Discuss whether fiscal policy is the most effective way for Singapore to sustain a successful economy, with low unemployment, low inflation, and economic growth. [25]

Discuss whether fiscal policy is the most effective way for Singapore to sustain a successful economy, with low unemployment, low inflation, and economic growth. [25]

Introduction

This paper discusses if fiscal policy is the most effective way for Singapore to sustain a successful economy, where the idea of a “successful economy” is based on attaining the macroeconomic goals of generally low unemployment, low inflation, and economic growth. The means of attaining each of these desirable macroeconomic objectives may sometimes be at odds with other macroeconomic goals because of trade-offs. The most effective way for Singapore to sustain a successful economy is not to depend on one single macroeconomic policy; in particular, due to Singapore’s small and open economy, fiscal policy would go only a little way to help Singapore attain her macroeconomic goals, and a combination of exchange rate policy and supply-side policies would work more effectively instead.

Fiscal Policy Can Be Effective

First and foremost, it can be argued that fiscal policy could theoretically achieve the macroeconomic goals of low unemployment, low inflation, and economic growth. First, low unemployment can be achieved through the use of expansionary fiscal policy. What does expansionary fiscal policy mean? It  means increasing government spending (G) or lowering taxes (T), in times of high unemployment or recession. The discretionary expenditure by the government, for instance on the military or on education, would raise aggregate demand (AD) and drive up employment, due to the multiplier effect, thus resulting in a higher level of employment. AD shifts to the right and causes unemployment to fall. What is unemployment? Unemployment is defined as the situation in which people who are willing and able to work are unable to find employment. Secondly, likewise, stable actual economic growth can attained the same way, because expansionary fiscal policy can ensure that growth is maintained during recessions. Actual growth can be thought of as an increase in real national output. These implications are reflected in the diagram below.

Likewise, fiscal policy can be used to reduce inflation by contracting AD in times of high inflation in order to reduce inflationary pressures and control prices. This is the reverse of expansionary fiscal policy; contractionary fiscal policy can reduce AD in times of inflation. Inflation is defined as a persistent and inordinate increase in the general price level, and if it is demand-pull, contractionary fiscal policy reduces AD accordingly.

Limitations of Fiscal Policy

On the other hand, the way fiscal policy works in reality is different from theory because policymakers may not know exactly where the full employment level is in reality, and time lags, recognition lags, and implementation lags are all real. All the theoretical effects of fiscal policy also assume that the economy has a sufficiently large multiplier for the injections by the government to make large impacts on national income and employment. It also presupposes that the government’s budget does not suffer from massive deficits, and that fiscal policy would not result in the “crowding out effect”, when the government drives up interest rates, negatively affecting the private sector, when it attempts to finance policies through borrowing.

However, more importantly, while the Singapore government’s finances is such that it can potentially deliver a fiscal stimulus without financial or political problems, the fact that Singapore’s national multiplier is small implies that this would not have a great impact on growth or employment. The high level of imports and high proportion of savings in Singapore means that the multiplier effect would be small. Furthermore, fiscal policy seems most effective in reducing cyclical unemployment, associated with falling AD during a recession, and does not go a long way in relieving structural or frictional unemployment; as for inflation fiscal policy helps reduce demand-pull inflation and does not go a long way in alleviating cost-push inflation. Even if fiscal policy could generate employment, it is only in the short run, and unemployment will eventually return if it was actually due to structural unemployment, the mismatch of skills and knowledge in an economy due to structural changes in the methods of production, and hence such reductions in unemployment and the concomitant growth would not be sustainable.

Exchange Rate Policy

In order to sustain a successful economy, arguably a combination of fiscal, monetary and supply-side policies is required instead. In particular, monetary policy – in Singapore’s context, an exchange rate policy – would be able to affect AD during short-term economic fluctuations. It should be noted that interest rates-based monetary policy cannot be applied in Singapore as a result of Singapore’s vulnerability to short-term capital flows and thus an exchange rate policy has to be adopted in Singapore. As Singapore is dependent on imports, low inflation can be sustained instead through a gradual appreciation of the currency, because the imports would look relatively cheap vis-à-vis other countries. However, it should be noted also that this would affect exports negatively, on the flip-side.

On the other hand, depreciation can be used to increase AD, by raising demand for Singapore’s exports, since short-term depreciations of the Singapore dollar could help to raise competitiveness of Singapore’s exports and thus drive growth and generate employment. However, it should again be noted that this would affect inflation, on the flip-side. Hence, trade-offs are inevitable, although exchange rate policy is clearly a viable alternative.

Supply-Side Policies

As for long-term economic growth and stability, supply-side policies are necessary to sustain potential growth. Education and retraining of workers has to be implemented in order to maintain flexibility of labour and allow Singapore to cope with structural changes.

Furthermore, in terms of reducing unemployment, job fairs and placement or matching agencies could also help reduce frictional unemployment. Low domestic inflation can be maintained in the long run through continuous improvements in productivity and the enhancement of cost-competitiveness. The productive capacity of the economy must grow continuously in order for increases in AD to translate into sustained, non-inflationary, real economic growth in Singapore's national output; this increase in LRAS can be encouraged through fiscal spending that has supply-side effects such as investments in infrastructure and education, which would both affect AD and LRAS, leading to economic growth both actual and potential.

Conclusions

In conclusion, the application of fiscal policy is not an effective way for Singapore to sustain a successful economy that achieves its macroeconomic aims, thanks primarily to the small and open nature of the Singapore economy that gives rise to a small multiplier resulting from the high level of leakages due to high savings from CPF and high import contents in inputs. This reduces the impact that fiscal policy can have on the economy because the famous Keynesian multiplier effect is mitigated. The current managed float exchange rate policy that Singapore adopts is more significant in achieving short-term demand-management objectives. In the long-run, the government would sustain a successful economy through a combination of both demand-management and supply-side policies that enhance the long-term productivity and productive capacity of the economy, thus providing potential growth, whilst driving AD through actual growth, which reduces unemployment and spearheads economic development. Hence, fiscal policy is clearly not the most effective way – an economic policy package is better. 

JC Economics Essays: Tutor's Comments - This Economics paper is very well written, full of Economics perspectives, theories, concepts, and arguments. It also has good content on the Singapore economy. It covers the relevant Economics materials required and has an excellent thesis- anti-thesis - synthesis approach, that uses relevant examples that are contextual, real life, and related to the question. The conclusion presented and argued is clear, relevant, and evaluative in nature - do remember the important keyword here is "evaluative". The usual Economics tutor's caveat applies, of course, that naturally to get the highest grades, students must always remember to add Economics diagrams that are well-labelled, properly and carefully explained, and relevant to the context and question. This Economics essay under examination conditions can definitely get the highest marks in an examination. As a friendly, useful tip, do think through this particular Economics paper and reflect on these educational comments presented. Thanks for reading and cheers!

(b) "Fiscal policy works best to achieve price stability in a small and open economy like Singapore." To what extent do you agree with this assertion? [17]

(b) "Fiscal policy works best to achieve price stability in a small and open economy like Singapore." To what extent do you agree with this assertion?

Inflation brings about some adverse effects to the economy and hence it is important for governments to implement policies to curb inflation. The policies used would differ according to the type of inflation as well as the nature of the economy. This paper discusses if fiscal policy works best to achieve price stability in a small and open economy, and uses Singapore as a case study in particular. First, it should be noted that Singapore is a small and open economy with no natural resources, relying heavily on trade, international capital flows, and foreign direct investments to drive growth. This paper argues that fiscal policy can be used, but its impacts are massively limited given Singapore’s context.

What is fiscal policy?

Fiscal policy refers to the manipulation of government expenditure and taxation to achieve macroeconomic goals. A contractionary fiscal policy could be used to curb inflation. Government expenditure could be reduced or taxation could be increased. With a lower government expenditure, this would translate to a lower aggregate demand (AD) which consists of AD = Consumption + Government expenditure + Investment + Net Exports, or AD = C + I + G + (X-M).

Through the multiplier process, a fall in G would lead to a multiple fall in AD. With a fall in AD, firms would accumulate inventories and this would be a signal to reduce production and output. Firms will reduce their number of workers hence resulting in a fall in output and a rise in unemployment and a fall in national income. With a fall in household incomes, there is a fall in spending and hence through the multiplier process, this would result in a contractionary effect on the economy. Hence, AD would shift to the left as shown, resulting in a fall in the general price level.

With higher taxes such as income taxes, this would reduce the disposable incomes of consumers and hence this would also reduce consumption expenditure, shifting the AD curve to the left, and, hence, also resulting in a fall in the general price level.

Limitations of Fiscal Policy in Singapore’s Context

However, the effectiveness of fiscal policy would depend on the size of the multiplier. In the case of Singapore, the size of the multiplier is small due to the high marginal propensities to save and import. This is firstly due to compulsory savings such as the Central Provident Fund (CPF), and, secondly, a high marginal propensity to import, among other factors. Because Singapore is a small and open economy that relies heavily on foreign trade, there would be high leakages from the economy. Also, it would also be difficult to reduce government expenditure for long-term, major projects. Increasing personal income tax could also result in a disincentive to work and a higher corporate tax could drive businesses away from Singapore.

Other Possible Solutions

On the other hand, the Singapore government can also use contractionary monetary policies (in Singapore’s case, an exchange rate policy), or supply-side policies instead to tackle inflation, rather than just fiscal policy.

Monetary Policy, in Singapore’s Context

Monetary policy refers to the use of interest rates to achieve macroeconomic objectives. In Singapore’s case, her monetary policy is tied to exchange rates, and Singapore uses a form of exchange rate policy because Singapore is dependent on external demand. Therefore, it is more effective to control exports and imports in Singapore’s context. Hence, the exchange rate is used as a tool of monetary policy in Singapore instead.

In Singapore, a managed float system is adopted where the Singapore dollar is allowed to fluctuate within a band against a basket of currencies of her trade partners. The central bank will then intervene in the foreign exchange market to move the exchange rate to a desired level by buying up or selling the Singapore dollar using her foreign reserves, when the currency level approaches the bands. For instance, to curb inflation, the Singapore central bank (the MAS) could buy up the Singapore dollar, resulting in an appreciation of the Singapore dollar. This appreciation of the Singapore dollar would lead to a fall in the price of imports in terms of Singapore dollars. This would lead to a lower cost of living as the price of imported products would be lower. With a lack of natural resources, Singapore depends heavily on imports as inputs to manufacture our exports. Therefore, the fall in the price of imports would lead to a fall in the cost of production.

The lower price of imports would also mean that consumers switch away from local goods and purchase more imports instead, assuming they are substitutes. With an appreciation of the Singapore dollar, this would mean that Singapore’s exports are more expensive in foreign currency terms and hence less price-competitive. Assuming demand for exports to be price-elastic, this would lead to a more than proportionate fall in quantity demanded of exports from Singapore. If the Marshall-Lerner condition holds, this would lead to a fall in net exports and hence a fall in AD. The AD curve would shift to the left, resulting in a fall in the general price level, ceteris paribus.

Limitations of Singapore’s Exchange Rate Policy

However, there are limitations to the effectiveness of Singapore’s exchange rate policy. Intervention in the foreign exchange market to generate an appreciation of the currency would require Singapore to maintain significant reserves. A fall in export earnings through an appreciation of the dollar would also lead to a worsening of the current account.

On the other hand, besides fiscal and monetary policies, the Singapore government could also use supply-side policies to tackle both demand-pull and cost-push inflation. With supply-side policies, the aggregate supply (AS) could be increased through labour retraining and education. By increasing the productivity of workers, in the long run, the cost of production would fall, resulting in a rightward shift of the LRAS curve, leading to a fall in the general price level, ceteris paribus. Cost-push inflation can also be curbed using wage and income policies. For instance, a flexible wage structure would enable wages to be adjusted downwards. In Singapore, the National Wages Council (NWC) recommends the level of wage increases. This could control labour costs and ensure that wage increases do not outstrip productivity increases.

However, supply-side policies would not work effectively if AD continues to increase. Therefore, there is a need to use both contractionary fiscal or monetary policy to reduce AD to reduce the upward pressure on prices. In the long run, supply-side policies are important to curb inflation.

Conclusions

In concluding, it should be mentioned there could also be considerable time lags involved in the implementation of policies. It takes time for policymakers to gather data. There could also be implementation lags due to the time taken to implement suitable policies. Once policies are implemented, there could also be impact lags as it takes time for policies to take effect. Also, due to the characteristics of the Singapore economy, it is arguably better to adopt contractionary monetary policy using exchange rates to curb inflation, as Singapore’s monetary policy is in the form of exchange rate policy. This poses a tricky problem, in that, with a small multiplier in Singapore’s context, the effectiveness of fiscal policy is limited, yet the benefits of supply-side policies might only be reaped in the long run. However, it should also be noted that curbing inflation could lead to a trade-off with another macroeconomic objective of unemployment. By curbing inflation, a fall in national output will occur and that might lead to an increase in unemployment. In the final analysis, fiscal policy is only one of many solutions and its impact is massively limited in Singapore, and as such as plethora of policies should be used instead of one single policy.

JC Economics Essays: Tutor's Comments - This paper was written by an Economics tutor friend of mine, who was my former classmate at the NIE (National Institute of Education), doing PGDE (Postgraduate Diploma in Education, JC, Economics specialisation). For part (a) of this question, see the suggested "model" Economics answer why low inflation is an important macroeconomic aim of the Singapore government.  My usual tutor's comments and questions apply here to this essay: what do you like about this paper, and what have you learnt here? Also, what have you studied that is different or similar to what is written in this Economics paper? Using your knowledge of macroeconomics, what diagram must you use here to explain the words? Remember, although this was written under simulated examination conditions by an Economics tutor, you can always think of other ways to improve it, refine it, and make it better suit the context. Also remember that you should know how and when to apply your Economics concepts and theories, rather than just merely memorising and regurgitating. Be sure to think hard, clearly, and properly when writing your Economics essays, especially during examination conditions. 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!

What can a government do to increase economic growth? Discuss. [25] (Second Version, Revised)

What can a government do to increase economic growth? Discuss. [25]

Note: This essay has appeared before on my site; this is a second version.

What can a government do to increase economic growth? There are many policies a government can utilise to achieve this macroeconomic objective. Economic growth can be measured by percentage increases in real Gross Domestic Product (GDP), and there are two main aspects – actual and potential growth. Actual growth measures the actual rate of change in the volume of output produced within a given country, within a year. Potential growth is the percentage annual increase in the economy’s potential capacity to produce output. Economic growth can be increased via increasing aggregate demand (AD) and increasing aggregate supply (AS), which target actual growth and potential growth respectively.

Thus, this paper suggests that a government may introduce demand-management policies, such as monetary and fiscal policy, which target actual growth, as well as supply-side policies, which target potential growth, in order to increase economic growth.

Demand-Management Policies

First, a government can use expansionary demand-management policies. Monetary policy is the manipulation of monetary variables such as money supply, interest rates, and even the exchange rate (for example in Singapore’s case) to achieve macroeconomic policy objectives such as steady, sustained economic growth, low and stable inflation, a healthy Balance of Payments (BOP) and full employment. Expansionary monetary policy may be employed to promote economic growth. It involves reducing interest rates, where the reduction of interest rates leads to an increase in consumption spending (C) or firms’ investments (I), thus raising AD, or reducing the external value of the currency which makes a country’s exports look relatively cheaper, thus boosting export sales. A reduction in interest rates will increase consumer spending on consumer durables and may encourage spending at the expense of savings. A lowered interest rate will also encourage investment. As AD is made up of C + I + G + (X-M), (G means government spending and (X-M) means net exports), hence, when both C and I increase, AD shifts to the right. A lower cost of borrowing will increase the incentive for investment as now the returns would be greater. The increase in both consumption expenditure (C) and investment expenditure (I) will cause AD to rise and thus, promote actual growth.

In terms of exchange rate policy, devaluation or depreciation in the exchange rate is often used by governments of open economies that operate a fixed exchange rate system or a managed float system. By devaluing their domestic currency, a country would be more export competitive as their exports will appear to be cheaper relative to other countries. Assuming the Marshall-Lerner condition is satisfied, net exports as well as AD will rise. This, in turn, will cause output and employment to increase.

Fiscal policy refers to the use of government spending and taxation to achieve macroeconomic objectives. To promote economic growth, to boost output and to increase employment, a government can also employ an expansionary fiscal policy. The government can increase government expenditure (G) or reduce taxes (t). An increase in G will cause an increase in aggregate demand directly since AD = C + I + G + (X-M). A reduction in personal income tax would raise consumption as it would further increase the disposable income of households and thus their ability to spend. Moreover, a decrease in corporate tax will increase profits and hence raise the level of investment in the economy. An expansionary fiscal policy thus raises AD, and hence output and employment, and thus promotes actual growth.

Supply-Side Policies

Secondly, and on the other hand, to promote potential growth, the government may adopt supply-side policies. Supply-side policies are designed to shift the AS curve to the right by increasing the quantity and quality of resources via improving the efficiency in product and labour markets, and also by improving the level of technology.

A reduction in labour market rigidities can be carried out via provision of education and training, reduction in direct taxes, cut in unemployment benefits, reforming trade unions, and wages and prices policies. Education and training can raise labour productivity and mobility and thus increase productive potential of the country. Labour productivity or the efficiency of labour is measured by output per hour worked. Reducing personal income tax and corporate tax rates can raise the productive capacity of a country by increasing the quantity and quality of labour and capital available to a country. A lower income tax rate would create incentive for work as now there is as expansion in the amount of disposable income. A lower corporate tax rate would also increase investment as businessmen would be able to keep a larger share of profits. The cut in unemployment benefits will also increase the incentive to work as the unemployed would be disadvantaged if they are not engaged in productive labour. The power of trade unions can also be reduced by the government as this would result in a reduction of wages of labour. This, in turn, will increase employment, labour markets flexibility and efficiency. Thus, if labour costs to employers are reduced, their profits will probably rise. This would encourage and enable more investment and economic growth.

Pro-business policies are designed to promote greater private investments in the country. These include building world-class infrastructure, investing in R&D and tax reforms to ensure greater compatibility with international trends in taxes. The government can also increase AS via the adoption of more pro-competitive policies such as the passing of anti-monopoly laws, removal of barriers to entry to certain regulated industries, eliminating tariffs as well as other restrictions on imports.

Limitations of Policies

However, both aggregate demand and supply side policies have their share of limitations. Reducing interest rates may cause the country’s currency to depreciate as it encourages hot money outflows. A lower exchange rate will make the exports of a country more competitive whereas imports will be dearer. Moreover, if the consumer and business outlook is gloomy, a fall in interest rates may not encourage firms and households to increase borrowing because firms’ profits are falling and consumers may be expecting lower wages and lower year-end bonuses. When the exchange rate is reduced, if the economy is operating near or at full employment, inflation will result. If the demand for exports and imports is price inelastic, net exports and AD will fall. This, in turn, will cause output and employment to fall. Hence, inflation can cancel out the price advantages resulting from a reduction in the external value of the currency.

Fiscal policy may conflict with other macroeconomic goals because if AD increases by too much, economic growth will be achieved at the cost of demand-pull inflation. Also, if the government has to borrow in order to increase spending, it may result in a BOP deficit. The decrease in tax rates may not bring about the desired increase in consumption and investment if households and businesses are pessimistic about future prospects. Moreover, a cut in personal income tax may induce an increase in the amount that they save rather than spend. The full effects of an expansionary fiscal policy may only be felt after a considerable time period. Thus, its effectiveness may not be realised in the short term.

Supply-side policies such as education and training take time to have an effect and are also very costly. Reducing taxes may encourage some people to work fewer hours so that they can enjoy more leisure. Reducing corporate taxes may result in firms paying higher dividends rather than undertaking more investment. Cutting unemployment benefits would also not guarantee that it would reduce unemployment as jobs are not created and neither are their skills upgraded. It increases the urgency of finding a job. However, it does not increase their capability of getting a job.

Conclusions

Thus, economic growth can be achieved via fiscal policy, monetary policy, supply-side policies as well as by pro-business policies. However, it may be achieved at the expense of the limitations discussed and thus, a combination of policies could result in better economic growth rather than the policies being utilised as standalone measures to improve the economy.

JC Economics Essays – Tutor’s Commentary: This Economics essay on economic growth has appeared before on my site; this is a second version (amended, revised, changed version). One major problem with this Economics essay is that the conclusion is still not evaluative enough. Economics tutors usually lament that their students cannot write excellent evaluations after writing many excellent paragraphs before that. How do you write an evaluative paragraph? One tip that many Economics tutors give is that students should be sure to signpost their essays with phrases such as: “to a large extent, in my opinion, it is likely that, one can argue that”, and so on. Now put yourself back into the shoes of your own Economics lecturer in school, here once again. How would a good Economics tutor make this conclusion here better? Also, which diagrams do you need here, and why? A good Economics tutor would point out that AD/AS would be really useful here: my advice for this piece of work would be – always include a relevant Economics diagram and also write an evaluative conclusion to get the highest, best grades. 

Discuss the effectiveness of government policies that could be used to tackle China’s inflation. [25] (rephrased Economics question)

“In 2003, China achieved an impressive growth rate of about 9%. Domestic consumption and investment formed the dominant source of her growth, and her inflation rate was above 5%. The economy was overheated.”

Adapted from The Straits Times, 2004

Discuss the effectiveness of government policies that could be used to deal with China’s ‘overheated economy’. [25]

Introduction

China is facing massive demand-pull inflation because of her rapid actual economic growth in recent years. Inflation can be defined as a persistent and sustained increase in the general price level, and can be classified as demand-pull or cost-push. In the context of China, because domestic consumption and investment forms the dominant source of China’s actual economic growth, the likely cause of China’s “overheated economy” is demand-pull inflation, which has to be countered using either demand-management or supply-side policies, or a combination of such measures by the Chinese government. This paper discusses contractionary demand-management policies, such as fiscal and monetary policies, and supply-side policies, in China’s context, and discusses the effectiveness of the suggested policies.

Demand-Pull Inflation

Insert Economics diagram here. What Economics diagram should go here?

In the diagram above, it is clear that increases in consumption (C) and investment (I) have led aggregate demand (AD) to shift to the right, which constitutes in this case actual economic growth, and thus inflation has resulted because the economy is near the full employment level. With a burgeoning middle class in China wanting to spend on consumer goods and other luxuries, and with domestic and foreign firms wanting to capitalise on the rising middle class in China, there has been a huge increase in AD. These collectively lead to demand-pull inflation because AD = C + I + G + (X-M), and therefore there is a need for the Chinese government to utilise either contractionary demand-management policies or increase the AS through supply-side policies.

Effectiveness of Government Policies

In the short run, contractionary demand management policies such as fiscal policy, monetary policy, or exchange rate policy can be used, to shift AD to the left and thus reduce inflationary pressures. In the longer term, supply-side policies can be used to increase the AS and thus reduce inflationary pressures.

What is the effectiveness of demand-side policies in China’s context? First and foremost, it is clear that any contractionary demand-side policy will reduce AD and tackle the problem directly. For instance, fiscal policy dictates that government spending should be reduced or taxes raised, and this would shift AD to the left, ameliorating inflationary pressures. Monetary policy used in this context would raise interest rates, reducing C and I because borrowing costs have increased, and therefore AD would also shift to the left. Appreciating the currency or revaluing the country’s currency would make exports look relatively expensive whilst imports look relatively cheaper, thus shifting AD to the left as well, directly addressing demand-pull inflation. In China’s case, a combination of fiscal policy and revaluation would make sense by reducing AD, directly addressing the issue.

What is the effectiveness of supply-side policies in China’s context? There are many supply-side measures that can be taken, for instance improving the efficiency of the labour market, via reducing frictional unemployment; increasing human capital training and development via training, retraining, and upgrading; and increasing labour productivity through capital and technological increases. These measures would be effective in the long run when AS shifts to the right and thus reduces the general price level in the intermediate and long term.

Ineffectiveness of Government Policies

On the other hand, the Chinese government has to be aware of possible limitations of such policies. First, contractionary fiscal policy might lead to unemployment and political problems if Chinese State Owned Enterprises laid off staff or if military spending were to be cut. Rising income taxes could hinder productivity and labour incentives because people might not work as hard. Corporate taxes, when raised, might affect the profitability of firms. These might lead to unemployment or lower actual economic growth.

Secondly, monetary policy could be highly ineffective in China’s case. This could be due to a variety of reasons. First, if business confidence is high, increasing interest rates would not dampen consumption and investment much. Secondly, China operates a fixed exchange rate and therefore the economic “trilemma” should apply to China. According to theory, a country cannot have free flowing capital, a fixed exchange rate, and yet pursue monetary policy using interest rates, because of the impossible economic “trilemma”. Thus, it is more likely that China uses exchange rate policy rather than depending mainly on interest rates.

Thirdly, supply-side policies operate in the long run but inflation affects China now. Furthermore, supply-side policies operate indirectly rather than tackling the root of the problem which is demand-pull inflation, which affects AD. Also, the Chinese government would have to invest in costly, expensive, and difficult long-term training, retraining, and upgrading for the workforce, and all this spending would have opportunity costs in terms of healthcare, defence, and education.

Conclusions

In conclusion, the Chinese government can use fiscal, monetary, or exchange rate policies in conjunction with longer term supply-side policies to tackle demand-pull inflation. However, multiple management policies would probably have to be implemented in order to successfully counteract the “overheated economy”. Also, there are trade-offs in that an excessive handling of inflation could lead to unemployment and slower actual economic growth, and governments should be aware of the trade-offs and their implications.

JC Economics Essays – Tutor's Commentary: The above Economics essay is on the interesting and current topic of inflation in China and government macroeconomic policies that could tackle this inflation. Instead of me telling you the grade that this paper would get – instead, let’s do another thinking exercise. Put yourself into the role of an Economics examiner looking at this piece of work. Once again, think about how your Economics tutors in Junior College, or university, for that matter, would rate this essay. Try to put yourself into your Economics tutor’s shoes. What would he or she say, and why? Also, try another exercise: try to draw out the diagram that would have been in this post if I had been less of a luddite and more of a techie. What would the diagram be, and why? Hint: you might want to use an AD-AS diagram - how would it look like? Thanks for reading and cheers. 

Analyse the impact of FTAs on the Singapore economy and assess the extent to which the impact of FTAs has been positive. [25m]

Free Trade Agreements (FTAs) are highways that connect Singapore to major economies and markets. With FTAs, Singapore-based exporters stand to enjoy many benefits like tariff concessions, preferential access to certain sectors, and faster entry into markets.

Analyse the impact of FTAs on the Singapore economy and assess the extent to which the impact of FTAs has been positive. [25m]

Note: The original essay was edited two-fold - first, to fit into this JC Economics Essay blog post; second, to remove diagrams/graphics. Hence it is entirely in verbal (English) form. 

A Free Trade Agreement (FTA) is a legally-binding agreement to liberalise trade and bring about closer economic integration between member countries. FTAs aim to remove barriers to trade and investment and create a free flow of goods, services, investment, and people. Under a FTA, member countries provide each other with favourable treatment for goods, services, and investment. Such favourable treatments include reduced tariffs, easier access to markets, and opening up of various sectors for investment opportunities. Thus, FTAs help to foster and facilitate the flow of trade and investment between Singapore and its trading partners with the aim of achieving economic growth and development. FTAs bring about both positive and negative impacts on the Singapore economy. However, the government has implemented policies to mitigate these negative impacts and the overall impact of FTAs on the Singapore economy is largely positive.

The Singapore economy is open to the world, in trade and investment. This openness to trade is a necessity because of its small size and lack of natural resources.

Figure 1 illustrates the effect of a tariff on imports. The original import expenditure for country A is shown by area Oaeq0, the price of imports is Oa and the quantity of imports is Oq0. For a country with price-elastic demand for imports, when the tariff is imposed, the price of imports rises to Ob and the quantity of imports fall to Oq1. Import expenditure is represented by area Obfq1. There is a reduction in import expenditure as the fall in quantity demanded of imports is greater than the rise in price of imports. For a country with price-inelastic demand for imports, when the tariff is imposed, the price of imports rises to Oc and the quantity of imports fall to Oq2. Import expenditure is represented by area Ocdq2. There is an increase in import expenditure as the fall in quantity demanded of imports is less than the increase in price of imports.

This illustrates the positive impact of free trade on the Singapore economy and is one of the key reasons why Singapore campaigns actively for the removal of tariffs and the setting up of FTAs. It has a relatively price-inelastic demand for imports since it has no natural resources and has to import both food as well as inputs for production. Imposing tariffs on such goods will have more adverse effects for its economy than gains.

On the export side, domestic producers in Singapore gain from an enlarged export market. Thus, they are able to reap internal economies of scale and earn greater export revenue. In addition, the reduction, or removal, of tariffs results in cheaper exports, which will lead to an increase in export demand and revenue. The increase in net exports increases aggregate demand and in turn increases national income, employment, and short-run growth if the economy is operating below full employment. On the other hand, if the economy is near or at full employment, the boost of net exports might lead to demand-pull inflation.

The other benefit that FTAs bring to the Singapore economy is that it allows countries to specialise in producing goods in which they have a comparative advantage in to a greater extent. Comparative advantage is the idea that relative opportunity costs of production must be taken into account when trading between countries. Consumers benefit from lower-priced goods, as Singapore’s trading partners are able to produce these goods more efficiently due to their comparative advantage. Also, there is both a greater variety of goods available and better quality of products. The removal of tariffs means that domestic producers face greater competition from foreign producers, which will boost the efficiency of domestic production and the quality of products.

Lastly, Singapore benefits from greater foreign direct investment. Foreign Direct Investment (FDI) refers to long-term capital inflows, which typically takes the form of a Multinational Corporation (MNC) investing in an enterprise that is outside the economy of the MNC. The greater inflow of capital will have a positive impact on the Balance of Payment (BOP), creating a surplus in the BOP. Foreign direct investment will also result in an increase in capital accumulation, which increases the productive capacity of the economy and short-run economic growth. In addition, the diffusion of technology from the MNCs to domestic producers will increase the level of productivity and lead to long-run economic growth.

On the other hand, FTAs bring about negative impacts on the Singapore economy. First, structural unemployment arises in industries that are in direct competition with other lower-cost trading partners due to a loss of comparative advantage.  There will be a decline in production levels and employment in some of Singapore’s sectors such as manufacturing. This results in structural unemployment, as these workers are not equipped with the skills required to work in the newly-created sectors. In addition, new technology increases the importance on skills and substitutes for relatively low-skill inputs. Technology replaces low-skilled jobs, exacerbating the problem of unemployment.

Second, FTAs cause member countries to become more vulnerable to external events. FTAs foster closer trade links among member countries, and as a result increases the interdependence of their economies. This means that a recession in one country may quickly spread to other countries, which are its trading partners, an effect known as the “contagion effect”. In the case of Singapore, higher reliance on imports makes the economy more vulnerable to the threat of imported inflation, while reliance on exports to drive economic growth may make Singapore more vulnerable to external shocks. There is also the possibility of an increase in long-term capital outflow due to greater opportunities in member countries.

The above illustrate that FTAs have both positive and negative impacts on the Singapore economy. The government has put in place measures to mitigate the negative impacts and has been largely successful in reducing the problems of demand-pull inflation, structural unemployment and vulnerability to external shocks.

To tackle the threat of demand-pull inflation due to the growth in exports and investment, as well as the threat of imported inflation, the Singapore government has put in place an exchange rate policy of gradually appreciating the Singapore Dollar. A gradual appreciation of the Singapore Dollar keeps the price of imports relatively low, reducing the possibility of imported inflation. A gradual appreciation of the Singapore Dollar also prevents excessive increases in export demand and hence aggregate demand, reducing demand-pull inflation.

To tackle structural unemployment, Singapore has adopted manpower policies to equip workers with the skills required to work in the newly created industries, for instance biotechnology. The government also spearheads Research & Development (R&D) projects to develop new areas of growth and new dynamic comparative advantage, such as the biomedical sector, in the face of the erosion of Singapore’s comparative advantage in an attempt to search for new markets.

The government uses supply side policies to deal with the third problem of vulnerability to external shocks. Singapore’s economic strategy is outward-oriented. Small and Medium Enterprises (SMEs) are encouraged to venture overseas to reduce the dependence of our current account on exports and hence, the Balance of Trade (BOT). With SMEs investing abroad, this will lead to an inflow in the current account in the long run. This helps to reduce the vulnerability of Singapore’s economy to changing global conditions.

There is evidence that the above policies have been successful. The exchange rate policy has been effective in keeping inflation at a consistently low and stable level. The government also managed to develop new high-value added industries such as biomedical and life sciences to replace jobs in the lower-skilled manufacturing sector, in which Singapore is rapidly losing its comparative advantage. The outward orientation policy has also proven to be effective in helping Singapore cope with changes in global conditions. However, it takes time for supply side policies to work. Thus, in the short run the drawbacks of FTAs appear to be large, but in the long run, the positive impact of FTAs outweighs the negative impact when the policies take effect.

In conclusion, the signing of FTAs brings about benefits and detriments. Nevertheless, the long-run benefits tend to outweigh the short-run drawbacks and the Singapore’s government policies to mitigate the negative effects of FTAs have been relatively successful. Singapore is a small economy with a lack of natural resources. It benefits from the removal of tariffs, as its demand for imports is inelastic. Domestic producers benefit from entry into the markets of its trading partners and consumer welfare increases as consumers are able to obtain lower cost goods produced by Singapore’s trading partners.  FTAs also encourage foreign direct investment and technology transfer from MNCs, which contribute towards economic development and growth of Singapore. The main negative impacts of FTAs are demand-pull inflation, structural unemployment and vulnerability to external shocks. These impacts have been mitigated by the exchange rate policy, supply side policy and outward orientation measures put in place by the Singapore government. The Singapore government continues to campaign for the setting up of FTAs as they seek new opportunities in emerging markets such as China, India, Russia, and Latin America.

JC Economics Essays - Tutor's Commentary:  Once again, note that the original was edited two-fold - first, to fit into this JC Economics Essay blogpost; second, to remove diagrams. It is well written and crafted, and was done professionally. Given that this essay was written professionally and not under examination conditions, if an Economics student could write about half the standard of this paper, he would get more than a decent grade. Having said that, the usual questions apply: how can I write an essay better? How can I improve on this paper? 

(b) What can the government do to increase Economic Growth? [15]

(b) What can the government do to increase Economic Growth? [15]

There are many policies a government could undertake to increase economic growth. Economic growth is measured by percentage increase in real Gross Domestic Product (GDP). There are two main aspects to economic growth. Actual and potential growth. Actual growth (AG) measures the rate of change in the volume of output produced within the country in a year. Potential growth (PG) 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 economic growth.

Monetary policy is the manipulation of monetary variables such as money supply, interest rate and the exchange rate to achieve macroeconomic policy objectives such as steady and sustained economic growth, low and stable inflation, a healthy Balance of Payment (BOP) and full employment. Expansionary Monetary Policy may be employed to promote economic growth. It involves, raising monetary supply, reducing interest rates (as seen from Figure 1 - think of WHAT diagram and HOW to draw the diagram) where the reduction of interest rates leads to an increased supply of goods or reducing the external value of the currency. A reduction in interest rates will increase consumer spending on consumer durables. It may also encourage spending at the expense of saving. It also increases the amount available to spend after people have paid less for loans with low interest rates. A lowered interest rate will also encourage investment. This is shown in Figure 2 as AD0 increases to AD1 as AD is made up of C + I + G + (X-M). Hence, when C and I increase, AD shifts to the right. A lower cost of borrowing will increase the incentive for investment as now the returns would be greater. The increase in both consumption expenditure (C) and investment expenditure (I) will cause the AD to rise and thus, promote actual growth. A reduction in exchange rate is often used by governments of open economies that operate a fixed exchange rate system. By depreciating their domestic currency, a country would be more export competitive as their exports to other countries will be cheaper. Assuming the Marshall-Lerner condition is satisfied, net exports as well as AD will rise. This, in turn, will cause output and employment to increase.

Fiscal policy refers to the use of government spending and taxation to achieve the macroeconomic objectives. To promote economic growth, boost output and employment, a government can also employ an expansionary fiscal policy. With reference to Figure 3, the economy initially operates at A which is below the full employment level Yf. The government could adopt an expansionary fiscal policy. The government can increase government expenditure (G) or reduce taxes. An increase in G will cause an increase in aggregate demand directly since AD = C + I + G + (X-M). A reduction in personal income tax would raise consumption as it would further increase the disposable income of households and thus their ability to spend. Moreover, a decrease in corporate tax will increase profits and hence raise the level of investment in the economy. An expansionary fiscal policy thus raises AD and hence, output, employment and thus promotes actual growth.

To promote potential growth, the government may adopt supply-side policies. Supply-side policies are designed to shift the AS curve to the right by increasing the quantity and quality of resources via improving the efficiency in product and labour markets, and also by improving the level of technology. A reduction in labour market rigidities can be carried out via provision of education and training, reduction in direct taxes, cut in unemployment benefits, reforming trade unions and wage and price policies. Education and training can raise labour productivity and mobility and thus increase productive potential of the country. Labour productivity or the efficiency of labour is measured by output per hour worked. Reducing personal income tax and corporate tax rates can raise the productive capacity of a country by increasing the quantity and quality of labour and capital available to a country. A lower income tax rate would create incentive for work as now there is as expansion in the amount of disposable income. A lower corporate tax rate would also increase investment as the businessmen would be able to keep a larger share of profits. The cut in unemployment benefits will also increase the incentive to work as the unemployed would be disadvantaged if they are not engaged in productive labour. The power of trade unions can also be reduced by the government as this would result in a reduction of wages of labour. This, in turn, will increase employment, labour markets flexibility and efficiency. Thus, if labour costs to employers are reduced, their profits will probably rise. This would encourage and enable more investment and economic growth.

Pro-business policies are designed to promote greater private investments in the country. These include building world-class infrastructure, investing in R&D and tax reforms to ensure greater compatibility with international trends in taxes. The government can also increase Aggregate Supply via the adoption of more pro-competitive policies such as the passing of anti-monopoly laws, removal of barriers to entry to certain regulated industries, eliminating tariffs as well as other restrictions on imports.

However, both demand and supply side policies have their share of limitations. Reducing interest rates may cause the country’s currency to depreciate as it encourages hot money outflows. A lower exchange rate will make the exports of a country more competitive whereas imports will be dearer. Moreover, if consumer and business outlook is gloomy, a fall in interest rate may not encourage firms and households to increase borrowing because firms’ profits are falling and consumers may be expecting lower wages and lower year-end bonuses. When exchange rate is reduced, if the economy is operating near or at full employment, inflation will result. If the demand for exports and imports is price inelastic, net exports and AD will fall. This, in turn, will cause output and employment to fall. Hence, inflation can annul the price advantage resulting from a reduction in the external value of the currency. Fiscal policy may conflict with other macroeconomic goals as if AD increases by too much; economic growth will be achieved at the cost of inflation. Also, if the government has to borrow in order to increase spending, it may result in a BOP deficit. The decrease in tax rates may not bring about the desired increase in consumption and investment if households and businesses are pessimistic about future prospects. Moreover, a cut in personal income tax may induce an increase in the amount that they save rather than spend. The full effects of an expansionary fiscal policy may only be felt after a considerable time period. Thus, its effectiveness may not be realised in the short term. Supply-side policies such as education and training take time to have an effect and are also very costly. Reducing taxes may encourage some people to work fewer hours so that they can enjoy more leisure. Reducing corporate taxes may result in firms paying higher dividends rather than undertaking more investment. Cutting unemployment benefits would also not guarantee that it would reduce unemployment as jobs are not created and neither are their skills upgraded. It increases the urgency of finding a job. However, it does not increase their capability of getting a job.

Thus, economic growth ca be achieved via Fiscal Policy, Monetary Policy, Supply-side policies as well as by pro-business policies. However, it may be achieved at the expense of the limitations named above and thus, a combination of the policies could result in better economic growth rather than them being utilised as a stand alone measures to improve the economy.

JC Economics Essays: Tutor's Comments: A very well written essay, which was composed under examination conditions. Total Marks: 20.5/25. 

Further Economics tutor's comments: think of how you could work on this Economics paper to make it better, tighter, clearer, or worth more marks. Also, think of how the conclusion could be made more evaluative, interesting, and readable. Do think of how to draw the relevant and proper Economics diagrams for this essay as well. Thanks for reading and cheers!