Discuss whether governments should rely solely on supply-side policies to achieve its macroeconomic aims. [15]

(Please see previous post on JC Economics Essays on macroeconomic aims and conflicts.)

Explain the possible conflicts in the achievement of macroeconomic aims when using demand-management policies. [10] 

In the light of these macroeconomic conflicts, discuss whether governments should rely solely on supply-side policies to achieve its macroeconomic aims. [15]

This paper argues that in the light of these conflicts, supply-side policies which focus on shifting the SRAS and LRAS can be used by governments to avoid these macroeconomic conflicts. However, on the other hand, supply-side policies also have limitations and may also result in other macroeconomic conflicts. Hence, it may not necessarily be true that governments should rely solely on supply-side policies.

On the one hand, it can be argued that there are some important reasons why governments should rely solely on supply-side policies.

Firstly, supply-side policies should be used to avoid conflict between achieving full employment and price stability. Since expansionary demand management policies will always lead to inflationary pressures, especially as the economy approaches full employment, supply-side policies should be used instead. If governments focus on increasing productivity of the economy, for example, through subsidising R&D efforts and retraining programmes, the LRAS of the economy will increase  and shift to the right. This allows the economy to achieve both actual and potential growth, while keeping general price levels low. There is thus no conflict between increasing real output and employment and price stability.

Secondly, supply-side policies should be used to avoid conflict between achieving healthy balance of payments and price stability. Since currency depreciation to keep exports competitive may result in imported inflation, supply-side policies should be used to maintain export competitiveness instead. For example, the government may choose to encourage firms to invest in R&D, through the use of tax rebates, in order to use more efficient production techniques. This can cause costs of production to fall and prices of exports can remain competitive. For example, the US government has anti-monopoly laws to encourage more competition. This may give firms more incentive to improve the quality of their products and exports can also be more competitive if their quality is superior to products made in other countries. These would help boost the demand for exports and increase export revenue. The demand for imports might fall if local consumers prefer buying domestic goods. Import expenditure may fall too. This causes the current account and hence the balance of payments to improve. At the same time, because of the increase in R&D across industries, the productive capacity of the economy may increase and LRAS may increase. This helps to keep general price levels low. Hence there is no conflict between achieving a healthy balance of payments and price stability.

However, when (X-M) increases, AD would increase and if the economy is approaching full employment level, there would be inflationary pressures. Thus the extent to which price stability can be achieved depends on the pace of the increase in LRAS. If the LRAS is increasing at the same pace as AD, price stability can be maintained. If AD rises much faster, the conflict with price stability would still arise.

Thirdly, supply-side policies should be used to avoid conflict between achieving healthy balance of payments and economic growth. When expansionary demand management policies to help achieve economic growth, there will be an increase in import expenditure, resulting in a worsening current account and hence balance of payments. However, if supply-side policies are used to attract FDI to promote economic growth instead, the capital and financial account is likely to improve. For example, the government might lower corporate tax rates or offer foreign firms incentives such as tax rebates in order to attract them. They may also reduce the red-tape to make application processes for new foreign businesses more efficient. If there is a net inflow of FDI, the capital and financial account will improve and this may offset the worsening current account. Hence, balance of payments may improve. However, it should be noted that, in the long run, the current account of the balance of payments may worsen even more as profits from foreign firms are sent back to their home country.

On the other hand, supply-side policies also do have their limitations and hence governments should not rely solely on them. While it is true that supply-side policies can help to some extent to avoid some of the conflicts in achieving macroeconomic aims, they also have their shortcomings. For example, supply-side policies like encouraging firms to invest in R&D can not only be costly, they may take a long time before any effects are seen, and even then, the success of these policies is very uncertain. Subsidising R&D can cause a strain on the government budget, depending on how substantial the subsidies are. Since R&D efforts tend to be costly, firms would probably only be incentivised to invest in R&D if the subsidies are significant. This is in contrast with demand management policies like MP where the government need not tap on budget reserves. Furthermore, there is no guarantee that R&D efforts would lead to increase efficiency. The effects of research can be uncertain and often takes many years before a breakthrough brought about by technology or discovery of new methods can be seen. Hence, it may be wise to also make use of some demand-management policies which may have more certain and immediate effects. This is especially so if the economy is facing a recession and needs to get out of it quickly. If there is severe demand-pull inflation, the government may need to take quick action to reduce AD in order to reduce general price levels. Using supply-side policies to shift the LRAS may take too long, especially if the policies are targeted at increasing productivity through technology, training and R&D. If AD is in the Classical range and there is demand-pull inflation, shifting SRAS downward, for instance by subsiding costs, may not help either, since there is no more spare capacity to increase output even if costs are reduced. The inflation will thus not be alleviated. Thus it would not be wise to solely rely on supply-side policies.

It would be better to argue that both demand management and supply-side policies can be used together. While expansionary fiscal or monetary policies can be used to stimulate AD and growth, supply-side policies can be used to ensure that LRAS can continue to increase so that when the economy recovers from the recession, the general price levels may still be kept relatively low.

Furthermore, when using supply-side policies, there may also be conflicts in the achievement of macroeconomic aims which arise and hence governments should not rely solely on them. When supply-side policies such as investment in more R&D and technology are used, there are also other conflicts which may arise. Hence it may not be wise to solely depend on supply-side policies as they also bring about unintended consequences. For example, in Singapore, with the government’s push to increase productivity through encouraging more firms to use technology, for example through the Productivity and Innovation Credit Scheme (PIC), not all workers will be able to adapt. Some workers without the relevant skills may find themselves out of a job. Also, with the rise in the use of technology, some workers may be replaced by machines. If these workers do not have other skills which are relevant to the changing needs of employers, they will face structural unemployment. Hence, pursuing actual and potential growth quickly via supply-side policies may result in a conflict with achieving low unemployment.

However, this does not mean that supply-side policies should not be used. Instead, there can be other policies put in place to mitigate these unintended consequences. For example, governments can put in place retraining programmes and provide subsidies to firms to encourage them to upgrade the skills of their employees.

In the final analysis, in the light of these conflicts, whether or not governments should rely solely on supply-side policies depends on the macroeconomic aims the government is trying to pursue; the prevailing economic conditions; and the nature of the economy. First, if the government wants to achieve sustainable economic growth, it would be wise not to depend only on supply-side policies. This is because supply side policies tend to help achieve potential growth but can be slow in achieving actual growth. If both demand management and supply-side policies are used, actual and potential growth can be achieved together. This helps ensure sustainable economic growth. Some conflicts between macro-economic aims can be avoided when using supply-side policies as discussed above. Hence, supply-side policies alone may be adopted where appropriate. However, it is important to note that supply-side policies may also result in other problems and hence in those instances, relying solely on supply-side policies may not be appropriate. Second, if the economy is facing cost-push inflation, the government may want to rely solely on supply-side policies to increase SRAS in order to reduce general price levels. Using demand management policies in such a situation may be inappropriate because while general price levels may fall with contractionary fiscal or monetary policies, there will be a conflict with growth as real output falls. If the economy is facing a severe recession, the economy is likely to be operating rather far away from the full employment level. This means that expansionary demand management policies are unlikely to cause a conflict with price stability. Thus, the best measure may be to use expansionary fiscal or monetary policies which has quicker and more certain effects than supply-side policies. Third, if the economy has a small multiplier, the effectiveness of demand-management policies may be limited. For example, in Singapore, due to high MPM and MPS, the multiplier is small, any increase in government spending would lead to a small increase in real national income. Thus the government tends to focus on the use of supply-side policies, and depend on external demand instead. However, this does not mean that the Singapore government relies solely on the use of supply-side policies. A mix of both demand management and supply-side policies are considered too.

JC Economics Essays: Once again, special thanks to W for her kind contribution of this well-written economics essay. However, this economics essay was not done under timed examination conditions and was planned and argued carefully. An economics student who delivers this level of content and argumentation within the examination conditions would easily and likely score a grade A. 

This economics paper discusses the pros and cons of relying on supply side policy, and tackles the question through a few important angles. What are these perspectives? Do test yourself to see if you understand the various arguments made and the perspectives through which the arguments were made. 

There are also, of course, many good points to learn from this paper. First, it directly addresses the question. It also has many strong arguments followed up with examples, which suggests that the candidate has learnt her economics material well. It makes many good analytical points by logical, reasonable argument, and does not reply on assertions and stating points. Remember to always argue a point or make a point in your essays. This economics essay is also very well written and crafted, and is clear cut, accurate, and to the point; however, on the other hand, perhaps some economics diagrams could have been drawn. What economics diagrams would you have drawn in this case, and why? Economics essays often benefit from a relevant, well labelled, and accurate diagram that illustrates and analyses a point. Thanks for reading and cheers!

Explain the possible conflicts in the achievement of macroeconomic aims when using demand-management policies. [10]

This paper explains possible conflicts in the achievement of macroeconomic aims. When governments utilise demand management policies, there may be conflicts or trade offs amongst those goals. The most common conflict is the conflict between achieving full employment and price stability. There are also other conflicts such as those between achieving internal and external stability. This paper explains various possible conflicts in the achievement of macroeconomic aims when governments use demand management policies, such as fiscal and monetary policies.

First, demand management policies such as expansionary fiscal and monetary policies are often used to achieve full employment. For example, when there is an increase in government spending as governments spend on building infrastructure to boost economic activity, there is an increase in AD and hence an increase in real national income. As more resources are employed, the economy operates closer to full employment. However, there is a trade off as the economy will also face demand pull inflation as demand rises and bids up costs of factors of production. Demand pull inflation is defined as a persistent, sustained, and inordinate increase in the general price level due to increases in AD near or at the full employment level. Many fast developing countries like China with fast-rising AD and increasingly less spare capacity will likely face this conflict. On the other hand, contractionary fiscal and monetary policies can be used to reduce demand pull inflation, but this in turn conflicts with economic growth and employment, thus posing yet another trade off.

Second, as expansionary demand management policies are used to achieve economic growth, the balance of payments may worsen. For example, if interest rates are lowered to reduce costs of borrowing, households will borrow more to spend on consumer durables and firms may also invest more as expected net profitability increases. This leads to an increase in AD and real national income. However, the demand for imports and hence import expenditure increases too. This is because many consumer durables may be imported and firms may also import raw materials and machineries for their investments. Assuming that export revenue does not rise as quickly, the balance of trade worsens. Ceteris paribus, the current account and hence balance of payments worsens. Thus countries like Singapore with high MPM will be more likely to suffer from this conflict. This is because the increase in import expenditure is larger when national income increases. Vice versa, contractionary demand management policies to correct or address a balance of trade deficit can conflict with economic growth and employment.

If a country wants to achieve economic growth, it may choose to use expansionary monetary policy to increase AD. When interest rates are lowered, the cost of borrowing is lowered. This causes households to borrow more to purchase consumer durables such as televisions and refrigerators. This causes C to increase. Firms will also find that expected profitability of investment increases as costs of borrowing falls, given that economic conditions remain the same and returns on investments do not change. Thus I increases. Since C and I are components of AD, AD will increase, resulting in an increase in real national output and hence actual economic growth. However, in an open economy, the lower interest rates would likely result in capital outflow. If there is massive capital outflow as funds move to countries which offer higher interest rates, the capital and financial account will worsen. This leads to a worsening balance of payments. Hence, the desire to achieve actual growth via expansionary monetary policy can conflict with the desire to achieve a healthy balance of payments.

Furthermore, there is also a conflict between achieving a healthy balance of payments and price stability. If a country is facing a deficit in its current account and balance of payments, it may make use of demand management policies to improve the current account. For example, an expenditure switching policy of currency depreciation would help decrease the price of exports in terms of foreign currency and increase the price of imports in terms of domestic currency. As export competitiveness increases, the demand for exports and hence export revenue increases. At the same time as imports become more expensive, consumers switch to purchasing domestic goods instead. Assuming that Marshall Lerner condition holds, when IPEDx + PEDmI >1, balance of trade improves. Since X-M increases, AD increases and general price levels increase too.  However, if the economy is import-reliant, the depreciation of the currency could lead to imported inflation as the prices of imported raw materials increase. This causes the SRAS to fall and the general price level to increase. Thus a healthy balance of payments is achieved at the expense of price stability. An example of this would be Singapore, where imported inflation is likely to happen if the currency depreciates. This explains why Singapore is reluctant to depreciate its currency even when BOT is worsening.

In conclusion, there is a need to consider the use of supply side policies in some cases to minimise these trade-offs, conflicts in macroeconomic goals. Alternatively, a suitable mix of government policies may be considered to mitigate possible unintended consequences which may arise.

JC Economics Essays: Special thanks to W for her contribution of this well-written economics essay. However, this economics essay was not done under timed examination conditions. 

This paper explains the possible conflicts amongst macroeconomic goals of governments, and is basically about explaining the various trade offs and conflicts: inflation versus economic growth, internal versus external stability, and other such conflicts. 

There are many good points to learn from this paper. First, it directly addresses the question. It also has many definitions and examples, which suggests that the candidate has learnt her economics material well. The essay is also very well written, and is clear cut, accurate, and to the point; however, perhaps some diagrams could have been drawn. What economics diagrams would you have drawn in this case, and why? Economics essays often benefit from a relevant, well labelled, and accurate diagram that illustrates and analyses a point. Thanks for reading and cheers!

(b) Discuss if a low and stable rate of unemployment is what governments should only aim for. [15]

(b) Discuss if a low and stable rate of unemployment is what governments should only aim for. [15]

Should governments only aim for a low and stable rate of unemployment? First, what is unemployment? First, this paper defines unemployment. A low and stable rate of unemployment refers to a situation where workers who are willing and able to work are largely able to find employment, in contradistinction to a situation of unemployment. This is indeed one of the macroeconomic objectives of governments. However, governments also have other objectives, such as sustained economic growth, price stability, and a healthy Balance of Payments (BOP). This essay argues whether a low and stable rate of unemployment is the only macroeconomic objective that governments should aim for would depend on the economic conditions and status of the economy.

Increases in AD in a Developing Economy

This paper argues that a low and stable rate of unemployment could be the primary aim if the economy is a developing economy, as it would achieve other macroeconomic objectives relevant to developing economies. By assumption, a developing economy can be characterised by having spare capacity and massive unemployment. A developing economy is characterised this way as there is more spare capacity in such economies because they have huge populations. A low and stable rate of unemployment means more employed workers being able to spend more on consumption (C). Firms can take this steady increase in C as an indication for more investment (I). The rise in C, I and (X – M) would lead to a rise of the AD of the economy, and the economy would reach full employment eventually.

Other macroeconomic objectives can be achieved because of a focus on low unemployment. The General Price Level (GPL) can be considered virtually unchanged due to the spare capacity of the developing economy. Inflation is defined as a persistent and sustained increase in the general price level, and while inflation can be dangerous, mild inflation can be seen as useful as it stimulates economic growth and production. Production would increase, leading to more workers being employed. This would trigger an increase in the AD due to the probable increase in the components of C, I, G and (X – M). As a result, the economy is able to achieve sustained economic growth. This leads to governments being able to collect a steady stream of taxes from the economy. The tax revenue collected can potentially be used for basic needs of housing, healthcare, and education, among other things. This helps to increase the standard of living for the economy. Hence, all these effects collectively would lead to full employment, with stable inflation, and economic growth, which are all good objectives for the developing economy, but if pursued to its logical end, inflation could result once the developing economy enters developed status or if it hits the full employment level.

Increases in AD in a Developed Economy

However, a low and stable rate of unemployment should not be what governments should only aim for if the economy is a developed economy. A developed economy can be described as having its AD near or at the full employment level (Yf); developed economies are characterised as such as there is less spare capacity there, because, due to their low and stable rate of unemployment, developed economies are usually operating near to full employment (Yf) or even at full employment. The effects of a low and stable rate of unemployment would translate into an increase in the AD. Assuming an unchanged AS, an increase in the AD is undesirable. This is because the increase of AD results in an increase in the GPL. In such economies, such inflation would cause overheating in the economy as the GPL increases while real national output remains the same. An increase of the AD beyond a certain point would result in hyperinflation affecting the objective of price stability. Hyperinflation would cause increases in the prices of products, leading to the loss of the value of money.

Hyperinflation would also affect the aim of having a satisfactory balance of payments (BOP), for instance, a BOP surplus where there are more exports than imports. With higher prices, the export price competitiveness of the economy would fall as domestic goods are now more expensive relative to other economies. There would also be an increase in the amount of imports (M) as foreign goods are now cheaper. This would lead to more imports than exports. Though one can argue that the fall in the net exports (X – M) could be a corrective mechanism to bring AD down, it would not be applicable as developed economies tend to import more than export, generally due to their high incomes and wealth. Hence, if a low and stable rate of unemployment is the only aim of such economies, it would compromise other macroeconomic aims of price stability and having a healthy BOP. Therefore, a low and stable rate of unemployment should not be the only macroeconomic objective that governments of such economies should aim for.

Conclusions

In conclusion, whether a low and stable rate of unemployment should be what governments should only aim for would depend on the conditions of the economy in question, with developing countries possibly focusing more on employment. There are also other macroeconomic objectives that governments should also aim for, such as low inflation, economic growth, and a healthy BOP, and there seem to be trade-offs when focusing solely on one macroeconomic goal. A delicate balancing act should and must be maintained. In the final analysis, governments should aim for a set of macroeconomic aims rather than only having one aim. 

Junior College (JC) Economics Essays: Tutor's Comments - This Economics paper is part (b) of a two part question on unemployment in Singapore. It was written and contributed by TJL, an Economics teacher I knew from PGDE (JC) and National Institute of Education (NIE) times, and who is an excellent, motivated, and hardworking Economics tutor. However, having said that, as part of Socratic questioning and learning for the benefit of students - TEACHER'S QUESTION: putting yourself into the shoes of an Economics tutor, how would you improve on this essay? Reflect on the essay's structure, and reflect on how you would make this essay better, stronger, tighter, and more evaluative in the conclusion. Think about it. Think about it some more. Do remember to read Economics essays with a critical, probing, and intellectual mind, because you want to think of ways of how you can learn, study, and revise Economics, as well as improve on your essay writing skills and approaches to Economics examinations. Thanks for reading and cheers!

China's Economy: Discuss the implications of a revaluation of the Chinese yuan on Singapore’s economy. [25]

In recent years, economists worldwide argued that China should revalue her yuan, or shift away from her dollar peg, because her yuan (RMB) has been viewed as undervalued. (Year 2010-2012).

Discuss the implications of a revaluation of the Chinese yuan (RMB) on Singapore’s economy. [25]

Introduction

The Chinese yuan (reminbi, RMB) has long faced revaluation pressures with China’s mounting trade surpluses and developed countries’ claims of China dumping cheap goods on their markets, flooding their economies with low-priced goods “Made in China”. 

This paper argues that, as an increasingly dominant trading partner for Singapore, if China were to revalue the yuan, it would have a huge impact on Singapore’s economy. Revaluation, an increase in the value of the Chinese yuan, will impact the Singapore economy through imports from China, exports to China, and the concomitant effects on the balance of payments, and may thus impact Singapore’s economic growth and national income.

Imports: Imported Inflation

First and foremost, Singapore imports a large variety of goods from China, as Singapore relies on many Chinese intermediate goods as inputs for production of exports for her export sectors. As these are inputs or necessities needed in Singapore, the demand for these goods is relatively price inelastic, and thus the revaluation of the yuan, which makes Singapore’s imports from China more expensive, would likely raise Singapore’s import expenditure. 

Most importantly, because Singapore relies on Chinese inputs for production of both exports and also domestically consumed goods, a revaluation of the yuan would result in imported inflation in Singapore, as the prices of domestic goods will rise to account for the rising costs of production due to the increased costs of raw materials in terms of Singapore Dollars. 

Inflation is defined as a persistent and sustained increase in the general price level, and can be divided into demand-pull and cost-push inflation. In this case, cost-push inflation in terms of imported inflation would result from a revaluation of the yuan.

Exports: Earning?

However, on the other hand, Singapore’s exports to China would increase due to a revaluation of the yuan, ceteris paribus. A revaluation of the yuan, without any corresponding rise in the value of the Singapore dollar to offset the relative effect, would result in Singapore’s exports to China appearing cheaper in yuan. With the growing middle class in China and their rising disposable income, consumption of imports is rising in China, and Singapore can benefit from this boom. 

Yet, it has to be argued that the problem is that Singapore depends heavily on imported inputs, being a small and open economy, and as such it is likely that the increased exports to China would be less than the increased costs of imports, which are often needed to produce output in Singapore. This results in a catch-22, because the inflation from the imported inputs, which makes Singapore’s exports more expensive, would counter the relative price effects of the revalued yuan.    

Balance of Payments: Trade Deficit?

Therefore, the revaluation of the yuan would worsen Singapore’s balance of payments, possibly causing a growing trade deficit with China, thus hampering the Singapore government’s goal of a healthy balance of payments surplus. 

The balance of payments refers to the accounting record of all monetary transactions between a country and the rest of the world, and can be classified into the different components of the current account, capital account, financial account, and (statistical) balancing item. There could be a trade deficit for Singapore if (X-M) falls.

Damage to Singapore’s National Income and Growth

Furthermore, as China is one of Singapore’s emerging exporting market and increasingly important trade partner, given Singapore’s economy as one being driven by trade, the revaluation of the yuan can affect Singapore’s national income adversely. Economic growth can be thought of as increases in the Gross Domestic Product (GDP) of a country, and can be classified into potential and actual growth. 

First, potential growth could be hampered due to the rising input costs from goods we buy from China from Singapore’s perspective. Although potentially Singapore’s actual growth might improve if AD goes up due to rising X, this could be offset by long term damage to our potential growth. 

Furthermore, if Singapore’s exports are affected because unit costs have risen due to imported inflation because Singapore uses foreign inputs to produce exports, as argued earlier, then X might fall in the long run, and also cause actual growth to slow down. Hence, potentially a rise in the yuan could potentially and possibly lead to both lack of potential and actual growth for Singapore’s economy. Thus, while export revenue might increase in the short term, as Singapore is small and open, the higher costs of imported inputs from China would have detrimental effects and as such, the revaluation of the yuan has largely negative implications on Singapore’s BOP.

Policies and Conclusions

Since the export sector of (X-M) takes up a huge proportion of Singapore’s national income because Singapore is a open and small economy, falling net export revenue from China can potentially reduce Singapore’s rate of growth by shifting her AD to the left, unless this is cushioned by rising export revenues with other trading partners, like the USA and the European Union. 

However, that seems unlikely in the intermediate term given the global financial crisis and recent Eurozone crises and the concomitant recessions worldwide. Fortunately, as long as the Monetary Authority of Singapore allows an appreciation of SGD, ahead of the revalued yuan, the adverse impact of the revaluation on Singapore’s economy would likely be minimal. Singapore pursues an exchange rate policy using a managed float exchange rate system in place of a “standard monetary policy”. A strong Singapore Dollar keeps imported inflation low by maintaining the low cost of her imports. 

In conclusion, the implications of a revaluation of the yuan on the Singapore economy are most likely negative overall, but Singapore has the appropriate policy tools in exchange rates and monetary policy to manage and mitigate these impacts and will use them if need be. Hence, to a large extent, the discretionary powers of the MAS would be useful in mitigating the effects of a revaluation in the yuan. 

Junior College Economics Essay: Tutor's Comments - This Economics paper was written and contributed by a Chinese student from China. This Economics essay has to be praised: first of all, it was composed and written under H2 JC Economics examination conditions; second of all, the language is good, refined, and proper; third, the content knowledge is there, and there is wide understanding of both the Singapore and the Chinese economies. There is good application of economics knowledge and concepts, and there are also empirical evidence and current affairs discussions. As an Economics tutor, this is one of the best Economics exam pieces that I have seen by a Chinese student, and it goes to show that when students work hard, study hard, and try their best, they can achieve, grow, learn, and develop rapidly. If they want to, they can put their heart into learning and studying Economics. As usual, do think of how you can improve upon this work and how you would approach this essay. Maybe, try to write out the answer without referring to this sterling Economics essay? It has also to be admitted that this Economics paper is (of course) not perfect: What other economics concepts, theories, and knowledge could you bring in to make the discussion richer? 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. 

Discuss the extent to which globalisation has helped Singapore achieve its macroeconomic objectives. [25]

Discuss the extent to which globalisation has helped Singapore achieve its macroeconomic objectives. [25]

This paper discusses the extent to which globalisation has helped Singapore achieve its macroeconomic objectives. Globalisation refers to the integration of economies through greater flows of trade, capital, labour, and technology across international borders. Singapore’s four main macroeconomic objectives are high and stable economic growth, a low inflation rate, low unemployment, and a favourable balance of payments (BOP). To a large extent, globalisation has helped Singapore achieve its macroeconomic objectives; however, globalisation brings with it downsides which have to be properly mitigated.

Economic Growth

First, globalisation has helped Singapore attain actual economic growth through increased international trade. Actual growth means an actual increase in real Gross Domestic Product (GDP), a shift in Aggregate Demand (AD) to the right. An increase in net exports (X-M) to the rest of the world raises AD, which in turn leads to a more than proportionate increase in GDP via the multiplier effect. Singapore has relied heavily on exports for economic growth. In fact, net exports make up the largest component of Singapore’s GDP. Increasing actual growth also helps Singapore achieve full employment, or alternatively low unemployment.

Second, large amounts of foreign direct investment (FDI) have helped Singapore achieve potential economic growth. Potential growth is the increase in the economy’s potential capability to produce output. Transfers of physical capital, human capital, and technology from Multi-National Corporations (MNCs) have helped increase the Singapore economy’s productive capacity, and thus shifts Singapore’s long-run Aggregate Supply (LRAS) curve to the right, increasing her potential economic growth.

Third, Singapore has also benefited from increased labour flows across international borders. Importing foreign labour leads to an increase in Singapore’s labour which raises the economy’s productive capacity. This is a relatively efficient and cost-effective way of increasing potential growth.

Low Inflation

Fourth, globalisation has helped Singapore keep inflation low. Inflation is defined as a persistent and sustained increase in the general price level, and it is generally seen as a problem. By importing raw materials from other countries at low prices, Singapore has been able to lower her costs of production which translates to lower prices for final products. Importing necessities and other finished products helps keep the general price level down. Also, globalisation increases the Singapore economy’s productive capacity which lowers prices. This is reflected by a rightward shift of the Long Run Aggregate Supply (LRAS) curve, which increases Singapore’s productive capacity in the long run, and concomitantly lowers prices and prevents cost-push inflation.

Low Unemployment

Fifth, globalisation helps to keep Singapore’s unemployment low. Increased export levels shifts AD to the right which in turn leads to higher equilibrium national output. This means that actual growth occurs, which shifts AD towards the full employment level, which lowers unemployment.

BOP

Finally, Singapore is able to have a positive net-export position by importing cheaper raw materials from abroad and exporting high value-added products. For example, Singapore imports crude oil from abroad, refines the oil, and then exports it to different countries. Because the value of Singapore’s exports exceeds the value of her imports, she has a current account surplus, which could translate into a BOP surplus, assuming the deficit in the financial or current accounts are not huge.

Downsides of Globalisation

Yet, despite all its apparent benefits, globalisation has some downsides which could possibly derail Singapore’s macroeconomic aims.

First, Singapore’s dependence on exports makes her vulnerable to negative economic conditions in other countries. If one of Singapore’s trading partners were to experience a recession, demand for her exports would fall. This reduces AD which leads to lower equilibrium national output. Thus, the Singapore economy is susceptible to demand shocks. For example, Singapore’s GDP decreased during the financial crisis of 2007/2008. Thus, while globalisation might confer growth, it also means that same growth could potentially be more volatile.

Second, while globalisation gives Singapore a bigger market for her exports, it also means that she could face more competition. Developing countries, like China, are catching up quickly. Singapore has already lost her comparative advantage in low- to medium-end manufacturing to rapidly industrialising countries. If exports decrease due to competition from low-cost countries, it will result in a fall in AD, which would lead to a drop in output. Over the years, Singapore has had to move up to higher value-added goods and services like biomedical or financial services in order to remain competitive.

Third, increases in Singapore’s productive capacity brought about by globalisation might not be permanent because she is highly reliant on MNCs which are by nature internationally mobile. They could shift operations to a lower-cost location, taking capital with them. There is also no guarantee that Singapore’s “foreign talent” will stay in the country for the long term. Furthermore, importing foreigners to increase Singapore’s labour is also unsustainable in the long term given Singapore’s small land size because the influx of foreigners, perceived to be competing with Singaporeans for jobs and space, has become a major source of political and social discontentment and political acceptability is a major issue. Thus, potential growth might be illusory and fraught with many potential political perils.

Fourth, if the Singapore economy is already operating at or near full employment, then a rise in AD due to increased exports could possibly and realistically lead to demand-pull inflation. Singapore’s persistently low unemployment rate suggests that her economy is operating at close to full employment already. Thus, inflation could be a potential problem.

Fifth, importing raw materials from abroad also leaves Singapore vulnerable to cost-push inflation, more specially imported inflation. For example, Singapore was affected by the rise in oil prices due to political uprisings in the Middle East. Hence, Singapore is vulnerable to supply shocks.   

Sixth, should Singapore lose export competitiveness, (X-M) will become negative which would mean a current account deficit and a likely BOP deficit. Weak demand for exports would result in a depreciation of the Singapore dollar which would increase the price of imports. A depreciation of the Singapore dollar is likely to be inflationary given Singapore’s dependence on imported raw materials, and because it becomes more expensive to buy imported inputs which Singapore needs to produce goods. A deficit in the BOP also means a decline in the country’s foreign reserves which means that if Singapore has few foreign reserves, her currency will be vulnerable to speculative attacks.

Seventh, globalisation could also potentially be harmful for employment. Singapore’s heavy reliance on exports means that she will experience high cyclical unemployment should her major trading partners enter recessions. Perhaps, even more worrying is the increase in structural unemployment because lower-skilled workers could find their jobs being outsourced. Even if their work cannot be easily shifted abroad, they face competition from foreign workers willing to work longer hours and at lower wages. Concomitantly, there is a shortage of workers able to take on high-skilled jobs created by the global economy. As such, Singapore has had to import “foreign talent” to fill this gap. Therefore there are many negative implications for the labour market.

Conclusions

In the final analysis, despite many drawbacks, globalisation has been largely beneficial for Singapore. This is mainly due to the way in which the government has managed to tap into opportunities offered by a globalised world. For example, by providing necessary infrastructure, low tax rates, and a highly-skilled workforce, the government created conditions conducive for international trade and economic growth. At the same time, the government has been able to mitigate some of globalisation’s downsides through her economic policies. Singapore could and does use exchange rate policy. The Monetary Authority of Singapore (MAS) has the discretion to allow the Singapore dollar to appreciate in order to mitigate the inflationary effect of rising prices. Hence, to a large extent, globalisation has helped Singapore achieve its macroeconomic objectives; however, globalisation also brings with it several downsides which have to be properly managed.

JC Economics Essays: Tutor's Comments - This paper was modified and amended from one of the Economics essays written by my friend and classmate from NIE (National Institute of Education). After NIE, he became an Economics tutor at Raffles Institution (the JC section). [Special thanks and acknowledgements to my classmate's contribution.] This Economics essay is about globalisation and the impacts on Singapore's macroeconomic goals and aims; it also discussed policy options and methods to tackle impacts. There are many other globalisation and Singapore economy Economics questions and answers on my site here; do take your time here to explore and read, review, and study the other questions and answers. Compare and contrast them; think through them as well. Alright, here it is time to do the usual tutor's exercise once again: imagining that you are an Economics tutor, examining and marking this paper, what would you look out for? What would you consider a valid, reasonable, nuanced, and balanced argument or point? As an Economics tutor, how would you grade this paper, and why? Thinking through these processes will help you in writing better and better Economics essays, and improve your understanding and knowledge of this interesting and exciting subject. Thanks for reading and cheers!

(a) Explain why low inflation is an important macroeconomic aim of the Singapore government. [8]

(a) Explain why low inflation is an important macroeconomic aim of the Singapore government. [8]

Inflation is defined as a sustained and persistent increase in the general price level. There are different possible causes of inflation, such as demand-pull or cost-push inflation. According to economists, a generally low inflation rate of 2 to 3% is optimal for an economy; however, hyperinflation results in adverse internal and external effects on an economy. Therefore, price stability is considered one of the important, major macroeconomic aims of any government, and Singapore is not an exception.

Internal Effects

There are adverse internal effects on an economy due to inflation. First, there could be an increase in “menu costs” as businesses would have to change price lists on their menus and catalogues often when inflation occurs, therefore incurring high transaction costs. Inflation could also result in “shoe-leather costs”, for instance, when firms frequently move money in and out of financial institutions to get the highest possible returns. Hence, high transaction costs could be an internal problem generated by inflation.

Secondly, inflation could also lead to a redistribution of income. Fixed income earners would suffer as the real value of their income would decrease due to inflation. For instance, pensioners or people on fixed wages would suffer due to inflation as their incomes would be able to buy less goods and services. Variable income earners, such as insurance agents or property agents, might not suffer that much because their incomes could increase due to inflation. Simultaneously, inflation would reduce the real value of debt. Hence, debtors would gain while creditors would lose in terms of purchasing power. The amount of the debt repaid by the borrower would have a smaller purchasing power due to inflation. Hence, a redistribution of income in favour of variable wage earners and debtors would occur.

Third, inflation damages investment. This is because the real value of savings will fall and people might be inclined to consume and spend instead of saving. This fall in savings would reduce the amount of funds available for investment, hence increasing borrowing costs (interest rates would rise as a result). Inflation also creates uncertainty as it is difficult for businesses to predict costs and revenues, profits, and losses. This would lead to a fall in investment, which would limit the future economic growth of the economy as well as the productive capacity of the country.

External Effects

When it comes to the foreign sector, inflation also has adverse effects. Inflation could negatively affect the competitiveness of a country’s exports. With higher inflation, a country’s exports would become relatively more expensive compared to goods from other countries. Assuming that the demand for Singapore’s exports is price-elastic, this would mean a larger than proportionate fall in the quantity demanded of exports when Singapore’s exports are priced higher relative to other countries due to the effects of inflation. Furthermore, with a higher relative rate of inflation as compared to other countries, this would mean that domestically-produced goods are relatively more expensive as compared to imports. Consumers would then switch from locally-produced goods to purchasing imports instead, assuming these are close substitutes. Therefore, import expenditure would also increase.

The Balance of Payments (BOP) would therefore be affected. For a small and open economy like Singapore, which depends on exports to drive economic growth, inflation could greatly worsen the country’s current account and thus worsen the BOP, assuming the capital/financial account remains unchanged. As a small economy with no natural resources, Singapore is dependent on imports of raw materials. Therefore, this makes Singapore susceptible to imported inflation, where the rising prices of such imports would lead to a higher cost of production, hence leading to a spiral of higher prices. Due to the high import content of Singapore’s exports, this could lead to a higher price of Singapore’s exports, hence adversely affecting export competitiveness.

Conclusion

In conclusion, the higher the rate of inflation, the greater the adverse effects on the country, be it internal or external effects. There are many different policies that the Singapore government can potentially use to curb inflation, such as fiscal policy, monetary policy, and supply-side policies.

JC Economics Essays: Tutor's Comments - This is part (a) of a two part Economics examination question set by an Economics tutor who was one of my classmates at NIE (National Institute of Education), where we did the PGDE (Postgrad Diploma in Education) for Economics. She kindly allowed me to modify her essay to fit this post. However, despite the fact this Economics essay was written by an Economics tutor, under simulated examination conditions, the question still remains: how can I improve on this work? Now, try a little more "feeling-based" or even "emotion-based" questions - what do I feel is correct about this Economics paper? what do I feel is right about this paper? is it just right in length? does it address the question? and so on. You can get a right gut feel about an Economics paper if you have reviewed many related Economics questions and gotten a feel of what a correct answer will or should look like. On my Economics site here, I have many other related questions - do explore them and see the comments that I have given to my students, other fellow Economics tutors, and to professional Economics paper writers. Thanks for reading and cheers! 

“Governments should focus primarily on a low and stable rate of inflation.” Discuss. [15]

(b) “Governments should focus primarily on a low and stable rate of inflation.” Discuss. [15]

This essay discusses the macroeconomic aims of governments. This essay argues that, while low inflation is an important macroeconomic aim, governments should also focus equally on other macroeconomic aims such as low unemployment, economic growth, and a stable balance of payments. There are a few types of policies that governments can use to achieve their aims. First, monetary policy is the manipulation of monetary variables such as money supply, interest rate and the exchange rate. Second, fiscal policy refers to the use of government spending and taxation to achieve macroeconomic objectives. However, other than such demand-side policies, governments can also use supply-side policies, which increase the quantity and quality of resources, and improving technology.

Targeting Inflation

First and foremost, clearly there are good reasons for governments to use demand-management or supply-side policies to tackle inflation. This is because a persistent and sustained increase in the general price level hurts fixed-income wage earners and retirees on pensions, as well as consumers of goods and services, who find that their incomes buy fewer goods and services. Inflation reduces the real value of their incomes. In addition, inflation makes it difficult for trading and exchanges within an economy, for instance due to menu costs – the costs of constantly updating prices. Furthermore, inflation makes it difficult for a country to engage in international trade. This is because cost-push inflation reduces the competitiveness of a country that depends on exports, for instance, Singapore, which might suffer from imported inflation. These culminate in a wider socio-political impact: for instance, the hyperinflation in Weimar Germany in 1923 led to socio-political unrest and the collapse of the Weimar government.

Targeting Unemployment

Yet, inflation is not the main goal or the only focus of government policies. Another important goal of government can be to increase employment, or lower unemployment. Unemployment refers to the situation where people able and willing to work are unable to find jobs, and can be structural, demand-deficient, frictional, or seasonal. Being unemployed causes financial hardships for citizens, therefore governments have to ensure that there is job creation for citizens. For example, during 2008-2010, in the depths of the financial crisis and economic recession, there was massive unemployment in many developed economies, especially in the West. Governments can also tackle structural, frictional, and seasonal unemployment by focusing on these problems rather than concentrating their efforts on inflation.

In fact, reducing inflation sometimes leads to increased unemployment. This is because if the inflation comes from demand pressures, policies that lower AD might inadvertently cause demand-deficient unemployment. In a similar vein, focusing on solving unemployment might lead to higher inflation. This is because of government failure – governments do not always know where the AD and AS curves of the economy are, and their actions suffer from time lags and delays, due to imperfect information. If governments use demand side policies such as Keynesian fiscal policy, and the economy is near the full employment level, then an overshooting AD might lead to inflation. Therefore, there is a trade-off between inflation and unemployment.

Targeting Economic Growth

Another goal of government can be to raise economic growth, which leads to a rise of the standards of living in a country, which will generally make citizens better off. Economic growth is measured by percentage increases in real Gross Domestic Product (GDP), which measures the production of an economy. Generally, a higher real GDP per capita means a higher standard of living for the people of that country. There are two aspects to growth: actual growth measures the rate of change in the volume of output produced within the country in a year, and increases mean increased employment, another of the government’s goals. Potential growth is the percentage annual increase in the economy’s capacity to produce. Economic growth can be increased via increasing aggregate demand and increasing aggregate supply. Thus, the government may introduce demand management policies, such as monetary and fiscal policy, as well as supply-side policies in order to aid actual and potential economic growth respectively. Supply-side policies generally lower inflation by shifting LRAS to the right, and therefore it would seem that there is no trade-off.

However, increasing actual economic growth sometimes results in more inflation, because the AD shifts rightwards, and there might be a trade-off to be made between economic growth and a low rate of inflation; higher rates of economic growth are generally accompanied by higher rates of inflation, ceteris paribus.

Targeting the BOP

Another possible macroeconomic aim of government is to maintain a balance of payments (BOP) surplus. Generally, some governments like Singapore run BOP surpluses for most years, where export values exceed import values. For example, Asian countries such as China have been running huge BOP surpluses, vis-à-vis their trading counterparts, mainly western countries; they have been selling more exports than imports they buy, and this provides a net inflow of capital into their countries rather than an outflow.

However, running a current account surplus might lead to demand-pull inflation because exports (X) exceed imports (M), if the economy is already near or at the full employment level. Therefore there is a trade-off decision to be made between a current account surplus and demand-pull inflation.

Conclusions

In conclusion, one disagrees with the statement posed. All the macroeconomic aims of government are important and the government has to maintain a balancing act, considering various trade-offs. Also, governments may have to tackle different problems at different time periods, and thus inflation should not be the primary focus. In the final analysis, governments should use a combination of demand-management and supply-side policies to manage society’s macroeconomic aims, and not merely focus primarily on inflation, because it is one problem among many.

JC Economics Essay - Tutor's Comments: This is the second part to a question on inflation. There are many relevant real life examples in this essay, and this "A" grade essay also tackles a wide range of macroeconomic aims and  policies, which makes it a balanced, sound, and well-written Economics paper. In addition, the conclusion is considered, evaluative, and generally quite interesting to read. Overall, it is very well done! However, the usual question applies: if you were an Economics tutor, what would you do to make this Economics paper better? How would you improve on it? To take a specific case: if you were going to edit or correct the conclusion, what better conclusion, or what alternative conclusion to this Economics essay could you come up with? Think, think, think; thanks for reading and cheers!