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Macro Econs

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Louisa Ong

on 18 August 2015

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Transcript of Macro Econs

MACROECONOMICS
AGGREGATION
summing up individual economic variables to obtain economy-wide totals
AGGREGATE DEMAND


AGGREGATE SUPPLY
total amount of spending in the economy
total national output of goods and services
AS
AD
GENERAL PRICE LEVEL
NATIONAL OUTPUT
AIMS
INTERNAL STABILITY
EXTERNAL STABILITY
SUSTAINED ECONOMIC GROWTH
LOW UNEMPLOYMENT
PRICE STABILITY
HEALTHY BOP
STABLE FOREIGN EXCHANGE
GDP
GNP
UNEMPLOYMENT RATE
INFLATION RATE
EXCHANGE RATE
BOP
CPI
MANAGEMENT
DEMAND
SUPPLY
MONETARY POLICIES
FISCAL POLICIES
Value of all final goods and services produced within a given country during during a given period of time
Actual growth is measured by:
high & sustained economic growth
Aim
Benefits
higher current material SOL (real GDP per capita)
redistribution of income to poor
higher non-material SOL
Inflation = sustained increased in the general price level
Inflation Rate = percentage rate of increased in the CPI per period
Low = Stable
e.g. make investment decisions with more confidance
Aim:
Significance:
Stable economic decision making
Maintain purchasing power -> SOL
situation where people who are available for work and are actively seeking work cannot find jobs
Aim:
low unemployment rate
Significance:
Usually correlated with social problems
Waste of human resources
Drain of government resources
if there are unemployment benefits
record of country's international transactions between its residents and those of the rest of the world over a period of time
Current account
Capital account
Official financing account
Aim:
Sustainable
Significance:
Stable economy
Good for exchange rate
Circular Flow of Income
AD = C + I + G + (X-M)
Investments
NATIONAL INCOME (Y)
CONSUMPTION
w+i+r+pi
Explaining the central loop
Assuming households to be owners of all factor inputs, then Y = w + i + r + profits, where
w = wages (labour), i = interest (capital), r = rent (land) and profits (entrepreneurship). Therefore national income is distributed to households through four flows, represented by one single arrow on the above diagram.
There is a flow of consumption expenditure (C) that goes back to the firms as a demand for the output, which generates an equal amount of income (Y) to the household sector, which in turn generates a demand (C) for the output produced and so on.

W = withdrawals
S - Savings
T - taxes
M - local expenditure
J = Injections
I - investment
G - government exp.
X - export exp,
Explaining the other sectors
Not all national income returns directly to the firms as a demand for output though. There are three other flows out of the household sector in addition to consumption, and are called withdrawals (W) from the central loop.
W = S + T + M, where S = savings into financial institutions, T = taxes paid to government, and M = local expenditure on foreign goods, i.e. import expenditure.

Likewise, not all expenditure on domestic firms is by domestic consumers. Some are injections (J) from outside the central loop.
J = I + G + X, where I = investments, G = government expenditure and X = revenue earned from foreign purchase of local goods, i.e. export expenditure.

At equilibrium level of national income
firms have no tendency to increase or decrease production because there is no unplanned investment (accumulation of inventories, i.e. unsold goods) or unplanned disinvestment (rundown on inventories).
GENERAL PRICE LEVEL x NATIONAL OUTPUT = GDP
Nominal
does not eliminate effects of inflation
Real
changes in value can be due to changes in
GPL (price)
Volume of output (qty)
eliminates effect of inflation on GDP
monetary value of all final goods and services are at pric elevels of the base year and current output levels
GDP + Net Property Income from Abroad
NNP = eliminates effect of inflation
Potential Growth
Actual Growth
increase in real GDP
Due to:
increase in AD
downward shift of AS curve
fall in COP
Increase in productive capcity of a country
Due to outward shift of AS curve from:
improvements of quality of inputs
increase in quantity of inputs
technological advancement

Healthy Economy
shows increased levels of consumption
easier redistribution of income to the poor
AD
AS
C
I
G
X-M
DOWNWARD SLOPING
The wealth effect
The interest rate effect
The foreign-sector or international substitution effect
Consumer expenditure is the act of using income for the purchase of final goods and services to satisfy current wants
= a + bY
autonomous consumption
gradient
induced consumption
marginal propensity to consume
varies directly with income
shifts in consumption function
CONSUMER CONFIDENCE
if consumers are optimistic about their future income and future of the economy
-> spend more on buying goods and services
-> AD increase
-> AD curve shifts right
INTEREST RATES
Govt (thru Central Bank) affect interest rate through regulation of $ supply. Some Consumer spending is financed by borrowing and is influenced by interest rate changes.
& AVAILABILITY OF CREDIT
Increase in interest rates -> borrowing more expensive -> lower consumer spending on big-ticket items -> decrease in AD -> leftward shift in AD curve
WEALTH
value of assets that people own (houses, stocks, etc)
increase in consumer wealth

-> make people feel wealthier
-> will spend more
-> AD increases

PERSONAL INCOME TAXES
Govt increase Personal Y Taxes
-> Consumers' disposable incom fall
-> fall in spending
-> AD Decrease
EXPECTATIONS OF PRICE LV
if infln rate expected to increase -> people spend more now since same basket of goods and services will cost more in the future -> increased current spending -> AD increase
LEVEL OF SAVINGS
Savings = income that is not spent
Change in attitude, households become more prudent -> reduction in consumption
-> AD decrease
especially in times of economic downturn
DISTRIBUTION OF INCOME
Higher Y taxes / Benefits for poor -> Redistribution of Y from rich to poor


-> increase consumption -> increase AD
Has lower MPC
Has higher MPC
income may have been saved
income spent on goods and services as they try to get hold of the goods they have always wanted with the increase in consumption
Change in C / Change in Y
act of acquiring new fixed capital assets
(fixed capital formation)
accumulating stocks and inventories
(changes in physical stocks)

Autonomous
Induced
investment that responds to long term profits outlook
influenced by factors such as technical progress, population growth, not dependent on the level of national Y
directly related to the rate of change of national Y
as Y rises rapidly-> more people buy goods with their higher Y-> firms spend more on capital Y to meet increased demand for goods
MEI
investment
interest rate
expected rate of returns of an additional unit of investment
INTEREST RATES
Interest rates fall -> Expected rate of returns of investment at least equal to cost of investments -> investments increase -> movement along MEI -> AD increases
BUSINESS CONFIDENCE & EXPECTATIONS
COST OF CAPITAL GOODS
GOVT POLICIES
CHANGES IN TECHNOLOGY
RATE OF CHANGE OF INCOME
improvement in tech -> stimulate investment spending
new tech require new capital
increase investment to increase production capacity to meet additional consumer demand
w.r.t. direct taxes on profits
POLITICAL PRIORITIES
Expenditure: provision of merit goods and public goods, spending on subsidies and pensions, pensions... etc
ECONOMIC PRIORITIES
use spending as a deliberate attempt to influence aggregate demand
INCOME ABROAD
income level of trading partners increase -> demand for domestic goods increase due to higher purchasing power -> export earnings increase -> AD increase
assuming marshall lerner's condition holds, PED for exports > 1
PRICE LV OF OTHER CTRIES
if infltion higher -> rise in demand for domestic goods as they're relatively cheaper -> export earnings increase -> locals turn to domestic goods, reduce import spending -> rise in net export earnings -> increase AD
assuming marshall lerner's condition holds, PED for exports > 1
TASTES & PREFERENCES
inclination towards foreign goods (e.g. due to improvement in quality) -> increase in M expenditure -> fall in net X, -> reduce AD
FOREX
affect price of imports and exports
e.g. Sg goods become cheaper in foreign currency, foreign goods more expensive in Sg Dollar
rise in next exports earnings
EXCHANGE RATE DETERMINATION
total output of goods and services that firms as a whole would like to produce and sell at each GPL
PRODUCTION COSTS
PRODUCTIVE CAPACITY
rise in prod. costs -> firms willing to produce less at prevailing price lv -> decrease in AS
INPUT PRICES
price of inputs increase -> production costs increase -> AS increase
expected rate of inflation:
trade unitons negotiate for higher wages
-> raises production costs
ability of economy to produce more goods and services
AS curve shift right
DEMAND
foreign firms and consumers - buy
foreign firms and households - invest
currency traders - speculate
sources
SUPPLY
sg firms and consumers - buy foreign goods
sg firms and households - invest thru FDI
currency traders - speculators
sources
factors affecting
changes in demand for singapore goods and services by foreigners
changes in relative interest rates between countries
changes in expectations of currency traders about future value of sg dollar against foreign currencies
factors affecting
changes in demand for singapore goods and services by Singaporeans
changes in relative interest rates between countries
changes in expectations of currency traders about future value of the currencies
QTY OF RESOURCES
discovery of new stuff -> increase in resources
-> increase economy's ability to produce more goods and services -> shifts AS to right
CHANGES IN TECHNOLOGY
e.g. discovery of less costly ways of productions -> pdcers "squeeze" larger output from same amt of resources -> cut business cost and expand productive capacity -> AS curve shift downards and right
CHANGES IN QUALIFY OF FOP
increase in educational levels and training in an economy -> increase skills of its people -> increase economy's ability to pdce more goods and services -> increase pdtive capacity.
COP decreases as quality of workforce improves
once spare capacity has been used up, the rate of actual output will be restricted to the rate of growth of potential output. Thus, actual growth must be accompanied by potential growth for there to be sustained economic growth.
BENEFITS
HIGHER MATERIAL LIVING STANDARDS
EASIER TO REDISTRIBUTE INCOME AND HELP POOR
DECREASE UNEMPLOYMENT
greater demand for labour
INCREASED SAVINGS AND INVESTMENTS
increase in supply of loanble funds -> interest rates fall -> greater incentive for firms to invest -> greater capital expenditure -> potential capacity of economy to increase
COSTS
ENVIRONMENTAL
INEQUALITY OF INCOME DISTRIBUTION
CURRENT OPPORTUNITY COST
resources have alternative uses
1. e.g. channel resources to pdtion of capital goods (instead of consumer goods). If economy is pdcing at full capacity, trade-off leads to cut in current consumption, translates into a lower mat SOL
financing pdtion of capital goods -> cut in current consumption -> lower mat SOL
growth encourages creation of artificial needs
-> creates unneccessary waste -> adverse spill over costs threaten ecological system
real beneficiaries of growth tend to be the rich who have the savings that enable capital accumulation to occur & reap gains from investments

-> growth propagates inequality
WEAK GROWTH
CONSEQUENCES
UNEMPLOYMENT AND LOST OUTPUT
LOWER SAVINGS AND CONSUMPTION
LOWER INVESTMENT AND LONG-TERM GROWTH
recession -> lost output in future
households consume less if they are not working.

CAUSES
LACK OF AD
LOW RATE OF INVESTMENT
due to lack of investor confidence
high interest rate

POLITICAL SITUATION
corruption & political stability
LOW SAVINGS RATE
low income in LEDCS -> needs not satisfied -> low savings rate -> low investments

affected by:
central banks decreasing interest rates
erosion of traditional beliefs in virtues of savings
liberalisation of financial sector
ease of obtaining unsecured credit
increase in level of social security benefits
expectations of high inflation
high income tax (lowers disposable income relative to gross income)
EXTERNAL SHOCKS
in SR: slow / negative growth caused by external shocks
Demand Side Factors
LACK OF NATURAL RESOURCES
reduce ability for sustained economic growth
POOR HUMAN CAPITAL
labour efficiency
LACK OF TECHNOLOGICAL INVESTMENT
slow growth with usage of archaic production methods and equipment
Supply Side Factors
CAUSES
DEMAND-PULL
caused by persistent rises in AD
usually associated with booming economy
ANTICIPATED
UNANTICIPATED
firms respond to rise in demand by raising prices and increasing output.
how much they raise prices depends on how much slack or spare capacity there is in the economy
inflation persists when AD rises continuously


COST-PUSH
inflation resulting from rising production costs during periods of low unemployment
firms respond to rise in demand by raising prices and increasing output.
how much they raise prices depends on how much slack or spare capacity there is in the economy
inflation persists when AD rises continuously


WAGE PUSH
PROFITS-PUSH
INCREASE IN PRICE OF INPUTS
IMPORT-INDUCED INFLATION
STRUCTURAL INFLATION
due to structural rigidities
through higher import prices
CONSEQUENCES
UNCERTAINTY
firms are unable to predict COP & prices
long term planning difficult -> deter investments

FALL IN FDI
INCREASE IN SPECULATIVE ACTIVITY
MISALLOCATION OF RESOURCES
distinguish between change in price of item
or change in GPL?
business may hoard both materials and finished pdts -> intensify inflationary pressures
investments less profitable -> loss of confidence in economy
free market economy, prices are important signals to producers in their production decisions

erroneously devote more resources to produce products

misallocation of resources -> slower growth of economy
DETIORATION OF COUNTRY'S BOP
If total receipts is greater than total payments, surplus results
inflation -> exports become more expensive
demand for imports incerase

worsening balance of trade
DEPRECIATION OF COUNTRY'S CURRENCY
FALL IN REAL VALUE OF SAVINGS
fall in qty demanded for exports -> fall in demand for currency
less incentive to save - less funds available for investments
ARBITRARY REDISTRIBUTION OF INCOME
fixed income earners vs variable income earners
workers in strong trade unions vs workers in weak trade union
debtors vs creditors
holders of financial assets vs those with physical / real assets
SHOE-LEARTHER COSTS
cost of going to the bank to change money....
BREAKDOWN IN FUNCTIONS OF MONEY
use something else instead like gold
CAUSES
FRICTIONAL UNEMPLOYMENT
The unemployment that arises as workers search for suitable jobs and firms for suitable workers
IMPERFECT KNOWLEDGE
always exist, transient
GEOGRAPHICAL IMMOBILITY
due to:
ignorance of available job opportunities elsewhere
people are unable and unwilling to move
e.g. difficulty of getting acconomodation, unwillingness to leave family and friends
STRUCTURAL UNEMPLOYMENT
long term and chronic unemployment that can exist even when the economy isn't in recession, arising from a change in the eeconomic structure of an economy
mismatch of skills
CHANGES IN DEMAND
due to:
change in tastes and preferences
inventions of substitutes
cheaper imports
loss of foreign market to competitors
demand of goods fall, production decrease, drop in demand for labour
when retrenched workers cannot find work although job vacancies exist because the new job vacancies require skills that they do not have
CHANGES IN SUPPLY
unemployment caused by changes in supply conditions (e.g. exhaustion of mineral deposits) and high wage costs
CYCLICAL UNEMPLOYMENT
firms unable to sell current output
cut back on pdtion -> cut back on amt of labour employed
deeper the recession becomes and the longer it lasts, the higher cyclical unemployment will become

cyclical unemployment = demand-deficient unemployment
associated iwth economic recessions
SEASONAL UNEMPLOYMENT
occurs in sectors such as agriculture and tourism
more labour needed at certain periods
due to seasonal declines in business activity
NATURAL RATE
rate of unemployment consistent with the constant rate of inflation
CONSEQUENCES
OUTPUT LOSS TO THE ECONOMY
society is thus deprived of a higher output and standard of living
producing point inside PPC
-VE IMPACT ON GOVT BUDGET
unemployed do not pay income tax, loss of tax revenue

countries with welfare system - govt incur higher expenditure on unemployment benefits and other welfare payments

cost to society: instead of using this for productive uses, handed out to people who are idle and may reduce incentive for them to actively seek jobs
INCREASE IN SOCIAL PROBLEMS
prolonged periods of unemployment -> severe hardship and misery
high unemp rate -> higher incidence of deviant behaviour
PROLONGED UNEMPLOYMENT
reduce labour force, reduce potential GDP
Longer duration of unemployment, lower chances of finding new employment as skills become obsolete over time

CAUSES
of unfavourable BOP
CURRENT ACCOUNT
changes in demand for and supply of the country's exports or its demand for imports -> deficit in current account
CYCLICAL
STRUCTURAL
OTHERS
EXCHANGE RATE
GOVERNMENT POLICIES
TERMS OF TRADE
RANDOM FACTORS
FINANCIAL ACCOUNT
changes in demand for and supply of the country's exports or its demand for imports -> deficit in current account
EXPECTED RATE OF RETURN
RELATIVE INTEREST RATES
CAPITAL &
EXPECTED MOVEMENTS IN EXCHANGE RATE
EXCHANGE CONTROL REGULATIONS
CONSEQUENCES
UNDER FLOATING FOREX RATE SYSTEM
UNDER FIXED FOREX RATE SYSTEM
RISE IN EXTERNAL DEBT
financed through sale of paper assets or physical assets to foreign residents / borrow from IMF
less funds available for domestic consumption and investment
increasing share of domestic incomes must be paid out to foreigners to service the debt
FALL IN NAT OUTPUT AND EMPLOYMENT
CA deficit -> contractionary effect on the economy
INCREASE IN SPECULATIVE ACTIVITY
business may hoard both materials and finished pdts -> intensify inflationary pressures
CA deficit due to fall in export earnings, rise in import expenditure reduces level of AD
-> fall in National Output and Employment
UNEMPLOYMENT IN THE DOMESTIC ECONOMY
firms are unable to predict COP & prices
long term planning difficult -> deter investments

FALL IN FDI
INCREASE IN SPECULATIVE ACTIVITY
business may hoard both materials and finished pdts -> intensify inflationary pressures
investments less profitable -> loss of confidence in economy
DEPRESSION OF DOMESTIC SOL
country producing more than it is consuming, enjoying a lower living standard than it could
FALL IN FDI
INCREASE IN SPECULATIVE ACTIVITY
business may hoard both materials and finished pdts -> intensify inflationary pressures
investments less profitable -> loss of confidence in economy
Deficit
Surplus
INFLATION
increase NY due to k effect. but if near full emp, -> demand-pull inflation
FALL IN FDI
INCREASE IN SPECULATIVE ACTIVITY
business may hoard both materials and finished pdts -> intensify inflationary pressures
investments less profitable -> loss of confidence in economy
RETALIATION
firms are unable to predict COP & prices
long term planning difficult -> deter investments

FALL IN FDI
INCREASE IN SPECULATIVE ACTIVITY
business may hoard both materials and finished pdts -> intensify inflationary pressures
investments less profitable -> loss of confidence in economy
THE 'DUTCH DISEASE' EFFECT
firms are unable to predict COP & prices
long term planning difficult -> deter investments

FALL IN FDI
INCREASE IN SPECULATIVE ACTIVITY
business may hoard both materials and finished pdts -> intensify inflationary pressures
investments less profitable -> loss of confidence in economy
EMPLOYMENT OPPORTUNITIES
firms are unable to predict COP & prices
long term planning difficult -> deter investments

FALL IN FDI
INCREASE IN SPECULATIVE ACTIVITY
business may hoard both materials and finished pdts -> intensify inflationary pressures
investments less profitable -> loss of confidence in economy
cyclical fluctuations in variables
e.g. NY & GPL of trading countries -> change in dd for country's X / dd for M
demand for specific X/M changes
due to non-price determinants of demand
rise in exchange rate, country's X more expensive in terms of foreign currency
fall in Qty Dd
when it falls relative to that of other countries
capital outflow, less capital inflow
speculators convert domestic currency to foreign currency, results in capital outflow
price of own currency in terms of another currency
fixed
free float
managed float
e.g. Singapore
e.g. China
e.g. US, Aus, GBR (theoretically)
verbal influence...
no government intervention
e.g. HKG against US, Brunei against S$
Govt declares price of own currency and honours it
CAUSES
(free float)
DEMAND SIDE
SUPPLY SIDE
DOMESTIC GOODS AND SERVICES
non price determinants affecting demand
of price of currency changing
CHANGES IN RELATIVE INTEREST RATES BETWEEN CURRENCY
When i/r in SG increases, i/r in UK decreases, short term inflow of capital from SG
SPECULATIONS
reserve currency
e.g. 2008 recession, msians convert to S$ with impression that S$ is more stable
CONSEQUENCES
NEGATIVE
of appreciation in domestic currency
POSITITVE
REDUCE PRICE COMPETITIVENESS OF EXPORTS
Price of exports increase in terms of foreign currency

Quantity of expots decrease, assuming MLC holds

AD Falls ......

REMOVE INFLATIONARY PRESSURES
Imported goods inflation is removed

Improves business confidence & expectations
as real value of investments will hold
thus, increase in investments
balance of payments will always remain in equilibrium
reserves won't be used
floating exchange rate ensures demand of currency is always equal to supply of currency, credits = debits
When BOP in Deficit
Central bank buys domestic currency
sells foreign currency
When BOP in Surplus
Central bank sells domestic currency,
buys foreign currency
Deplete reserves
Difficult to make payment for imports
Essential imports become unavailable
Country's economic growth and development impeded
Persistent BOP surplus = Increase in Foreign Reserves
greater confidence in the economy
persistent surplus in one country, persistent deficits in another country
Deliberate management of government spending and taxation designed to influence the level of economic activity in order to achieve the economic goals of the govt
to smooth out ever-present fluctuations in economic activity
to promote economic growth
push economy closer to full employment
maintain price stability
MACRO AIMS
MICRO AIMS
Efficient allocation of resources
Equitable distribution of income
Keynes
RATIONALE:
Private decisions on consumption and investment expenditure are based on self-interest.
Impetus for economic growth
Excessive Inflation /
Serious Unemployment
Government Intervention is necessary
BUDGET
Since Keynsian revolution,
Budget deficits & surpluses are deliberately planned
influence AD
REVENUE
TAXES
Compulsory payments made by individuals and firms in the private sector to the government without any services rendered in return
State Enterprises
GIC Investments
Licence Fees

SALE OF GOODS & SERVICES
Government Investment Corporation of Singapore
E.g. Marriage licence, hawker's licence, COE, littering fines
E.g. fees from postal, telecommunications and public utilities serivces, earnings from commercial and industrial undertakings and state trading
transfer of funds from the private sector to the government
Direct
Indirect
Taxes on:
Incidence:
Example
Taxes on:
Incidence:
Example
Largest source in Singapore
Income & Wealth

On same party, cannot be shifted easily (usually)

Personal Income Tax, Corporate tax
Expenditure or production of goods and services

May not be on the same person, can be shifted

GST, excise duty on cigarettes
income earner / company
TAX SYSTEM
depend on PED Value
Inelastic - burden shifted more on consumer
PROPORTIONAL
PROGRESSIVE
REGRESSIVE
Marginal Tax Rate (MTR)
Average Tax Rate (ATR)
Change in Tax Paid

Change in Income
Total Tax Paid

Total Income
same proportion of income is paid as tax as income rises
corporate tax
Income increases,
Rate of tax increases
WHAT IT IS
reduce post tax income differentials
-> reduce inequality of income distribution

EFFECTS
takes larger proportion of income from rich than from poor
takes into account ability to pay
personal income tax
Income increases,
Rate of tax decreases
takes smaller proportion of income from rich than from poor
indirect taxes on goods and services
SPECIFIC / AD VALOREM / REGRESSIVE
PROPORTIONAL / PROGRESSIVE
REGRESSIVE
PROGRESSIVE
Total tax paid
PROPORTIONAL
Total Income
REGRESSIVE
PROGRESSIVE
Average tax rate
PROPORTIONAL
Total Income
EFFECTS
PRODUCTION
RESOURCE ALLOCATION
SAVINGS
INVESTMENTS
INFLATION
INCENTIVE TO WORK:
INCENTIVE TO TAKE RISK:
Income effect
Substitution effect
high income taxes > encourage absenteeism & discourage overtime work
need to work longer hours to have same disposal income
opportunity cost of leisure has fallen
higher tax -> lower after-tax profits -> remove reward for risk-taking
govt need tax incentives to encourage startups
important today due to high degree of capital mobility & competitive corporate tax rates in the region
influence allocation and pdtion of various types of goods & services

TAX INCENTIVES
influence supply of various types of labour, thus supply of output of various occupations
outflow of talent to countries where taxes are lowers
higher tax
-> but level of consumption remains same,
-> reduce abilitiy and willingness to save
effects is uncertain
based on many stuff
indirect taxes increases prices of goods and services
workers may ask for higher wages and when permitted -> inflationary spiral
increasing direct taxes reduces ability to buy goods & services
AD fall, reduce inflationary pressure
unions may ask for higher nominal income
OPERATING EXPENDITURE

DEVELOPMENT EXPENDITURE
spending in govt on a day to day routine, reccurent in nature
GENERAL SERVICES (expenditure on general administration)
ECONOMIC SERVICES (transport, storage and telecom, economic crises)
SOCIAL SERVICES (education, health, welfare)
Purpose of economic / social development
(new schools, new expressways, land reclamation, flood alleviation schemes)
greater proportion
EFFECTS
RESOURCE ALLOCATION
INCOME & WEALTH DISTRIBUTION
ECONOMIC GROWTH
STABILITY
varying type of govt exp ->
affect pattern of pdtion
progressive tax system + expenditure on social welfare/educational/healthcare/pensions will benefit mainly the poor.
-> inequalities of income and wealth distribution will be reduced to some extent
expenditure on infrastructure devt
-> improve pdtive effiency of country
-> attract pdtive investment
-> sustained econ growth

INTERNAL & EXTERNAL
influence level of econ activity
increase G: increase AD
reduce G: arrest rise in GPL
higher T on M: reduce BOP deficit
may impact AS
improvement and extension of transport / communication facilities e.g. 5G
NON-DISCRETIONARY
DISCRETIONARY
deliebrate change in G and / or T to bring about desired change in level of AD
not by deliberate government action but by operation of built-in stabilisers
PROGRESSIVE TAX STRUCTURE
UNEMPLOYMENT COMPENSATION
FAMILY ASSISTANCE PROGRAMME
economy expands
-> tax payments increase faster than increase in Y
-> govt receive more tax revenue
-> people earn more and so pay extra income tax
-> extra withdrawal -> contractionary impact on economy
economic expansion slows down -> reduce pression on prises
controls increase in AD, keeps inflation incheck
-> stabilise eocnomy when high growth epxerienced
times of recession,
tax receipts fall sharply
income falls, tax payments fall faster than fall in NY
people earn less and so pay less Y tax
fall in C slows down
fall in AD is checked
stabilise any abrupt changes in consumption and therefore economic activity
income falling
unemployment level rises
more unemp benefits paid out
offset loss of earned income of unemployed
less C
economy expands
fewer workers unemp
less unemp benefits paid out

slows down rate of growth
income falling
provisions given to help slow down fall in C
less C
thus slow down fall in AD & output
exercises counter-cyclical effect on economic activity, will not eliminate fluctuations entirely and therefore cannot be completely relied on.
EXPANSIONARY
CONTRACTIONARY
Planned G > Planned T (Budget Deficit)
Planned G < Planned T (Surplus)
Multiplier Principle
Diagram
Stimulate AD when economy operating below full employment
Increase G

Decrease T
Increase G
Increase AD through increased G -> increase Y1
Increase Induced C -> multiplier process
Increase AD (several times)
Increase NY (more than proportionate to initial increase in G
transfer payments, public works project, military spending, educational programmes, special subsidies to research & devt, food assistance
one person's spending is another person's income
reduce tax rates
eliminates certain taxes
Decrease T
Increase C or Increase I -> increase Y1
Increase Induced C -> multiplier process
Increase AD (several times)
Increase NY (several rounds)
whole of G = C
not all tax savings = C
Decrease G

Increase T
Decrease G (fall in induced C)
Decrease AD
Fall in NY
Increase T
Fall in C / Fall in I -> Decrease Induced C
Decrease AD
Fall in NY
Unemployment
Expansionary FP
-> Increase G
-> Increase AD
-> Increase emp (dd deficient)
-> Increase NY
-> Increase induced C
-> Increase AD
-> Increase NY
-> Increase Emp
-> Actual growth
GPL
Real NY
AD1
AD2
AD3
1
2
1) an initial 10m rise in govt spending shifts the aggregate demand to the right by 10m
2) ... the multiplier effect amplifies and causes a further shift in AD

EXPENDITURE REDUCING
EXPENDITURE SWITCHING
SR
LR
Budget surplus -> Fall in AD -> Fall in NY ->
Fall in M -> Improve BOT & BOP
Budget surplus -> Fall in AD -> Fall in relative GPL
-> Increase in X, decrease in M -> Improve BOT & BOP
Microeconomic
RESOURCE ALLOCATION
INCOME DISTRIBUTION
different tax systems (e.g. progressive / regressive)
subsidies...
Limitations
SIZE OF MULTIPLIER

TIME LAG

CROWDING OUT EFFECT
Affects the extent of increase in NY for given increase in autonomous spending
smaller k, greater amount of G to pump
RECOGNITION LAG
ADMINISTRATIVE LAG
OPERATIONAL LAG
when problem is recognized and diagnosed
recognition of need and subsequent taking of action
time between action taken and impact of the action on output
may lead to overshooting
A
B
C
impact of fiscal policy felt
fiscal policy implemented
recession occurs
DOMESTIC INVESTMENT
govt borrow to finance budget deficit
-> compete with private sector for funds
-> increase interest rates
-> decline in private expenditure as a result of increase in G
IN AN OPEN ECONOMY
interest rate
GPL
Real NY
Qty of $
S
LF0
D
D
LF0
LF1
AD0
AD2
AD1
increase in G
Loanable funds increase
increase in interest rates
increase interest rate
reduce in consumption
OVERALL impact depends on multiplier effect / extent of crowding out effect
govt borrows to finance budget deficit
-> increase interest rates
-> hot money inflow
-> currency will appreciate
-> dampening effect, fall in NX
-> fall in AD
-> crowding out of net exports will reduce the effectiveness of FP
BURDEN ON FUTURE SOL
budget deficits increase N debt
-> debt needs to be repaid in the future
-> may involve rise in tax to finance repayment
-> if financed internally - redistribute wealth from tax payers to bond holders
-> if financed externally - repayments to overseas countries will hinder economic growth
Ricardian Equivalence
individuals anticipate that present deficit financing
(govt borrow to finance to increase G)
= higher future tax
Consumers will save from disposable income
(since taxes will be imposed later)
Magnitude due to forecast errors
deficits are politically attractive
Political Pressure
severity of recession / outomce / size of K - MPC, MPM could all change.
Policy Conflicts
aims conflict.
grow economy but inflation
Limitations
DO NOT ELIMINATE FLUCTUATIONS

ADVERSE SUPPLY-SIDE EFECTS
high tax rates -> discourage work effort and initiative
Extent that steeply progressive income taxes -> discourage growth of production, tend to increase rate of inlation
High Unemp Benefits -> frictional unemploymenet higher. May encourage them to spend a longer time looking for the 'right job'


PROBLEM OF FISCAL DRAG
slow down recovery
high import leaking / MPM
increase in NY -> increase tax revenue -> contractionary effect -> fiscal drag
tax rate constant, rising NY, rising tax revenue -> reduces Disposable Y -> reduces ability of spending on consumer goods
Govt exp on transfer payments withdrawn w recovery
Overall rising tax revenues -> drag on growth of AD
Hinders ability of economy to attain full employment level of NY, esp when recovering from recession.
IN SINGAPORE
fiscal policy is directed primarily at promoting medium to long-term econ growth
Principles
private sector is engine of growth
govt's role is to provide a stable conducive envt for private sector to thrive
High import leakage, High MPM, Small Economy, Small k multiplier (<1)
rarely use discretionary policy
limited scope for active demand management policies
tax and expenditure policy focused on microecon / SS side issues
counter-cyclical role of fiscal policy is limited, due to high import leakages
essential public goods, etc
corporate tax is low (competitive)
tax policies: attract FDI, enhance competitiveness
Fair tax policies, prudent govt expenditure
enables Sg to enjoy budget surpluses
Prudent FP, high domestic savings, high investment rates, high level of foreign reserves, helps to booster investor confidence and buffer against adverse economic shocks.
Interest Rate
Attempts by monetary authorities to influence money supply and rate of interest to bring about desired changes in the economy.

Carried out by Central Bank, mainly a demand-management policy. Targets exchange rate.
Interest rate = "price" of money
- Cost of borrowing
- Returns on lending / saving
LIQUIDITY PREFERENCE
LOANABLE FUNDS
interest rate determined by DD & SS of money in money market
SS of money is fixed by CB
Money SS vertical (controlled by CB )
DD
Transactionary
Precautionary
Speculative
Increase Income, Increase in Price Level
Interest rate = Price of Loans
Demand
Supply
Borrowers
Firms
Households
Lenders (Savings)
Finance cost of new investment
-> Returns on I
i.e. MEI to i/r
Finance cost of purxhasing consumer durables
lower interest rate -> more I & C undertaken -> D(lf) downward sloping
the higher the interest rate -> the higher the opp cost of present Cn (as forgone interest on savings higher) -> higher savings level -> SLF upward sloping

money supply
CB holds
influenced by
Households
Firms
GREATER DISPOSABLE Y
more savings -> increased supply of LF
GREATER EXPECTED FUTURE Y
more current consumption -> less current savings -> decreased supply of LF
INCREASE IN MONEY SUPPLY
more loans available with MP -> increase in supply of loanable funds
interest rate determination
Transmission mechanism
controlling money ss or i/r using monetary policy tools
increase money supply
decrease money supply
expansionary
contractionary
DIRECT
INDIRECT
changes in money supply
influence interest rate
influence AD
change in supply of loanable funds
change in AD
increase in money supply induces people to spend directly, -> expands AD
increase money supply
fall in interest rates
C and I increase
AD rise
Multiplied effect on real NY
keynes
internal
external
changes in exchange rate
interest rate fall
lower short term capital flows
supply of currency increase
depreciation of currency

Marshall-Lerner Condition
assuming it holds, PED exports + PED imports > 1
depreciation of currency -> net exports increasse
Net exports increase, BOT improves
shift AD, multiplied effect on real NY
Increase AD, Improve BOP position
Effectiveness
INTEREST ELASTICITY OF MEI
investment is interest inelastic (-Keynes)
INTEREST ELASTICITY OF DEMAND FOR MONEY
Demand for I is interest inelastic
money demand -> perfectly elastic
liquidity trap
MS1
MS2
Liquidity Trap
Demand for money is perfectly elastic
Market i/r has already reached its lowest level and cannot fall any further -> any increase in Ms -> no impact on i/r
interest rate -> animal spirits of investors
optimism of economy
reduction in interest rate -> investment will barely increase
EXPECTATIONS
TIME LAGS
business pessimism
exp MP limited to boost I if economic outlook is uncertain
IMPLEMENTATION
IMPACT
time for k to work
fuel inflation
when econ is alr recovering
ALTERNATIVE SOURCES
change in i/r -> little bearing on I (esp FDI)
funds are typically financed from parent company
INTERNAL
EXTERNAL
TYPE OF MACRO OBJECTIVES
may not be able to solve all macro aims
e.g. if unemp is structural
need other policies to complement
e.g. supply side policies
CONTRACTIONARY
to increase interest rates

e.g. China now

Central Bank buys govt bonds
Increase market supply of bank reserves
Interest rates falls
Increase Investment & Consumption
depreciates domestic currency
Increase in capital
X-M Increases
assuming MLC Holds
Increase in AD
k effect
Exchange Rate
Government buys Sing Dollar with Foreign reserves
Appreciates domestic currency
Worsen Inflation
Decrease (X-M)
assuming MLC Holds
Long Term
Keep out imported inflation
CHANGES IN DEMAND FOR
BY FOREIGNERS
income levels of trading partners
CHANGES IN EXPECTATIONS OF CURRENCY TRADERS REGARDING THE LIKELY FUTURE VALUE OF THE LOCAL CURRENCY AGAINST FOREIGN CURRENCIES
FOREIGN GOODS AND SERVICES
non price determinants affecting demand
CHANGES IN RELATIVE INTEREST RATES BETWEEN CURRENCY
When i/r in SG decreases, i/r in UK increases,
-> short term outflow of capital from SG
-> purpose: purchase UK Assets
-> Increase supply of S$
SPECULATIONS
reserve currency
e.g. 2008 recession, msians convert to S$ with impression that S$ is more stable
CHANGES IN DEMAND FOR
BY LOCALS
income levels of trading partners
CHANGES IN EXPECTATIONS OF CURRENCY TRADERS REGARDING THE LIKELY FUTURE VALUE OF THE LOCAL CURRENCY AGAINST FOREIGN CURRENCIES
Ceteris Paribus,
Reduce level of Unemployment
When CB increases money supply through the purchase of bonds in the open market, bondholders who receive money in exchange for their bonds will have more money in their hands. This encourages them to spend more on other assets such as houses, etc.
Interest Rate
Qty of Loanable Funds
S
LF1
D
LF
S
LF2
i/r 1
i/r 2
Expectred & Disposable
DEMAND SIDE
SUPPLY SIDE
if households or firms expect future income to increase, they will spend more currently. Hence, savings in the current period will fa.ll. The smaller quantity of savings will mean the amount of loanable funds available at each interest rate is lower.
The greater the households' disposable income, the greater the absolute value of savings, ceteris paribus. A higher level of savings means more funds are avilable for making loans at each interest rate.
Direct
Indirect
Cheaper cost of borrowing, households are induced to purchase more consumer durables such as cars and properties where financing by loans will be requierd. At the same time, firms will undertake new investments as there will be more projects which will be more profitable now due to the lower cost of borrowing
increase C
increase I
External
interest rate in the country falls relative to that of other countries.
In an open economy where capital flows are unrestricted across countries, there will be an outflow of hot money from the economy.
Assuming a free floating exchange rate system,
this increases the supply of the country's currency in the foreign exchange market.
This results in a depreication of the country's currency against other currencies
real national income will increase via the multiplier effect, assuming economy is below full employment
the increase in production requires the employment of more factors of production, hence unemployment decreases
as production increases and the economy approaches the full employment level, factor prices will be bid up due to increasing demand for the limited resources. Hence, the cost of production will rise and the final price of goods and services increases. This will lead to an overall increase in GPL.
If demand for money is more interest-inelastic,
increase in the money supply will have a greater impact on the rate of interest
stimulate greater investment and consumption,
thus larger impact on AD
larger rise in National Output



In a period of business pessimism, the adoption of an expansionary monetary policy to combat a sluggish economy may not be effective if businessmen are pessimistic about the future.
Lowering of i/r will not induce them to undertake more investments
Keynsian belief
owing to the time lag associated with the working of the monetary policy, an interest rate cut may take effect at the time when economic recovery is already underway. As the economy moves towards full employment, increases in spending may instead see shortages developing and thus fuelling inflation.
fall in interest rate will not increase the level of long-term investment extensively if there is a large proportion of FDI from abroad. Often, these firm shave their sources of funds and may not borrow from local banks. Because of this, any fall in i/r has little beaing on foreign firms' decisions to invest.
can't tackle supply side problems
expansionary
CONTRACTIONARY MONETARY POLICY
increase interest rates,
savings are more attractive
(returns from savings are higher)

loans become less attractive
cost of borrowing increases
purchasing goods and services
...
ST / LT
LT projects can't be abandoned easily
without incurring great losses
contractionary

will continue to borrow to invest despire higher costs of borrowing
if firms forecast a profit level that can still cover the higher cost of borrowing
explaining managed float
an acceptable band whereby the exchange rate is allowed to fluctuate in the forex market before intervention by CB begins

e.g. free market forces from increase in dd -> upward pressure on value of S$ -> go beyond upper limit of the band
CB intervenes -> release more S$ into forex market
Decrease Import Prices
Verticle Shift of AS Curve
reduce price competitiveness of Singapore's exports from the rest of the world
addresses root cause of BOP deficit
Effectiveness
J CURVE EFFECT
in SR, PED of X+M may be low, MLC not satisfied
time
BOT
0
surplus
deficit
in the very SR, changes in the qty dd for X & M may be insignificant as consumers may take time to change their consumption pattern and preference from imported goods to domestically produced substitutes.
Furthremore, producers may have to fulfill the terms of prevailing contracts with respect to the volume and price of M/X

worsen BOT position initially
In LR, changes in consumption pattern takes place, substitutes can be found. Contracts binding importers and exporters will expire. Thus, dd for X and M are more Pe. MLC fulfilled, improvement in BOT from deval of country's currency
IN SINGAPORE
Open Economy Trilemma
choose between i/r, ER, free capital flow
E/R centered Monetary Policy
promote price stability as a sound basis for sustained economic growth in LR
small economy

open economy
(X+M) 4x GDP
dependent on external sector
Sg is highly dependent on the external sector. Total merchandise trade is 4x its GDP. Hence, ER is the policy of choice as it directly affects the level of econ activity in Sg.
Small size -> price taker in global market
Thus, High M content of output = changes in world prices / ER have significant and direct influence on price levels in the economy
Thus, ER is powerful tool to offset imported inflation, influencing overall inflation

SG's role as a financial centre -> vast network of international financial linkages
open economy with free K mobility
domestic interest rates -> inextricably tied to i/r of other countries (if Sg's differ from other countries, short term capital can rapidly move in / out of country, depending on which country has the most favourable interest rates)
huge capital movements -> BOP problems -> little scope for completely independent i/r policy
higher GDP per capita -> more goods and services produced & available for C for average person in the country -> higher SOL

e.g. econ growth has led to greater quantity and range of goods and services for consumers - personal computers, engineering and healthcare - which contributed to a significant increase in living standard in many countries. In Sg, within a short span of 4 decades, we have been able to increase our per capita income significantly. This has moved us from a 3rd world -> developed country. -> sgeans able to enjoy wide range of consumer goods -> higher SOL
higher actual econ growth -> greater utilisation of resources -> move economy towards full emp -> unemp rate falls.
unutilised resuorces -> AiE PiE

retrenched fr lower Y groups -> worsen income disparity
negative expectations
lower C, I -> lower AD, actual growth
erosion of skills -> lower LRAS, lower LT EG

lower FDI, capital outflows, lower ER, worsen KA

worsen SOL
output of ecnomy not maximised, results in worsening of problem of scarcity
can split between micro and macro
wages main source of Y for households -> high unemp -> significant loss of Y -> worsen Y disparity
worse if job losses affect mostly unskilled workers

e.g. many firms in US shift all / part of their labour intensive mass-manufacturing processes to lower cost developing countries such as Mexico. -> retrenchment of many unskilled workers in US, widening Y dispairty as these low-income households experience a further decline in Y
households increase savings as a precaution
fimrs lower expected returns on investment
level of investment falls
fall in C & I decreases AE
larger fall in NY via reverse multiplier
(worsens existing recession)
prolonged periods-> lose touch w new devt, lack opp to acquire new skills required when dd returns
high levels of cyc unemp may not fall significantly even when AD rises as it can become structural unemp. erosion of skills, w fall in I -> slows increase in AS, reduces econ growth in LR
countries e.g. US, aust, japan
sharp non discretionary rise in transfer payments
worsened if govt also provides additional medical, housing and other subsidies as high unemp rates -> sharp increase in no of people that qualify
-> strain on govt budget, large deficit if situation is prolonged
improve supply side potential of the economy
make markerts and industries operate more efficiently -> contribute to faster rate of potential growth
lower general price levels and higher employment
MARKET ORIENTED
INTERVENTIONIST
PRIVATISATION
sale of public enterprises to the private sector
involves transfer of state-owned assets from public sector to the private sector
different motivations
state-owned fail
market forces = lower cost
break up monopoly, competition

private ownership of resources
-> firm must survive on its own while subjected to competitive pressures -> gives firm incentive to cut costs and be more efficient in order to be profitable and survive the competition -> unit costs of production falls -> downward shift of AS curve
privatisation allow price mechanism to take over allocative function as product and resource prices are allowed to fluctuate freely and fully, in response to changing market conditions
PRO-COMPETITION POLICIES
promote more freedom and compeititon in the private sector
remove tarriffs -> expose domestic firms to international competition -> incentive to lower COP
-> increase productivity
anti-trust laws
banning price fixing
Tough competition policy regime
removal of artificial BTE
commitment to free intl trade through reduction / elimination of tariffs & other restrictions placed on M
MICRO: greater compeititon forces firms to be more efficient in the way they use scarce resources and improve AE. Gives firm incentive to reduce cost of pdtion which can benefit consumers in the form of lower prices

MACRO: lower unit costs of production
downward shift of AS curve
PROMOTION OF ENTERPRISE
encourage people to become entrepreneurs
entry of innovative new firms injects more competition
startups bring new technology and new methods of production which increase productivity and cause a rightward shift of the AS curve, leading to potential economic growth
anti-trust laws
banning price fixing
Spring Singapore
2013 budget: cash grants to SME
enhancements to productivity & credit scheme
grants to support SME upgrading and productivity
MICRO: greater compeititon forces firms to be more efficient in the way they use scarce resources and improve AE. Gives firm incentive to reduce cost of pdtion which can benefit consumers in the form of lower prices

MACRO: lower unit costs of production
downward shift of AS curve
C & I are interest inelastic, more dependent on confidence levels, bleak expectations of future incomes may mean C, I do not rise despite low i/r
LIQUIDITY TRAP
if interest rates are already at the perceived lowest possible rate, increasing money supply will not decrease it any futher, since investors expect it to rise in future and would rather hold on to cash to exchange for bonds when that happens
e.g. US
FOR SINGAPORE
market operations are ineffective due to our inactive secondary bond market
Depreciate currency
X-M increase
due to high import content of our exports, they will actually become less competitive due to imported inflation
Attract FDI
lower cost of operation
Hot-money flow increase
people expect currency to appreciate
I increase
BOT improves, remedy BOP deficit
unstable exchange rates may actually discourage long-term investment
sg's 0.54
require excess capacity
high import leakage
CPF, high MPS

Growth, employment, reduce inflation, improve BOP
SRAS
prices & income policy
Wage freezes
Price ceilings
however
distorts market forces in the labour market, may result in confrontation with trade unions
reduce imported infln
imports relatively cheaper
LOWER COP
trade unions push wages without a corresponding increase in labour pdtivity
price of imported goods & services rise
prices of locally produced goods that use imported FOP rise
main cause in Singapore
e.g. from taxes
may lead to wage-price spiral
higher wages -> less workers -> RNY, emp fall -> govt boost AD -> output & emp return to intial levels, but higher GPL -> to offsert rising cost of living, higher wages
Increase Unemp
Decrease Unemp
INFLATION IS OKAY
low and mild inflation
increases firm's profits
stimulate investment and growth
encourages investment
increases employment (dd pull)
encourages savings
low cost-push inflation
expected -> confidence not affected
a key source of funds for investment
happens as people are confident that the real value of their money will not fall
investors are more confident of returns
even if inflation is high
tax is a fixed proportion of the price of good
fixed tax per unit of good, regardless of price
savings fall -> reduce funds for investment
expected ROR -> reduce firm's incentive to invest, as per MEI
SN fall -> reduce ability to invest
not a problem if govt reallocates tax revenue into R&D, as what Sg govt does
SS policies are a basket of policies implemented by the government to influence the AS so as to achieve economic objectives of growth and stability.
These could be in the form of market based policies such as tax cuts, reduction in unemployment benefits, encourage compeittion, etc, or in the form of interventionist policies such as providing education and training, promoting R&D activities, etc
TAX CUTS
CUTS IN SOCIAL & WELFARE PROGRAMME
EDUCATION & RETRAINING
PROMOTE R&D
CORPORATE INCOME TAX
increase AS by increasing investment in SR
Fall in CIT -> rise in post-tax profits -> rise in expected yields from investment -> rightward shift in MEI curve
At every interest rate, volume of investment is higher -> in LR, fixed capital investment leads to capital formation, increasing qty and quality of -> increase productive capacity of economy -> increase in AS (rightward shift) -> higher output is produced, assuming a high level of AD initially -> GDP increases
long term growth -> rise in econ growth will influence expectations, increasing expected yields since consumer spending is expected to increase and hence attract investment (domestic + FDI)
GPL lowered -> price stability achieved. -> represents a more certain environment in which businesses can plan and operate more efficiently.
Firms able to predict future revenue, costs and profits within the economy -> increase business confidence -> rightward shift in MEI curve -> vol of investment increases
Govt can provide subsidies to firms to provide subsidies to firms to provide training to its employees or alternatively, directly provide the opportunities for skills upgrading and acquisition of knowledge -> future generation of workers are more productive and able to develop more skills -> improve the quality of future labour force
policy increase AS by improving the quality of human capital and achieves long term growth and stability -> attracts investment
REDUCE POWER OF TRADE-UNIONS
INCOME POLICIES
reduce ability of trade unions to unilaterally raise wages -> encourage firms to invest as wage cost can be monitored & projected more accurately -> econ growth
SG: tripartite policy
harmonious industrial relation between employers, workers and government
NWC bring wage increases in line with national productivity growth
help ensure that any wage increases do not increase unit costs of production
-> reduce / eliminate incidence of work stoppages / industrial strikes
-> loss of output due to strikes prevented
-> attract foreign investment
-> shift AS curve to the right
wage increases should lag behind or at best, keep pace with the rate of productivity growth
ensure unit labour cost is either lowered or remains unchanged respectively.
Ceteris Paribus, a reduction in unit labour cost reduces the average costs of production, thereby leading to vertical downwards shift of AS curve
lower income taxes,
higher take home pay
increase opportunity cost of leisure
individuals choose to work more

increased productive capacity
AS curve shifts right
Increase in Labour supply & Investment (AD)
lower corporate income taxes

attract foreign talent
prevent brain drain
by increasing no. of hours worked per day / per week / postpone retirement / discouraging periods of unemployment
after-tax profit increases
encourage foreign and local investments
esp for globalisation
E.G. IRELAND
cut corporate tax -> large rise in FDI

E.G. SINGAPORE
tax reforms - direct to indirect tax
successful in reducing punitive income taxes on the highest income earners and corporate tax
40% in 1984, 30% in 1986, 17% today


programmes -> loss of job becomes less of an economic criss -> may encourage people to spend a longer time looking for the 'right' job
reduce such programems -> stimulus some of the unemployed require to find a job
shift effective labour supply to right, average duration of unemployment fall
rightward shift of AS curve

Limitations
maintaining an appropriate level of social welfare spending is important in
helping economically disadvantaged
building social cohesion
fight widening income disparity
Limitations
alone, is insufficient to encourage FDI
tax incentive wars
Limitations
must be clearly explained to the workers such that there is general acknowledgement and acceptance of the policies in view of the long term benefits
employers must show that they are willing to reinstate or increase wages in times of economic growth / improved company performance
clear communication, cooperation among government, employers and trade union is essential
SINGAPORE:
flexible labour market and willingness to accept various wage reccomendations
-> helped economy get out of recessions of 1985, 2001, 2003
wage recommendations include
voluntary wage restraints (2-yr wage freeze on civil servants)
reduction in employers' CPF contribution rate from 25% to 20% during 1985-1986
NWC recommended most companies to freeze wage levels on top of other measures 2003
measures induce employers to keep their workers on payroll, enchance cost competitiveness
direct government intervention in markets
govt subsidises retraining

lower unit labour cost -> attract FDI

increase productive capacity AND reduce COP

AS curve shifs outwards
raise labour productivity
gain new skills
-> improve occupational mobility
reduce structural unemp
reduce loss of potential output
SINGAPORE
CET (Continuing Education & Training) Masterplan
comprehensive plan to prepare Sg workforce for the future and maintain competitive advantages
CET seeks to ensure that skills of workers remain current and provide opportunities for training and upgrading in all types of jobs
STEP (Skills Training for Excellence Programme) for PMET and WTS (Workfare training support) scheme for low wage workers
NATIONALISATION
government taking strategic industries into public ownership
transport & telecommunications
higher investment, increased productive capacity, hence potential economic growth

sponsor R&D in industries to spur more research and innovation in such areas
successful R&D efforts -> technological breakthroughs
-> increase productive capactiy -> reduce unit costs of production -> shift AS curve outwards -> achieve potential economic growth
SINGAPORE:
PUB and PSA controlled by Singapore
SINGAPORE
R&I recognised as keys to sustaining long-term growth of economy
aims to raise R&D sector to 3.5% of GDP
last decade has seen Singapore successfully drawn top scientific and creative talent to its shores and nurture R&D collaborations between the public sector and private enterprise
Effect
Limitations
OUTPUT & PRICE
EMPLOYMENT
BOP
LENGTH OF TIME
UNCERTAINTY
GOVT BUDGET
key to achieving sustained economic growth w a low rate of inflation
SS policies -> increase in Real NY while preventing increase in price

bring down the level of structural unemployment in the economy, via:
SS policies make workers more responsive to changes in job opportunities and more adaptable and mobile
alleviates structural and frictional unemp caused by rigidities / imperfections in labour market
In a world of globalisation where a rising share of GDP in most countries is devoted to internation trade, firms are increasingly exposed to international competition
COuntries with successful SS policies and reduce COP / increase product quality -> see increased demand for X and improvement in BOP, ceteris paribus
SS policies usually longterm in nature, take a relatively long time for effects to kick in

R&D & Retraining
Outcomes uncertain
R&D / retraining successful'?
gain acceptance?
not effectively executed with its intended effects when met with opposition
require significant government expenditure which ma be restricted by fiscal and reserves position of countries
e.g. Greece in 2010: high govt debt, difficult to implement education / training programmes for its workers
leads to:
outflow of wealth in future since debt must be repaid with interest
fall in foreign reserves
excessive depreciation of ER -> less ability to buy imports
cost of unstable exchange rate
uncertainty-> fall in I-> fall in econ growth->speculative attacks
surplus important for Singapore
accumulate foreign reserves
sell foreign currencies, buy S$ -> prevent excessive depreciation
due to rigidity of contracts and taste and preferences which are hard to change
Maximise use of resources
as PE as possible
minimise potential loss in output
achieve as high SOL as possible
very important for singapore
Labour is Sg's most precious resource
Tight labour market-> fears of wage-push infln
fixed income earners lose out while those with assets that rise in value during inflation gain
COSTS OF UNSTABLE INFLATION
uncertainty in calculating profits
divert resources from productive to unproductive investments
Property bubble burst, when borrowers default on their loans
Banks take over properties and try to sell them
If banks can't recover bad debts, this may lead to a banking crisis -> hurt growth
lose export competitiveness
Sg has high savings rate (CPF). Thus need to protect savings to maintain future SOL
worsen inequity
Can't completely reduce inflation
can't mitigate domestic sources of inflation (higher housing costs, wage costs, road usage costs)
ability to intervene in ER markete depends on amount of foreign reserves the CEntral Bank holds
Effectiveness depends on prudent fiscal policy, deep and efficient financial markets, sound corporate sector, efficient legal system
increases in real GDP increases ability to care more for the environment
workers receive more income, fall into higher income tax brackets, contribute proportionately more of their income in the form of taxes (assuming progressive)
assume population does not grow
can reduce inflation
associated with unstable inflation
QUANTITY OF RESOURCES
population size. age distribution, female participation rates, rate of savings, economic, social and political factors
Allocative Factors
Resource mobility promotes rapid technological change
Changing AD and AS, reallocation of resources must occur
Reallocation not fast enough -> economy does not grow to its potential
Free price mechanism -> not effective enough -> govt assistance often needed to channel resources and technology into the right places

People's attitude to work and health -> how much time and effort they are willing to put into eocnomic pursuits
Materialism keeps market expanding -> entrepreneurial spirit is crucial ingredient in country's econ growth
political stability - attract investments
Non Economic
counterproductive
reduce incentive to look for jobs
KA? ST? Persistent?
Alleviated by:
import controls
devaluation
encourage exports
expenditure reducing
increases k
QTY OF $
i/r
D
SOL
SOURCE OF CHANGE IN GDP
A change in production may not be equal to a change in consumption. Rise in GDP due to increase in pdtion of military weapons -> no rise in SOL

Limitations
GINI COEFFICIENT
Income distribution worsens as GDP rises, increase in GDP will be concentrated in the hands of a minority. Average singaporean may not be better off
NON MATERIAL ASPECTS
Pollution levels rise due to increase in production of goods and services -> compromise on non-material aspects of life as higher pollution index -> detrimental to health, lower quality of life.
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