Tuesday, May 21, 2019

Topics to Watch Out For

1. Pareto efficiency

2. Equity vs. equality

3. Long-run Philips curve

Monday, May 20, 2019

Suggested Solution for 9708/42 March 2019 (CAIE in India)

Section A
(a) Quantitative easing - expansionary monetary policy - Central bank will purchase government bonds/ financial assets from commercial banks - will increase liquidity in banking system - enable banks to generate more lending - supportive of consumption and investment

(b)  Central bank has the responsibility to ensure that the inflation target is met - takes calculated risks every time when they implement QE - slight mistake could be very costly - for instance, if money supply is increased excessively, that may lead to high and unstable inflation - undermines the stability of banking system - people may end up withdrawing money - banks may experience liquidity crisis - unable to accommodate growth

In 2008, banks engaged in sub-prime lending - lent excessively even to people with poor credit history - many defaulted on the loans - banks experienced huge losses being unable to recover most of the loans given out - many were afraid that the banks in the USA and parts of Europe to go bankrupt - withdraw their money - run on the bank - unstable banking system - could cause the economy to collapse if the government did not intervene timely

(c) Fall in the price of oil is due to competitive forces - excess supply in the market - Saudi Arabia over-produced oil - Chinese economic slowdown - fall in the demand for oil for industrial need - collapse in prices

To some extent, the claim is true - oil is a necessity - has low price elasticity of demand - fall in price of oil implies lower export revenue - fall in (X-M) of oil exporting countries - lower AD and hence output and growth

However, the same cannot be said for China - borrowed heavily over the past to fund infrastructure projects - cannot continue to borrow forever - need to scale back spending and start paying back - avoid bankruptcy on banks - fall in G - lower AD and hence output and growth

In conclusion, economic downturn was not just due to fall in oil prices - may be valid for oil producing nations in the OPEC but not for most parts of the world

(d) The article mentions that OECD is concerned that major economies were over-relying on loose monetary policy as a hope for recovery - did not work - historically low level of interest rates - did not stimulate borrowing and spending - consumer and business confidence at all time low - afraid to undertake more commitments - difficulty to pay back

However, the OECD's concern may be unfounded - usually there would be a time lag - flows of information are not perfect - for instance, some may not realise about the rate cut - also firms may have invested in a particular project - unlikely to invest so soon

The extract also mentions that major economies should instead focus on loose fiscal policy - boost government spending onto roads and healthcare - injection into the circular flow of income - rise in AD and hence output and growth - betterment of infrastructure could raise potential capacity of economies - bigger roads reduce congestion - better health will increase productivity at workplace - higher LRAS and therefore potential growth

However, loose fiscal may not work either - China for instance had borrowed heavily in the past - there is a limit to how much more it could borrow further - has to start paying back - same can be said regarding developed economies - have the macroeconomic aim of balanced budget - pursue austerity measures to ensure the goal is met at the expense of growth

In conclusion, it is thought that the global economies will recover - pace of recovery may be different - case to case basis - some countries may experience growth at different level

Sunday, April 28, 2019

Data Response and Essay Techniques for CIE/ CAIE Economics (Paper 4) (updated post)

Exam Advice/ Tips/ Strategies for Section A (Paper 4)

1. Read through the article(s)/ extract(s) thoroughly. Ask plenty of HOW, WHY and WHAT questions. It is extremely crucial that a candidate is able to see the inter-relationships between all the information provided e.g. HOW does an increase in interest rates may slow down the wage rise, WHY would the government pursues austerity measures knowing that it would hurt growth/ jobs, WHAT are the policies that are suitable to tackle unemployment in this case etc. Do not spend more than 5 minutes for this. This skill/ ability may not be that important for AS. However, in A2, almost every question would require candidates to be able to apply the information from the extract to fit into their answers. It is therefore advised that we extract as much knowledge/ information as we can while digesting it

2.  Expect four or five questions with at least two of them being evaluative in nature. One common error among students is to think that there is only one evaluation question and it will always be the last one with highest marks. This is totally untrue. First, it doesn't have to be the last question. Second, it need not be the one with the highest marks. Third, it doesn't have to begin with 'DISCUSS'. We can even have an evaluative question with 4/5 marks. The technique is to identify the keywords being used. As long as justification/ weighing is required, it will always be an evaluative question. Watch out keywords like:
a) How far ....
b) To what extent ....
c) '....will always....'
d) '....the only....'
e) Do you agree ....
f) Consider whether ....
g) Explain whether ....

4 marks - 1 yes + 1 no + 1 conclusion
5/ 6 marks - 2 yes + 1 no + 1 conclusion
7/ 8 marks - 2 yes + 2 no + 1 conclusion

3. 1 mark will be lost if no conclusion is given. However, that doesn't mean that candidates will automatically be granted full marks if conclusion is given either. The examiner will also need to consider the credibility of the conclusion given e.g. whether it is relevant, suitable in the context etc

4. Always monitor the time. I realise that most candidates will only check the timing once they reach the last question. This is unwise. You should check the time spent after every question

5. On average, one analysis/ explained idea/ evaluation carries 2 marks. Each analysis is estimated to be around four or five lines and each subsequent line must add value to the previous line so that a complete/ coherent chain of analysis can be built

6. Data response with micro economic nature tends to be 'much easier' than the one with macro economic nature (Weirdly, micro economic essays tend to be 'more difficult' than macro economic essays as they are less predictable and repetitive)

7. Let's just say that you cannot finish the last question of Section A. In this case, you should 'salvage' by giving point-form answers for both analysis and evaluations. Three short sentences will do. Provided if they are correct, you may get up to 2/ 3 marks out of this (better than nothing right!). Cambridge has made it easier for you to gain low-level marks. However, it can be extremely difficult for you to gain high-level marks (rather unfair to some of you)

8. Whenever the instruction is 'With reference to the information provided/ article....', you must always prioritise the information given. You are unlikely to gain any marks if you use your own point even though they are sound

9. Also, you are strongly advised to paraphrase the evidence from the article (DO NOT COPY THE WHOLE SENTENCE AS IT IS A WASTE OF TIME) into your writing before you start interpreting them into an idea of your own. For instance:
a.  The article mentions that large firms may not give the consumers what they want. This can be related to allocative efficiency which is commonly found in large firms (recommended)

b. Big firms are allocatively inefficient (not recommended) (the examiner may not be able to see everything from your perspective. He/ she may question where the idea of 'allocatively inefficient' comes from)

c. The extract states that large supermarkets often force farmers to supply the agricultural output to them at an extremely low price. This is an abuse of monopsony power and hence shows one of the disadvantages of big firms (recommended) 

d. Large firms often abuse their monopsony power (not recommended) (the examiner may not be able to see everything from your perspective. He/ she may question where the idea of 'monopsony' is derived from)

10. It is worth noting that you may lose up to 10 marks (out of 70) (2 marks from Section A and 8 marks from Section B) from this paper for not giving any conclusion at all

Exam Advice/ Tips/ Strategies for Section B (Paper 4)
Possible Questions for Macro Economics 
1. GDP and standards of living. Please don't forget to include other indicators like HDI, NEW and MPI as well as evaluating them. Although the question does not explicitly mention about these indicators, they actually want them to be included

2. Injections and economic growth. There are three injections namely investment (I), government expenditure (G) and exports (X). However, the one that is more commonly asked is 'investment'. Candidates are required to link 'investment' to the 'multiplier effect' even though the question does not mention it explicitly. A simple numerical example with a diagram (either Keynesian cross or J/W) would make your answers more impactful. Remember, numbers speak louder than words!

3. Factors that could influence the level of investment. Please link 'investment' to 'accelerator effect' even though the question does not mention it explicitly

4. Whether X and Y are the only characteristics of a poor developing country. You will have to explain what contribute to X and Y e.g. low level of income and high population growth rate. Then, you'll have to mention that these are not the only traits of a poor developing country. There are others (easy ones to write) e.g. primary product dependency, poor infrastructure and overhanging national debt

5. Fiscal/ monetary/ supply-side policies and how they can be used to achieve macro economic aims like growth, full employment and low level of inflation. Evaluations are definitely part of this. Also, they are unlikely to ask either one policy but rather a combination of them

6. Difference between fiscal and monetary policy. This is not going to be a full-question on its own but rather part of (5). Candidates are expected to mention key differences e.g. fiscal is conducted by the government while monetary is by the Central Bank, fiscal involves manipulation of G or/ and T while monetary is interest rates or money supply, fiscal focuses on growth and full employment while monetary on price stability etc

7. Conflicts between macroeconomic aims. Candidates are advised to use 'growth' and 'full employment' against other aims like 'price stability', 'balance of payments being in equilibrium', 'environmental goal' and others. Don't forget to evaluate as well, saying why these goals are not necessarily conflicting with one another e.g. 'growth and low inflation' not a conflict if growth is due to an increase in LRAS or 'growth and BOP in equilibrium' is not a conflict if it is due to export-led growth as it allows a government to achieve both aims simultaneously

Possible Questions for Micro Economics
1. Economies and diseconomies of scale associated with an increase in the scale of production. Usually, EOS is the analysis and DEOS is the evaluation. Use points that are common and easy to write. For EOS, it would be purchasing, financial, transport and managerial. For DEOS, it would be difficulty to monitor the performance of workers, communication failure and principle-agent problem


2. Comparisons between a perfectly competitive firm with a monopolistically competitive/ monopoly firm. Do contrast between the number of firms, pricing ability, barriers to entry and exit, nature of products, short-run vs. long-run, efficiency both productive and allocative and business goals


3. Whether a given market e.g. pharmaceutical is contestable or not. Here, you have to mention that it is non-contestable (more likely to be) and then evaluate by saying that it may be contestable as evaluation

4. Whether a monopoly is desirable or not. 'Yes' as analysis and 'no' as evaluation. Desirability can be upon consumers, workers in the firm, the monopolist itself, suppliers, other firms in the industry, the government and shareholders

5. Whether profit maximisation is the only goal that private firms go for. Candidates will have to mention that 'it is' since firms' long-term survival depends on how much profits they retained. For evaluations, candidates could then mention that they also have other aims e.g. sales-revenue maximisation, sales maximisation, corporate social responsibility, maximising welfare of employees, minimising losses and others. You don't have to write everything. Three other goals are often sufficient if they are well-developed for a 12/13 marks question

6. Indifference curve and budget line and they can be used to illustrate (a) how a rational consumer attempts to maximise satisfaction (b) how quantity may change when there is a price increase/ decrease for a normal/ inferior/ Giffen good

7. Market efficiency, why market in the real world will fail and whether government interventions would correct market failure/ improve resource allocation. This will usually appear as a 25-marks question. Market is only efficient theoretically/ hypothetically. That happens when competition is at its most extreme level, bringing this to a perfectly competitive market analysis. Both productive and allocative efficiency can be achieved in such a market. Price is competitive and the only way to increase profits is by lowering costs. Also, if firms do not give the consumers what they want, then they may not survive into the long-run. Candidates are then required to highlight 3/ 4 market failures (ANY OF THEM, UNLESS THE QUESTION SPECIFIES e.g. monopoly and negative externalities are common). Then candidates must recommend suitable policies to improve resource allocation and whether this will always work. Obviously they don't and that is why we have government failures e.g. regulatory capture, information failure as in the government may have intervened too much or too little with indirect taxes/ subsidies and also difficulty to predict how consumers and firms will react to the policy changes. Don't forget about the conclusion too

8. Theory of wage determination and how equilibrium wage and level of employment are determined in a competitive market. Do include assumptions like both sides of the labour market are wage takers, workers are homogenous and so is the product, production is in the short-run so that the relationship between quantity of labour, productivity and output can be measured, there is no distortion in the market e.g. powerful unions, dominant employers and government (which can cause wage rate to settle below or above equilibrium). Then include a table if possible (higher-order skills) that includes quantity of labour, MPL, price, MRPL, wage rate, TCL, ACL and MCL. Include a diagram as well and explain these two from there

9. Whether market wage rates are always dependent on market forces alone. You will have to repeat (8) and then mention that this is true but only to some extent. In practice, labour market is largely dominated by imperfections. Forces like powerful unions and government intervention can cause wage rates not to settle at its equilibrium, and in this case ends up being above. Also, powerful employers can cause wage rates to go lower than equilibrium knowing that these workers are occupationally immobile. Do include other factors like racial and gender discrimination, experience and skills, level of education and others

10. Whether trade union interventions will always cause unemployment. You have to mention 'yes' if one refers to competitive forces of demand and supply. Unions may be able to negotiate for higher wage rates but this comes at the expense off rising unemployment. As evaluation, you have to mention 'no' if one refers to the case where trade unions intervene into an otherwise monopsonist labour market. Wage rates and employment are increased at the same time

One more update tonight
 

Data Response and Essay Techniques for CIE/ CAIE Economics (Paper 2)

Data Response:
1. Read analytically. Ask how, why and what

2. Spend not more than 5 minutes to get a very thorough picture

3. Spend not more than 45 minutes on this section

4. Pay attention to keywords used - identify, outline and state do not require detailed analysis or  explanations


5. Provide explanations if the instructions are explain and analyse

6. 'Discuss' refers to evaluation-based question. They are always the last question. Suggested approach - 2 agrees, 2 disagrees and a conclusion

7. 'Consider whether' is the new keyword for evaluation. Sometimes, there may be more than one evaluation questions. May carry up to 4 marks - 1 yes, 1 no and a conclusion

8. Candidates WILL DEFINITELY lose 1 mark from evaluative questions e.g. 5 marks instead of 6 marks or 3 marks instead of 4 marks if NO CONCLUSION is given. However, that doesn't mean 6 marks/ 4 marks would automatically be awarded either if a conclusion is given. The examiner will also need to consider the quality of the conclusion given e.g. whether it is justified, reasonable, correct or relevant to the context or not

9. Please make sure that the diagrams are clearly and completely labelled

10. If you can’t finish the 'Discuss' question, please proceed into giving points. It is easier to gain 2 marks than 6 marks

Essays
1. Read all the three pairs of essays. Get the 'feel'. Provided if you are fully prepared, there is definitely one pair that attracts you

2. Prepare a skeletal essay before you start and this must done very quickly e.g. less than a minute 

3. Do not define similar keywords in part (b) if you have do so in part (a)

4. Part (a) essay has to be completed in less than 20 minutes

5. Part (b) essay has to be completed in less than 25 minutes

6. While you are writing the essay, keep looking back at the question to make sure that you fully
 adhered to what the question wants. Avoid writing excessively and going into irrelevant points

7. Remember to use evaluation techniques like contradict, magnitude and short-run vs. long-run

8. Remember conclusion techniques like prioritisation, depends and alternative

9. IF you happen to realise that you have chosen a wrong essay and you have committed into it, then proceed into completing it. Situation cannot be turned around if you switch essay essay at this stage

Essays to watch out for:
1. Using PPC diagram(s) to illustrate concepts like scarcity/ opportunity cost, economic inefficiency/ recession, economic growth and international trade

2. Difference between goods e.g. public, merit and demerit and why profits cannot be made in the provision of public goods but possible in the case of merit and demerit goods

3. Characteristics and functions of money

4. How substitutes, complements, inferior and normal goods can be identified using elasticity

5. Factors which will determine the value of PED or PES

6. How useful is the knowledge of PED or XED or YED or PES to businesses and governments (please refrain from doing this type of question)

7. Whether maximum price is able to protect the interest of low-income families/ whether minimum price is able to protect the interest of firms

8. Between indirect tax and education, which is more suitable to decrease the production and consumption of alcohol and cigarettes

9. Between subsidy and education, which is more suitable to increase the production and consumption of education and healthcare

10. Theory of comparative advantage and how it can be used to explain the pattern of international trade and whether this theory is practical in reality (you have to bring in issues like trade barriers, trade is far more complex as there are more than two goods and two countries, countries do not specialise in just one good etc)

11. Exchange rate and how it can affect demand-pull and cost-push inflation

12. Whether inflation or deflation is more desirable

13. Factors which will determine the value of an exchange rate under floating exchange rate system

14. Fiscal/ monetary/ supply-side policies to correct inflationary problem

15. Expenditure-dampening (contractionary fiscal and monetary policies)/ expenditure-switching (currency devaluation, tariffs and subsidies)/ supply-side policies to deal with current account problem

There's more...stay tune!!