ACJC Suggested Answers Intro to Macroeconomics Tutorial Worksheet

1 © ACJC/Economics Department ANGLO-CHINESE JUNIOR COLLEGE JC1 Economics H2 Introduction to Macroeconomics Tutorial Worksheet 5 Question 1 Table 1: Selected US economic indicators from 2009 – 2014 2009 2010 2011 2012 2013 2014 Real GDP (% change) -2.8 2.5 1.6 2.3 2.2 2.4 Unemployment rate (%) 9.3 9.6 8.9 8.1 7.4 6.2 Labour Force (Millions) 154.2 153.8 153.6 154.9 155.4 155.9 Inflation rate (%) -0.4 1.6 3.2 2.1 1.5 1.6 Source: World Bank, US Bureau of Labour Statistics Suggested answers: (a) (i) State the formula to calculate unemployment rate. UnN rate is calculated by taking the total no. of unemployed divide by the total labour force X 100% [1] (ii) Explain why ‘retirees’ are NOT considered as unemployed. Unemployed ➔ they are willing and able to work and are actively looking for jobs, but are not able to find a job - Must be part of the labour force to begin with [2] Section A: Data Response Questions

2 © ACJC/Economics Department Retirees ➔ NOT willing nor able to work, so are not actively looking for job ➔ not part of the labour force ➔ hence not considered as unemployed even though they do not work. (b) Describe the trend of General Price Level in the US from 2009 to 2014. • (General trend) From 2009 to 2014, general price level in the US has been rising. • (Refinement) There was a fall in general price level in 2009. [2] (c) Compare the trend of unemployment rate and inflation rate in the US from 2011 to 2014. • (Similarity) Between 2011 and 2014, both unemployment rate and inflation rate in US reflect generally decreasing trends. • (Difference) Unemployment rate has been consistently decreasing while inflation rate experienced an increase from 2013 to 2014. [2] (d) Explain what the trend of unemployment rate from 2011 to 2014 suggests about the overall performance of the US economy across the years. Hint: link to the total production of output within the country. Unemployment rate falling ➔ suggests higher utilization of labour resource (1m) A country is now able to produce more output (1m) since more labour resource are hired ➔ economic performance improved / better since there is a fall in unN over the years. (1m) Students should also note that economic performance is tied closely to standard of living: The higher the economic performance, each citizen / resident is also able to consume more goods and services and also earn higher per capita income *assuming no change in population. Therefore, material SOL improved. [3]

3 © ACJC/Economics Department Question 2 Table 2: Percentage change in real gross domestic product (GDP) 2009 2010 2011 2012 2013 Japan -5.5 4.7 -0.5 1.8 1.6 USA -2.8 2.5 1.6 2.3 2.2 China 9.2 10.6 9.5 7.8 7.7 Germany -5.6 4.1 3.6 0.4 0.1 Source: World Bank, OECD Statistics Table 3: Unemployment (% of total labour force) 2009 2010 2011 2012 2013 Japan 5 5 4.5 4.3 4 USA 9.4 9.7 9 8.2 7.4 China 4.4 4.2 4.3 4.5 4.6 Germany 7.7 7.1 5.9 5.4 5.3 Source: World Bank, OECD Statistics Suggested answers: (a) Compare the trend of real GDP between China and Japan from 2010 to 2013. • (Similarity) Both China and Japan real GDP experienced generally increasing trend from 2010 to 2013. • (Difference) China experienced increasing trend throughout the period but Japan experienced a fall in real GDP from 2010 to 2011. [2] (b) Explain the possible relationship between Germany’s real GDP growth rate and unemployment rate. • (Identify a possible relationship) When Germany experienced positive real GDP growth rate i.e. real GDP is rising, its unemployment rate falls. • (Brief explanation) Rising real GDP → implies rising income → rising C → rising investment → job creation → fall in unemployment rate. [2] (c) Explain what the Japan’s real GDP in 2011 suggest about the overall Japan’s economic performance in that year. Japan’s real GDP fell (as suggested by the -ve real GDP growth rate) ➔ total output produced within the economy fell. (1m) The overall economic performance in that year worsened / decreased. (1m) Students should also note that economic performance is tied closely to standard of living: The poorer the economic performance, each citizen / resident is less able to consume goods and services and also earn lower per capita income *assuming no change in population. Therefore, material SOL worsened. [2]

4 © ACJC/Economics Department Question 3: Asia’s Consumer Revolution Gets Serious Table 4: Singapore: Expenditure of Gross Domestic Product at 1995 Market Prices 1998 (S$ million) 1999 (S$ million) 2000 (S$ million) 2001 (S$ million) 2002 (S$ million) Total GDP 138,399 147,286 161,103 157,318 160,853 Private Consumption Expenditure 52,467 56,762 64,737 66,239 66,812 Government Consumption Expenditure 14,109 15,063 17,720 19,181 20,033 Gross Fixed Capital Formation 51,456 48,909 52,733 49,737 44,929 Increase in Stocks -7,828 -2,755 1,045 -8,917 -8,487 Net Exports of Goods and Services 29,622 31,219 27,362 33,656 40,145 Statistical Discrepancy -1,427 -1,912 -2,494 -2,578 -2,579 Source: Singapore Department of Statistics (a) Explain what it means by ‘Gross Domestic Product measured at 1995 market prices’? • Gross Domestic Product (GDP) refers to the monetary value (not quantity) of all final goods and services produced within the geographical borders of a country in a given period of time. • The phrase “measured at 1995 market prices” suggests that the GDP value calculated using current prices (e.g. prices in 1998 for GDP in 1998) has been adjusted using market prices in 1995 so as to remove the effect of inflation on GDP value. [2] (b) (i) Describe the trend for GDP at 1995 market prices in Singapore from 1998 to 2002. • (General Trend) Generally, it was a rising trend from 1998 to 2002. • (Refinement) although there was a slight fall in 2001. [2] (ii) Using the data in Table 4, account for the general trend in b(i). [3]

5 © ACJC/Economics Department • Explanation for upward trend: This is supported by the increase in private and government consumption expenditure over the whole period • Explanation for the refinement: ➔ Investment (gross fixed capital formation + increase in stocks) started falling from 2001. The fall in investment in 2001 outweighed the gain in the other components, leading to a fall in overall GDP in 2001. ➔ However, the gain in the other components outweighed the fall in investment in 2002, causing GDP to increase again in 2002. (c) Using the concept of the circular flow of income, explain how an increase in private consumption expenditure affects the equilibrium level of national income. [4] • An increase in private consumption (C) will generate an equivalent increase in income (Y) for households as more factors of production are hired to increase production. • Part of the increase in Y will leak out of the circular flow as savings, taxes & import expenditure while the remaining will be spent on additional consumption, leading to an additional / further increase in consumption (C) and hence an equivalent further increase in Y. • The cycle of leakages, increase in C and increase in Y will continue until there is no further increase in C. Adding up the incr