EJC Econs N2022 H2 EQ4

1 2022 H2 A-Level Paper 2 Essay Question 4 During the pandemic, there was a fall in investment and a rise in employment. Innovation- based investment is a good way to stimulate the economy but, unless appropriate government policy action is taken, this might lead to another type of unemployment. (a) Explain how a fall in investment might lead to one type of unemployment while a rise in innovation-based investment might lead to a different type of unemployment [10] (b) Discuss the extent to which a rise in Singapore government spending on investment in major capital projects and in human capital are both required to reduce unemployment in a post-pandemic world. Suggested Response Part (a) (Question Analysis) Approach Command Word Explain how - Process Question Type Causes Start point Factors – fall in investment, rise in innovation-based investment End Point Types of unemployment Content and Context Content • Demand-deficient Unemployment • Structural Unemployment Context Generic/Singapore (I) Introduction State essay approach: Unemployment refers to the situation where people are unable to find employment, even though they are of legal working age and are both capable and willing to work at the current wage rates. There are two types of unemployment, namely demand- deficient unemployment and structural unemployment. This essay seeks to explore the causes of these two types of unemployment. (II) Body Point 1: A fall in investment might lead to demand-deficient unemployment Demand-deficient unemployment arises from insufficient aggregate demand (AD), which may be caused by business cycles or economic shocks . During the COVID pandemic, with the closure of national borders and pessimism over economic outlook, it has adversely affected the business confidence of investors. This has led to a fall in their investment spending. Given that I is a component of aggregate demand [where AD = C + I + G + (X-M)), a fall in investment spending leads to a fall in AD.

2 Figure 1: Demand-def icient unemployment due to fall in AD With reference to Figure 1, the initial equilibrium national income is at Y 1, where AD is equal to aggregate supply (AS). With a fall in AD from AD1 to AD2, firms find that they are unable to sell their current level of output, hence stocks of unsold goods accumulate. Firms will thus reduce production and decrease the derived demand for factors of production, including labour. hence leading to a rise in demand-deficient unemployment. As less labour is employed, less factor income is earned. The initial fall in national income will lead to a further fall in income- induced consumption due to the reverse multiplier effect. The economy moves into recession represented by a further fall in AD from AD 2 to AD 3, it is now at a much lower level of equilibrium national income from Y 1 to Y3. The economy is said to be operating with spare/excess capacity or unemployed resources. When the equilibrium national income (Y3) is below the full -employment level of national income (Y f), the gap (Y f – Y 3) represents the presence of demand-deficient unemployment. Point 2: A rise in innovation-based investment might lead to structural unemployment On the other hand, a rise in innovation-based investment might lead to structural unemployment which arises from a mismatch of skills between the unemployed and employers. This is because the unemployed might not possess the right skills to fill the existing job vacancies. In an increasingly digital economy where there is a r ise innovation-based investment in the use of new and advanced information technology, it has resulted in a relentless change in industries, jobs and skills. As new industries develop around emerging technologies, they give rise to jobs requiring new skills, while making other jobs obsolete. For example, labour-saving technological advancement through automation and robotisation has led to the replacement of labour by machinery and the mismatch of skills due to a requirement for an enhanced skill set to operate the new machinery Hence, as capital is increasingly being used to substitute labour. Coupled with occupational immobility where workers who are less proficient in handling the more advanced equipment and are unable to upgrade themselves, these workers may find their skills obsolete and become structurally unemployed for a long period of time. (III) Conclusion Link to part (b): Hence a fall in investment might lead to demand-deficient unemployment while a rise in innovation-based investment might lead to structural unemployment. Understanding AD2 AD3 Real National Income General Price Level 0 AS AD1 Y3 Y2 Y1 Yf

3 the causes of the different types of unemployment would be useful for government s to implement appropriate policies to reduce unemployment in the economy. Mark Scheme Band Knowledge, Understanding, Application, Analysis Marks L3 For an answer that shows well -developed explanation of the causes of demand-deficient from a fall in investment and structural unemployment from a rise in innovation-based investment • clear and accurate explanation of the causes of the above types of unemployment with appropriate AS/AS diagrams • appropriate examples of the causes of the above types of unemployment 8-10 L2 For an answer that shows under -developed explanation of the causes of demand-deficient and/or structural unemployment • lacks depth of analysis (i.e., limited effective use of relevant economic analysis or gaps in diagrammatic analysis) • lacks appropriate examples 5-7 L1 For an answer that shows limited knowledge of the causes of demand - deficient and/or structural unemployment • with listing of points, unexplained statements, or descriptive response • major conceptual errors • smattering of points 1-4 (b) Discuss the extent to which a rise in Singapore government spending on investment in major capital projects and in human capital are both required to reduce unemployment in a post-pandemic world. [15] Suggested Response (Part b) Question Analysis Approach Command Word Discuss the extent – Balanced answer + evaluation Question Type Policy Evaluation (HAL) Start point Increase in Govt Spending on both forms of investment • Investment in major capital projects (mainly Demand- side Policy) • Investment in human capital (mainly Supply-side Policy) End Point Reduce types of unemployment (Demand- deficient and structural) Content and Context Content How policies work + Limitations Context In Post-Pandemic Singapore (I) Introduction State Essay Approach: To reduce unemployment in post-pandemic Singapore, the Singapore government can implement policies which include a rise in its spending on different forms of investment, namely increased investment in major capital projects to tackle demand-deficient unemployment directly and increased investment in human capital to tackle structural

4 unemployment directly. Whether the government’s spending on both of these investments are required to reduce unemployment in post -pandemic Singapore will also be explored in this essay. (II) Body Point 1: A rise in Singapore government spending on investment in major capital projects can help to directly reduce demand- deficient unemployment in a post - pandemic world. In a post-pandemic world where there is slow economic recovery globally, demand- deficient unemployment would likely be high given the poor economic outlook which leads to low consumers, investors and exports spending. Hence an expansionary fiscal policy through a rise in government spending on large capital projects can help to boost domestic spending and raise aggregate demand, thus reducing demand-deficient unemployment directly. Such government spending on large capital projects includes the mega constru