This economics paper explains the factors affecting Aggregate Demand (AD) and Aggregate Supply (AS), given the context of Singapore.
First and foremost, in economic theory, AD and AS represent the aggregate demand (AD) and supply (AS) respectively of all the goods and services in an economy. The level of real national output and the general price level are determined by the intersection of AD and AS on an AD-AS diagram.
THINK: how would you draw an AD-AS diagram to reflect the intersection of AD and AS?
In theory, AD refers to an economy’s total demand for domestically produced goods and services for a given general price level. AD = C + I + G + (X – M), where C represents consumption, I represents investment, G represents government expenditure, X represents exports, M represents imports, and (X – M) represents net exports. Real national output (or real national income) and the general price level is determined by the intersection of the AD and AS curves. The AD curve is downward sloping because the lower the general price level, the greater the quantity demanded for domestic outputs. As AD = C + I + G + (X – M), what affects the AD curve are the factors that influence each individual component, which are C, I, G and (X – M). An increase in any of these components of AD would shift the AD curve to the right, while a decrease would shift the AD curve to the left.
Consumption
First, consumption (C) refers to household’s expenditures on goods and services. Consumption is affected most by income and wealth. For instance, when the Singapore economy is booming, rising wages of workers, rentals of buildings and assets, company profits, and interest will raise households’ incomes, which will then in turn increase consumption. On the other hand, higher personal income taxes and increased social security contributions, for instance in Singapore’s case particularly such as increases in the amount in the Ordinary Account of the Central Provident Fund (CPF) that Singaporean workers have to set aside for their retirement, will lower disposable income, thus dampening consumption. Wealth consists of savings and assets. A booming Singapore stock or property market pushes the value of financial and property assets up, thus making household feel that they are wealthier, which would then cause them to consume more, thus in turn increasing the consumption level. Conversely, if the Singapore stock or property market faces a downturn, Singaporean households will feel that they are less wealthy, and thus they will consume less, thus in turn causing consumption to decrease. As wealth also consists of savings, it is thus also affected by taxes such as property taxes and capital gains taxes; however, in the case of Singapore there are no capital gains taxes. The higher these taxes are, the lower the consumption level will be. Since AD = C + I + G + (X – M), a rise in consumption will increase AD thus shifting the AD curve to the right, a drop in consumption will decrease AD, thus shifting the AD curve to the left.
Investment
Second, investment (I) refers to firms’ spending on capital goods. Investment is affected most by business expectations. For example, if a Singapore firm expects the demand for its goods to rise, it is likely that the firm would invest more currently in machinery and plant to boost its future capacity. This would thus increase the investment level in Singapore, and since AD = C + I + G + (X – M), a rise in investment would increase AD, and shift the AD curve to the right, whilst on the other hand a drop in investment would decrease AD, thus shifting it to the left.
Government expenditure or government spending
Third, government expenditure (G) refers to the government’s spending on publicly provided goods and services. Government expenditure consists of government spending on public goods and services and also on government investment in infrastructure; the amount that the Singapore government spends depends on the state of the economy, as well as the aims and objectives of the government in power. In this case, let us focus on government expenditure in general, for instance spending on teachers’ salaries and on the Singapore Armed Forces, rather than government investment. Since AD = C + I + G + (X – M), a rise in government expenditure would cause a rise in AD, thus shifting the AD curve to the right, whilst conversely, a drop in government expenditure will cause a drop in AD, thus the AD curve will shift to the left.
Net exports
Fourth, exports (X) refer to foreign purchases of domestically produced goods and services while imports (M) refer to domestic purchases of foreign produced goods and services. (X-M) forms the net exports of a country, which in Singapore’s case is very important given that Singapore is a small and open economy. Factors which affect exports and imports are the usual factors which affect demand and supply, such as tastes and preferences, disposable incomes of foreigners who purchase these goods, and prices of related goods to these exports, such as substitutes and complements. Exports may rise due to foreigners developing a preference for Singapore’s exports, possibly due to better marketing or better quality of goods produced. On the other hand, if other countries promote their products more, or have better or new products compared to Singapore, then Singapore will be expected to face rising demand for imports. Since AD = C + I + G + (X – M), a rise in exports would increase AD thus shift the AD curve to the right, if there is a drop in exports, the AD curve will shift to the left as AD decreases. A rise in imports would also cause a drop in AD, thus shifting the AD curve to the left, while a drop in imports would cause an increase in AD, thus shift the AD curve to the right.
In conclusion, the factors that affect Singapore’s AD are the factors which affect consumption, investment, government expenditure, and net exports.
JC Economics Essays - This is a modified economics essay written by student JQ, which was originally written under timed conditions for an economics test. Do remember that it is very important to time yourself whilst practising for the economics essay examination, because you have to craft a well-written economics paper within a given time limit. When practising for any economics test, you could plan a structure or outline for 5 minutes, and then spend the rest of the time crafting your response. Do note that this economics paper has been cleaned up for spelling, grammar, and also for essay structure, and some of his arguments have been repositioned for easier flow. Do you find that this economics paper is easy to read and clear cut? How has the clear and direct structure made it easier for you to read this paper? In addition to these two basic questions on essay structure, when reading this economics essay, the other questions that you could ask yourself are: (1) how would you approach this essay? (2) What economics knowledge or information do you need to answer this essay question properly? (3) Also, should a diagram be drawn? Why or why not? (4) Did the writer of the essay answer the question adequately, not just in theory but also in bringing in the Singapore context? Do remember to read with a questioning mind when thinking through this essay. Thanks for reading and cheers.
