice competitiveness of producers in terms of product design and other such preference-related measures.

First, long-term rates of inflation compared to other countries would worsen competitiveness and hence cause a decline in the comparative advantage of that particular good. This would affect all producers not just the USA per se.

Secondly, in terms of protectionism, import controls such as tariffs and quotas can be used to create an artificial comparative advantage for domestic producers. In the case of the USA, protectionist measures are sometimes used (as Ha Joon Chang once mockingly said, this was akin to "kicking away the ladder").

Lastly, the nonprice competitiveness of producers, such as the product design, reliability, and the quality of after-sales support also affects comparative advantage. In this area, the USA has a lot of fans and some of its products are quite popular worldwide, for instance the infamous or for that matter famous iPhone and other Apple products.

JC Economics Essays: Economics Tutor's comments - This Economics essay on international trade in the context of the USA is short, sharp, and to the point - and it does make an attempt at addressing the requirements of the Economics question. There are many good elements in this writing and analysis that are worthy of learning and study. However, the usual tutor's questions are: how can this paper be made better? For instance, think about the conclusion - this Economics paper does not have a conclusion that brings in the relevant real world context of the USA. How would you craft an evaluative, nuanced, and clear conclusion for this Economics paper? Also, what other economic ideas or real-world arguments can you think of? Finally, think about the alternative approaches and methods in which you could approach this Economics question. Think through the process of writing, especially for examinations, tests, and term projects. Thanks for reading and cheers!

Discuss monetary policy and fiscal policy’s importance for the USA, in the light of stagflation.

Introduction to Monetary and Fiscal Policy, and Stagflation

Monetary policy means to control the money supply and interest rates to affect aggregate demand (AD) in an economy, according to what is known as demand-management. Fiscal policy is another demand-management policy that deals with manipulating government spending and direct taxes so as to affect AD. Stagflation is defined as a situation of low economic growth with high inflation - both stagnation and inflation. Inflation is defined as a persistent and sustained increase in the general price level (GPL), that poses a problem to society because this increase in GPL is sustained and inordinate. 

This Economics paper discusses the strengths and limitations of monetary and fiscal policy, each in turn, in relation to stagflation in the USA. This paper concludes that both policies are equally important for the US, but they should be used in conjunction with supply side policy. 

Monetary Policy

Monetary policy works, in theory, by two ways. First, according to the classical direct transmissions mechanism, increases in money supply help consumers spend more and firms invest more directly because they have more money and they feel richer. Second, according to the indirect transmissions mechanism, increases in the money supply lower the interest rate, which lowers the cost of borrowing. Since it is cheaper for households to borrow money to consume, and cheaper for firms to borrow money to invest, C and I both increase, and since AD = C + I + G + (X-M), then AD increases, which helps to solve unemployment and which also causes actual economic growth. 

Unemployment is defined simply as the situation where people who are able and willing to work cannot find jobs, or they are unwilling to take up the jobs at the wage rate given to them. Actual economic growth merely refers to increases in real output at the macroeconomic level caused by increases in AD. Hence, it would seem that prima facie, monetary policy can help solve unemployment and lack of growth in the USA, and hence fight stagflation by countering the “stagnation” part.  

Limitations of Monetary Policy

However, monetary policy might suffer from the liquidity trap, which means that beyond a certain point interest rates cannot be lowered further, thus hampering the workings of monetary policy. If interest rates cannot be lowered, the costs of borrowing cannot be reduced. This can be seen in an analysis of the liquidity preference theory put forth by Keynes. 

Fiscal Policy

On the other hand, Keynesian fiscal policy works when governments spend more, for instance on national defence and education, or when they tax less, through lowering income and corporate taxes. Increasing G raises AD directly given that G is one of the components of AD. Lowering direct taxes cause C and I both to increase, and since AD = C + I + G + (X-M), then AD also increases, which helps to solve unemployment and which also causes actual economic growth. Because of the multiplier effect, where the multiplier means that national income increases by a factor more than the initial increase in the injections into the economy, the USA’s AD will increase, promoting and boosting growth. 

In the USA, both C and I are large components of the AD. It can also be argued that G is also a big component given that the USA has a large military. Hence, it would seem that prima facie, fiscal policy can also help solve unemployment and lack of growth in the USA, and thus fight stagflation by countering the “stagnation” part.  

Limitations of Fiscal Policy

However, there are also limitations to fiscal policy, one of which is the famous “crowding out effect”. If governments run a budget deficit, and the USA is arguably famous for running both a budget as well as a trade deficit for many years, then they will have to borrow money. According to the loanable funds theory, this increase in demand for funds by governments will crowd out private consumption and investment, and hence C and I will fall despite G increasing, thus negating the effects of fiscal policy. The US government would be “crowding out” private consumption and investment. 

Supply Side Policies?

Hence, supply side policies that target the aggregate supply (AS) curve, which is affected by the factors of production which are land, labour, capital, and enterprise, could be better for the USA in handling stagflation. Subsidies for energy and other natural resources, increases in the US labour force in both numbers and quality, for instance by increasing American high school education and human capital, and increases in both the quantity and quality of American capital, plus encouraging immigration especially of entrepreneurial foreigners, would help massively. 

These methods and means would shift the AS curve both down and to the right and help solve cost push inflation in the USA. These would be better because they would solve both the “lack of growth” and “high inflation” aspects. 

Conclusion

In conclusion, perhaps both demand side and supply side policies should be used hand in hand, and together they can help solve stagflation because they encourage both potential and actual growth, which is great for the American economy. 

JC Economics Essays: Tutor's Comments - This Macroeconomics essay on monetary policy and fiscal policy, set in the context of the USA, is interesting and provides a suitable level of analysis. There are consistent references to the USA as well as relevant macroeconomic policies, and the underlying economic reasoning behind those policies. There are also well-defined terms that are explained clearly. Note: this particular Economics essay on the USA is related to the earlier Economics question on stagflation: Explain possible causes of stagflation in the USA. However, my usual question applies here: if you were the Economics tutor grading this Economics paper, what areas of improvement would you suggest? Let's look, for example, at the conclusion. While this essay's conclusion makes a good argument and tries to justify the argument made, there is a lack of detailed evaluation which could possibly make it an even better essay. What other areas of improvement for this Economics essay do you observe or notice? Thanks for reading and cheers!

Explain possible causes of stagflation in the USA.

Explain possible causes of stagflation in the USA.

Introduction - Possible Causes of Stagflation in the USA

Stagflation, as the name suggests, refers to the macroeconomic situation of low economic growth and high inflation – stagnation and inflation occurring at the same time. The background to this essay is that from 2008-2010 due to the housing bubble crisis in 2007/2008 in the USA, there have been massive rates of unemployment, raising the jobless rate.

This Economics essay argues that the possible causes of stagflation in the USA can be traced to mainly cost-push inflation.

Cost Push Inflation?

First, general cost push inflation could have resulted in stagflation in the United States. Inflation can be defined as a sustained increase in the general price level (GPL), and it could be a problem when the increase in the GPL is sustained, persistent, and inordinate.

Inflation can be both demand pull and cost push, the first affecting the aggregate demand (AD) which equals consumption, investment, government spending, and net exports or C + I + G + (X-M), by shifting it to the right, and the second affecting the aggregate supply (AS) curve, which is affected by the factors of production which are land, labour, capital, and enterprise.

For cost push, increases in unit input costs in the factors of production will lead to the AS shifting upwards, lowering employment, and simultaneously raising the rates of inflation. This can be explained using the AD/AS diagram demonstrating cost push inflation.

For example, first, higher costs of inputs such as oil could have contributed to this situation, because oil is fast running out, and the demand for oil is relatively inelastic, which could lead to high volatility and high prices. Second, wage costs could possibly have spiralled in the USA. Third, capital costs could have increased, but this is highly unlikely given that this is the USA with its technological advantages and its huge supply of capital.

Imported Inflation?

Imported inflation, which generally also leads to cost push inflation, but can also lead to demand pull inflation in some instances, might not have been a major influence of stagflation in the United States. This is because while the USA might accuse China of artificially having low exchange rates, thus increasing their imports of Chinese goods and probably causing some unemployment in sunset industries in the USA, the decreasing AD that results from this situation would actually ease inflation, and not cause stagflation. 

Furthermore, the United States of America is a large country and does not depend on imported inputs that much for the production of her own products or exports. Possibly, the rise in global food and oil prices (commodity prices have been rising internationally) could lead to some imported inflation in the USA, which would have possibly also contributed to shifting the AS curve upwards, increasing GPL.

Quantitative Easing (QE)?

Second, excessive printing of money from the QE exercises (quantitative easing), from around 2008 to 2012, by the USA Federal Reserve (USA’s central bank) could have also led to stagflation in the USA because there could be the case of too much money chasing too few real goods. Also, it can be argued that according to the Fisher Equation, where MV = PT, increases in the money supply cause inflation to occur, corroborating Milton Friedman’s famous statement that “inflation is always and everywhere a monetary phenomenon”.

This might have contributed to the high inflation in the USA because low interest rates encourage borrowing for consumption and investment, which would have caused demand pull inflation to also occur; also, according to the classical direct transmissions mechanism, more money in the hands of consumers and firms would lead to higher C and I, thus boosting AD, which might have contributed to inflation. This could have led to AS shifting upwards due to asset bubbles, which raise the costs of production.

Conclusion

Hence, in conclusion, cost push inflation is likely to be the main cause of stagflation in the USA. 

JC Economics Essays: Tutor's Comments - This Macroeconomics essay is about the causes of low economic growth and high unemployment in the USA, and is clearly in reference to recent events, in recent years (around 2007 - 2012). There are many good points about this Economics essay, such as its references to Milton Friedman and the many excellent, relevant, real world examples. However, put yourself into the shoes of an Economics tutor - what would you say were the weaknesses of this Economics paper, and how would you remedy them? Other than the fact that an Economics diagram could have been used (the AD/AS diagram which is already highlighted and put in bold fonts in the essay), what else could have been done better? While this Economics paper is good, how can it be made even better? Thanks for reading and cheers!

Discuss whether the undervalued yuan (RMB) is the only cause of China’s rising inflation and trade surplus with the US. [25] (Rephrased Economics Question)

In recent years, it has been argued that the undervalued renminbi (RMB / yuan) is the major cause of China’s burgeoning inflation and massive trade surplus vis-à-vis developed countries, especially the USA. From 2007-21012, economists worldwide argued that China should revalue the yuan.

Discuss whether “the undervalued yuan” is the only cause of China’s rising inflation and huge trade surplus with the USA. [25]

Introduction

China has often been accused by the West of using her fixed exchange rate to maintain an “undervalued yuan”, meaning that her currency (yuan, renminbi, RMB) is cheaper than it otherwise should be in a floating exchange rate, relative to other currencies. 

This Economics paper argues that having an undervalued currency encourages demand for Chinese exports, which could arguably lead to demand-pull inflation, whilst concomitantly causing imported inflation for China, as its imports from its trading partners are relatively more expensive. Hence, it can be strongly argued that China’s inflationary woes indeed stem in part from an undervalued yuan, and, to a large extent, the high demand for low-priced Chinese exports is responsible for China’s huge trade surplus.

Inflation

First and foremost, it has to be argued that China’s inflationary woes stem partly from the undervalued RMB. With a relatively undervalued RMB, Chinese goods appear cheaper relative to other countries’ goods, and this causes an increase in the demand for Chinese exports, in contradistinction to other countries’ domestically produced goods or even goods from other exporting countries. This is because with increased demand for Chinese exports, (X-M) increases, and since AD = C + I + G + (X-M), there arises demand-pull inflation. Inflation is defined as a persistent and sustained increase in the general price level, and demand-pull inflation is caused by rapid and persistent increases in AD.

On the cost-push side, the undervalued yuan may have made imported inflation a real possibility and thus may have pushed up the AS curve. This is because if China imports inputs or factors of production, especially and furthermore so if those natural resources are then used as inputs to produce exports, then this might cause inflation in China if these inputs rise in price. Given that the cheaper yuan makes other countries’ currencies look more expensive, this is a real possibility.

Inflation in China, on the other hand, is also caused by the rapid growth they experienced in recent times. There has been rising domestic consumption due to the rapidly expanding middle classes in China, and that would have raised C. At the same time, rising optimism about business prospects have led firms to undertake investments, thus raising I as well. Since AD = C + I + G + (X-M), it is clear that these increase AD. Hence, AD also shifts to the right, thus causing demand-pull inflation due to rapid domestic Chinese economic growth, which is not solely related to growth in exports.

Trade Surpluses

Secondly, the “undervalued yuan” can be blamed for the mounting trade surplus China has with its trading partners, predominantly America, since American consumers’ high demand for cheap Chinese goods caused the Chinese to sell massive amounts of goods to Americans. As China uses a fixed exchange rate regime, this balance of trade disequilibrium is not automatically corrected, unlike under a freely floating exchange rate regime. Concomitantly, prices of imports remain relatively high, from the Chinese perspective, since the yuan was kept low. This leads in theory to import expenditure being low, whilst export expenditure is high. Hence, the low value of the Chinese yuan will continue to encourage other countries to import cheap Chinese goods, and thus incur a growing trade deficit; on the other hand, China will, theoretically, continue to accumulate surpluses given the low value of the yuan. Hence, it seems that the criticisms of the undervalued yuan seem justified here.

Other Countries’ Declining Comparative Advantage

Nonetheless, the “undervalued yuan” cannot be the only cause of this huge trade surplus; America’s slowly declining comparative advantage, where comparative advantage refers to the relatively lower opportunity cost of a country in producing a good relative to other trading countries, in manufacturing has led to weakening US exports, whilst, on the other hand, it might be possible to argue that China has developed a new, dynamic comparative advantage in manufacturing, especially cheap and lower-end products. For instance, the American steel industry has been too reliant on protectionism for many years, and this has contributed to her mounting trade deficit, because it has become less export competitive, while the Chinese improved consistently over recent years. Hence, perhaps the trade surpluses are due to American weaknesses and Chinese strengths.

Conclusion

Thus, while it can be strongly argued that the “undervalued yuan” does indeed have a part to play in China’s rising inflation and huge trade surpluses, it cannot be considered the only cause of these problems, and China’s increasing prosperity, especially for the middle classes, her rising economic growth, and the falling productivity and comparative advantage of the developed nations who are her trade partners are realistic and relevant alternative explanations for the same phenomena. 

JC Economics Essays: Tutor's Comments - This Economics essay was actually written under examination conditions by a Chinese student. First, it has to be praised: the English is very well written and fluent, and the student has clearly got a very good understanding of the Chinese economy and a good knowledge of international economic events. Secondly, it has to be said that the quantity and quality of this Economics essay far exceed what I would have expected as an Economics tutor, because this was written under examination conditions and by someone whose native language is not English. This just goes to show that if one puts one heart into doing something, and tries one's best - one can achieve many great things in life. As an Economics tutor, seeing such work and effort in my students' Economics essays is one of the joys of teaching. If you were to write this essay, how would you approach it? Would the approach be similar or different? Thanks for reading and cheers.