H2 Economics notes

Note:ThebuildingblocksunderMacroeconomicsrefertostandardphrasingwhichearnyoucontentmarks.Asthechaptersinmacroeconomicsareallinter-related,itisgoodtostructuredifferentcontentpartsinyourbrainasbuildingblocks.AndsoinessaysandhigherorderCSQquestionsyoucanspamtherelevantbuildingblocks:) ThesectionunderMicroeconomicsisjustnotestokeepinmindforexams. MacroEconomics Buildingblocks Briefmultipliereffect(needifendgoalisunemployment)● ChangeinautonomouscomponentofADcausesamorethanproportionatechangeinRNY● Themultipliereffectisbasedonthepropositionthatexpenditure(order!)generatesincomeandincome(RNY)leadstoexpenditure(Cd)(rememberthatEcomesbeforeYinthealphabet).Orreversely,“basedonthepropositionthatfallinexpenditurecausesfallinincome,andfallinincomeleadstofallinexpenditure.”○ ORThechangeinautonomouscomponentofADcausesachangeinRNY, inducingasmallerchangeinCdduetoleakagesintheformofsavings,taxesandimportswhichinturncausesfurtherroundsofchangeinRNYandinducedCd● Thecyclerepeatsandateachsuccessiveround,thedecreaseinincomegetssmallerandsmallerbecauseofleakagesintheformofsavings,taxesandimports.● Eventually,themultiplierprocessendswhenthefallinwithdrawalsequalsthedecreaseininitialinjectionandtheeconomyreturnstoequilibriumatalowernationalincome.–ADanalysis:unplannedfallininventories>firmsincreaseproduction>deriveddemandforlabourincreases>factorpaymentispaidtohouseholds>increaseinrealnationalincomeinducesanotherroundofincreasedADviathemultipliereffectthatisbasedonthepropositionthatexpenditurecreatesincomeandincomecreatesexpenditure>thisprocessrepeatsuntiltotalincreaseinwithdrawalsisequalinitialincreaseininjection>RNYincreasesmorethanproportionately>Y0toY1>illustratingactualeconomicgrowth

Briefermultipliereffect● (ADincreases)● Themultipliereffectisbasedonthepropositionthatexpendituregeneratesincomeandincomegeneratesexpenditure(order!)● CountrywillhaveamorethanproportionateincreaseinRNY MPM→ksize(whySGmultiplierissmall)● SGlacksnaturalresources● Importreliant,importsalotofrawmaterials,semi-finishedgoodsandfinishedgoods→highMPM● Mostoftheexpenditureleaksoutintheformofimports● Lessresourcesarerepumpedbackinthecircularflowtofurtherincreaseexpenditureandincomeineachsuccessiveround● DecreaseinADissmallerascomparedtoifthemultipliersizewaslarge MPC→ksize(whyachievinginclusivegrowthhelps)● Thepoorhavenotmettheirbasicnecessities->theirMPCishigh● WhenthereisanincreaseinautonomouscomponentofAD,incomeincreases,inducingasmallerincreaseinCd● Partoftheincreaseinincomeisleakedoutintheformofsavings,taxesandimports● AsMPCislarge,theincreaseinCdtakesupalargeproportionoftheincreaseinincome● TheincreaseinCdthenincreasesincomeasecondtime,whichtheninducesyetanotherincreaseinCdthatisevensmaller● Thisprocessrepeatsuntilinitialinjectionsisequaltototalincreaseinwithdrawals● AstheleakageisasmallpartoftheincreaseinincomeduetolargeMPC,thisprocessrepeatsformanyrounds● ThemorethanproportionateincreaseinRNYislarger● Sizeofmultiplierislarge ADanalysis(Eli’sstory)● AD=C+I+G+(X-M)● ADincreasesfromAD0toAD1● Salesexceedsproduction● Leadingtounplannedfallininventories● Firmsthenincreaseproduction(Y0toY1)

● Byemployingmorefactorsofproductionsuchaslabour Demanddeficientunemploymentanalysis● Deriveddemandforlabourincreases● Morelabourisemployed● Morefactorpaymentispaid Demandpullinflationanalysis● Nearfullemployment● Lacksparecapacity● (duetoincreasedproductionfromADanalysis),deriveddemandforFOPincreases● ShortageofFOP● PricesofFOParebiddedup● COPincreases● Profitabilitydecreases● Toprotectprofitmargins,firmsincreaseprices● Consumersalsobiduppricesinordertoobtaingoodsinasituationwhere“toomuchdemandischasingaftertoofewgoods”/“toomuchgoodschaseaftertoofewdemand”● GPLincreasefromP0toP1 AD→SRASFallAD→IncreaseUNN→QQT→SRAS→Autonomoussavingsincrease,firmsexpecthhtosaveforrainydays,expectddforgoodstofall,Idecrease,ifrateofcapitalaccumulationislessthanrateofcapitaldepreciation,qtyofcapitalfalls Sidenote:inrecession,doesn’tmakesensetosaydecreaseinsupplyoflaborsowagesincrease.Instead,saysupplyoffactorinputsingeneraldecreases,soCOPincreases. SRASanalysis➔Usedforcostpushdeflation 1)IncreasedproductivityMoreoutputproducedusingthesameinputs

2)IncreasedquantityoflabourSupplyoflabourincreasesDownwardpressureonwages ● COPdecreases● Profitabilityincreases● SRASincreases(SRAS0toSRAS1)● Partlyincreaseproduction(Y0toY1)● Toremainpricecompetitive● PassonlowerCOPintermsoflowerprices(P0toP1) ● Reducesinflationarypressure SRAS→RNY● Wealth,interest,tradeeffect LRASanalysis 1)Increaseproductivity/qualityMoreoutputcanbeproducedusingthesameamountoffactorinputs 2)IncreasequantityIncreaseabilitytoproduce ● Productivecapacityincreases● LRASincreasesfromLRAS0toLRAS1● FullemploymentlevelofoutputincreasesfromYf0toYf1● Potentialeconomicgrowth Moneysupplyindirecttransmissionmechanism(MS→i/r)● Moneymarketgraph:shiftfromMS0toMS1,holdingLPconstant.● SurplusQdQsatinitialinterestrater0● Downwardpressureoni/r● I/r(r0tor1)andquantityofmoney(Q0toQ1)changes Interestrateeffect● Decreaseininterestrate● Firms’perspective:○ Costofborrowingdecreases○ Expectednetrateofreturnstoinvestment/profitabilityincreases

○ Firmsareprofitmaximizers○ IncreaseI● Netlenderhouseholds’perspective:○ Rateofreturnstosavingsdecreases○ Opportunitycostofconsumptiondecreases○ Increaseamountborrowed○ IncreaseC● Netborrowerhouseholds’perspective:○ Costofborrowingdecreases○ Increaseamountborrowed○ IncreaseC Moneysupplydirecttransmissionmechanism(MS→AD)● Increasemoneysupplyviaquantitativeeasingthroughthedirectmechanism● Householdsandfirmshaveexcessliquidity● Theyhaveanoptimalproportionoftheirwealthtoholdascash● Nowtheyhavemorecashthantheoptimalamount● FirmsincreaseI,householdsusesomeoftheexcessliquiditytobuyfinancialassetsandgoodsandservices→increaseC Hotmoneyeffect(i/r→e)● Increaseddomesticinterestrate● Countryisamoreattractivehotmoneydestination● SGisaneconomywithfreecapitalmobility● Insearchofhigherratesofreturn/rateofreturntospeculators’moneyincreases● Hotmoneyinflowsincrease,hotmoneyoutflowdecreases● Demandforcurrency(byspeculators)increases,supplyofcurrency(bycurrencyholders)decreases● ShortageofcurrencyinFOREXmarket● Upwardpressureonexchangerate● Currencyappreciates Fiscalpolicy–tax● Reducepersonalincometaxrate>increasedisposableincome>increasepurchasingpower>increaseC● Reducecorporatetaxrate>increasepost-taxprofits>increaseexpectednetrateofreturntoinvestment>firmsareprofitmaximizers>increaseI● ADincrease LinktodecreasingBOTdeficitduetoincreaseintaxrates

● ADanalysis● RNYdecreases● Ppdecreases● Assumingimportsarenormalgoods(YED>0)● Importexpendituredecreases Fiscalpolicy–G● Govincreasegovexpenditurebyinvestingininfrastructure● Firmsdonotneedtobuildtheirowninfrastructure● Decreaseinitialcapitaloutlay/initialcostofinvestment● EnjoyEEOS● Increaseprofitability/expectednetratesofreturnstoinvestment● IncreaseI● IncreaseAD(bothGandI) Structuralunemploymentanalysis● Mustgiveexamples!!!● Structuralchange:jobsrequireskillstoutilisetechnology○ Egsupermarketsutilisemoretechnologybyemployingmoreself-checkoutcounters● Skillsmismatch:1.jobrequirement(witheg)+2.possessedskillofworkers○ Eginsunriseindustriessuchascybersecurity,demandforhigh-skilledworkerswhocanutilisetechnologyisincreasing.However,duetomismatchofskills,low-skilledworkersdonotpossessrequiredskillstoutilisetechnology.● Reduce/worsenmismatchbetweenjob-seekersandskillsrequiredbyjobopenings SSP–structuralunemploymentI. SubsidyforskillsretrainingprogrammesA.Skillsfuture,wheresubsidiesaregivenforcourses,andhouseholdsreceivewagecompensationB.[Reskilling]workershaveskillsneededforeconomythathasexperiencedstructuralchange>reducemismatchofskillspossessedbyjob-seekersandskillsrequiredbyjobopenings>reducestructuralunemploymentC.[Upskilling]Improvelabourproductivity>LRASanalysisII. SubsidiesforapprenticeshipprogrammesA.ShopeeapprenticeshipprogrammeB.Reducecostofemployingunskilledworkers

C.IncreasewillingnessandabilityoffirmstohireunskilledlabourIII. RefundableInvestmentCredit(RIC)scheme(expenditure-switchingpolicy)Allowsfirmsthatadoptproductiv