EJC Econs 2023 A-Level H2 P1 Q2 - students

Suggested Answers for 2023 A-Level H2 P1 Qn 2: Economic impact of an ageing population (a) With reference to Extract 5: (i) Calculate and compare the old-age dependency ratio for Singapore in 1990 with that in 2020. [3] Old-age dependency ratio in 1990 = 164000/17200 = 10 Old-age dependency ratio in 2020 = 614000/26260 = 23 The old-age dependency ratio for Singapore in 2020 is higher than that in 1990. (ii) Explain one reason for the change in the old-age dependency ratio for Singapore between 1990 and 2020. [2] The old-age dependency ratio for Singapore increased from 1990 to 2020 because the resident population aged 65 years and over increased at a faster rate compared to the resident population aged 20-64 years. This is seen from Table 2 where the resident population aged 65 years and over increased by around 274% which is higher than that of the resident population aged 20 -64 years of around 53%. (b) Explain how the changes in the populations of countries shown in Figure 3 might affect aggregate supply and aggregate demand in those countries. [4] Figure 3 shows a projected decline in the population of those countries from 2006 to 2030 by several millions. The labour shortage that follows could lead to rising pressure on wages as firms compete for the limited amount of labour. The rise in wages could lead to a rise in production costs at every given output level, causing a fall in short run aggregate supply (SRAS). Furthermore, the smaller labour force means a lower number of units of labour, possibly leading to a fall in productive capacity and hence, long run aggregate supply (LRAS). A projected decline in population also means that the consumer base is smaller. Consumer expenditure (C) falls as demand for perishables and durables fall. This will lead to a fall in aggregate demand (AD) as it comprises of C. (c) With reference to Extract 5, explain why firms may choose to ‘cut investment in the domestic economy substantially, even as interest rates fall’. [3] Whether a firm decides to invest and how much to invest by depends on its expected rate of returns. The returns or profits that a firm reaps is given by total cost (which includes borrowing costs i .e., interest payments) subtracted from total revenue. According to Extract 5, firms might believe that output and consumption growth slows following an ageing population. This will mean that they believe that revenues are expected to increase at a lower rate as they project output sold to increase at a lower rate. In the case that firms adopt a more pessimistic outlook, they may project revenues to fall as there could be the belief that elderly individuals withhold their spending as they become more frugal. Hence, even if interest rates fall (meaning that cost of borrowing falls), it could be that expected revenues fall by a greater extent than the fall in cost, leading to a fall in the expected rate of returns and resulting in firms cutting investment.

(d) Discuss whether the benefits to an economy of having an ageing population outweigh the costs. [8] Command Discuss whether – Balanced answer with judgement as to whether the benefits outweigh the costs Start Point Ageing population End Point Benefits/costs to an economy Content AD/AS, 4 macroeconomic objectives Context An economy Requirement 1: An ageing population brings about benefits to an economy With an ageing population, there could be an increase in government expenditure (G) and C as suggested in Extract 7 especially if governments are able to encourage a habit of saving and lifelong learning amongst older workers via intentional policy measures. There will then be an increase in AD from AD0 to AD3. Firms find that there is a decrease in unplanned inventories and hence increase production in the next period, assuming economy is operating below full employment level YFE. This will in turn increase the amount of labour they employ, since labour is a form of derived demand. The rise in national income will lead to a further rise in induced consumption due to the multiplier effect. Hence real national income increases by a multiplied amount from Y 0 to Y1, leading to actual growth. As labour is a derived demand, there is a fall in demand-deficient unemployment. Figure 5 Requirement 2: An ageing population brings about costs to an economy With an ageing population, there will be an increase in G on the elderly in the form of payments like “pensions, health care, and long-care” as mentioned in Extract 5. These payments comprise a “large portion of government budgets”, meaning that there will be a significant opportunity cost incurred as this significant amount of G that could have been spent on other sectors like education is foregone. Furthermore, this will lead to strain on the government budget. Furthermore, the labour force will be projected to shrink with an ageing population assuming that the inflow of labour is outweighed by the outflow of labour as older workers leave. This will lead to a fall in the quantity of labour. Productive capacity falls as there will be a decrease in the amount of goods and services an economy that can be produced by fully utilising the factors of production. LRAS falls and shifts from AS0 to AS1 as shown in Figure 6 below. The full employment level of national income that

can be attained has decreases from YF1 to YF2, leading to a fall in potential growth. Assuming that the economy is operating along the intermediate range, there is negative actual growth from Y0 to Y1 and there are lesser quantities of goods and services produced within the economy. As labour is a derived demand, unemployment increases as well. Figure 6 Evaluative Conclusion In conclusion, whether the benefits of an ageing population outweigh the costs depends on the context of the country. In countries where the elderly finance a greater proportion of their personal consumption like in the US compared to European countries where there is a greater reliance on public sector transfer payments, it is likely that the opportunity costs incurred from spending on the elderly are greatly diminished and it is more likely that the costs of an ageing population are outweighed by the benefits. Whether the benefits of an ageing population outweigh the costs also depends on the quality of governance which will determine the extensiveness and robustness of policies implemented. In Singapore, the tendency for older individuals to invest in human capital is amplified with a national lifelong learning scheme implemented. The extent of government spending required on the elderly is diminished via the implementation of a retirement savings scheme to reduce the amount of spending that the government has t o undertake to finance the personal consumption spending of the elderly. Where quality of governance is relatively high, the benefits of an ageing population are amplified and the costs of an ageing population are diminished via more conscientious policymaking. It will thus be more likely that the benefits of an ageing population outweigh the costs. Level of Response and Descriptors Marks L2 Developed analysis of how an ageing population can be both beneficial AND costly for an economy. 4 – 6 L1 Underdeveloped analysis of how an ageing population can either be beneficial OR costly for an economy. 1 – 3 Evaluation E Evaluative marks will be awarded for a conclusion reached on whether the benefits to an economy of an ageing population outweigh the costs, or vice versa, after consideration of the analysis provided. 1 - 2

(e) Discuss whether immigration is the best way of promoting economic growth in an economy with an ageing population. [10] Command Discuss whether – Balanced answer with judgement as to whether immigration is the best way of promoting economic growt