Sunday, October 19, 2014

How To Write A Good Conclusion For Discuss Essay Questions? (CIE/ CAL AS Economics) ( 9708/02)

What Is A Conclusion?

It is a piece of judgemental writing which normally comes towards the end of an essay. It can also be seen as a decision or final thought after an extended analysis or research. What this means is that, students generally have to attach a weight to their opinions. I strongly discourage candidates from writing a piece of conclusion that sounds like a ‘bullet-list’ of all the points used up earlier. For an instance,

Sample 1:

In conclusion, the advantages of tariffs are higher tax revenue, reducing current account deficit, protect jobs and protect sunrise industries. Disadvantages are trade retaliation, distortion to comparative advantage, loss of jobs in long run and violating WTO rules

Sample 2:

As conclusion, the advantages of currency depreciation are higher growth, lower unemployment, and improvement of government finances and the disadvantages are cost-push inflation, increase in value of foreign debts and lower standard of living

As can be seen, they don’t sound like a conclusion. They are more known as a SUMMARY

How to Write a Conclusion?

‘Pick a winner’

Sample 1
Between higher indirect tax onto cigarettes and the complete ban of public smoking, it is argued that the former is much more favourable. It creates a win-win situation for all stakeholders. There is consumer sovereignty for smokers, higher tax revenue for government and negative externalities get to be internalised

Sample 2

Between currency appreciation and depreciation, it is argued that the latter is much more preferred. This can be seen in the case of both developed and developing countries which have a sizeable manufacturing sector. Only those countries with huge foreign debts may prefer a rise in domestic currency

‘Both are losers’

Sample 1
In conclusion, both tariffs and quotas are undesirable economic policies. Despite both have their own merits and demerits, economic history such as the Hawley-Smoot Tariff Act 1929 had proven that the long term damage is always far greater than the short term gain. Protectionist measures in whatever way will lead to trade retaliations that benefit no stakeholders at the end

Sample 2
In conclusion, both unstable exchange rate and unstable inflation are perverse economic conditions and in no way their existence has any merits. Their damaging effects cannot be considered in isolation since both are inter-related. An unstable inflation usually leads to an unstable exchange rate

‘Both are winners’
Sample 1

As a conclusion, both expenditure dampening and expenditure switching policies are equally important to reduce the size of current account deficit. They both work wonders if are combined simultaneously

Sample 2

As can be seen, the social costs of smoking far outweigh its private costs. Given that is the case, both indirect taxation and ban of smoking in public areas have to be conducted simultaneously to combat such habit 

Good luck for tomorrow. Hopefully my advice helps. Cheers

Macroeconomic Logic-What Textbook Doesn't Tell You (Important for CIE/ CAL AS Economics) (Part 3)

This is a continuation from the previous post on Macroeconomic Logic. Another problem with our CIE AS curriculum is that students are not told that expenditure-dampening policies to correct/ reduce current account deficit are actually contractionary fiscal and monetary policy themselves. In short, they are macroeconomic policies designed to reduce the level of national income so that the people have lesser income to spend on imports, which is where the name of EXPENDITURE-DAMPENING comes from-dampening the ability to consume imports. Knowing this underlying concept or fact is so important to avoid the confusion with EXPENDITURE-SWITCHING

Let me explain further:
Expenditure dampening policies: They are macroeconomic policies to reduce the level of national income so that people generally have lesser money to spend onto foreign goods and services and hence the reduction in the size of current account deficit

Fiscal policy: It is the manipulation of government spending and level of taxation in order to influence the movement of AD and overall level of economic activities

Contractionary fiscal policies as expenditure-dampening measures
1. Cut in government spending to fix current account deficit. When the public sector reduces spending into the economy, this will cause the AD curve to shift leftward. This is because government expenditure (G) is one of the components of AD. As a result, the level of output/ real GDP (as explained in earlier posting) will equally decline. Fall in output is almost always followed by a decline in national income. This implies lesser income to spend on imports. Assuming exports constant, current account deficit should decline

In case if you still don’t see how a cut in public sector spending can reduce average income, this is another version of explanation. When the government reduces public sector spending, it may imply that lesser jobs are created. It can also be the case where private firms are awarded with fewer projects than before and hence dampen the ability to spend into the domestic economy (yes, G can influence C and I)

2. A rise in direct taxation. When individuals pay more income tax, this means that their disposable income will fall. With lesser money than before, obviously they can afford fewer imports. Lesser outflows of money help to reduce the size of current account deficit. Another one is raising the level of corporate tax rate. As firms pay more tax, their retained profits will fall. This implies fewer capital goods can be imported from abroad. Less money flows out of the country and again, current account deficit may shrink

Monetary policy: It is the manipulation of interest rate or money supply in order to influence the movement of AD and overall level of economic activities

Contractionary monetary policy as expenditure dampening policies
1. Higher interest rate. The Bank of England may raise the base rate/ repo rate/ overnight rate to dampen the level of economic activities. Higher rate will encourage savings. Also more expensive borrowing will discourage household consumption on credit. These two will lead to an overall fall in consumption (C) into the economy. As AD shifts leftward, real output/ real GDP will fall. A decline in income per capita/ per person will reduce ability to consume imports

Another way to look into this is, higher rate of interest may be extended onto the usage of credit cards. As the cost of borrowing increases, people will tend to spend less using their credit cards. Less imports will be purchased and hence the improvement in current account deficit

2. Reducing the money supply. When money supply is cut, financial institutions will generally be less able to extend credit. Fall in the ability to generate new loans will lead to a decline in overall level of economic activities. Fewer people will go shopping, travelling domestically, buy houses and others. This explains why national income will fall hence reducing the ability to consume imports

Another way to look into this is, the credit card limit can be reduced. This means a fall in the maximum amount of money a credit card holder can spend. As a result, fewer imports can be afforded and hence a fall in current account deficit

What you should know in addition?
Contractionary fiscal policy. Since national income falls, that also implies that more people will be unemployed. Government finances may worsen eventually as more money will need to be spend to address rising unemployment e.g. Job Seeker’s Allowance. On top of that it also allows the economy to reduce demand-pull inflation

Contractionary monetary policy. National income will fall and current account deficit will shrink. But it is also worth noting that unemployment will rise, demand-pull inflation may reduce and government finances will probably worsen due to more benefits paid but lesser tax revenue collected

Friday, October 17, 2014

Macroeconomic Logic-What Textbook Doesn't Tell You (Important for CIE/ CAL AS Economics) (Part 2)

In my previous posting on Macroeconomic Logic, I had explained how all the main four main macroeconomic variables such as economic growth, unemployment, inflation and current account deficit interact with one another in the most logical way. What I didn’t mention was, there are in fact more macroeconomic variables, or to be more precise macroeconomic objectives than you think. Three other crucial ones are government finances, income inequality and environmental goals which I had purposely omitted. I will add them into our discussions one at a time, so as to minimise confusions

In this second posting, I will introduce another two. One is government finances and another is appreciation/ depreciation of exchange rate. To make things simple, I will consider pound sterling all the time
1. Currency depreciation vs. growth. When the value of pound decreases, British goods will become artificially cheap. This will most likely lead to an increase in the amount of exports. At the same time, weak currency implies that foreign goods will now become artificially more expensive. Imports will likely fall. The combination of these two, holding other factors constant, will lead to a rise in (X-M). Since this is one of the components of AD, that means AD will now shift to the right. Economic growth is achieved as more goods/ services are produced to cater for foreigners

2. Currency depreciation vs. unemployment. When the value of pound decreases, home-made goods will become artificially cheap. As such, value of exports will increase. At the same time, foreign goods will appear artificially more expensive to Britons. That leads to lower imports. Rise in factory orders both from the international and home market will help to rejuvenate the beleaguered manufacturing industry in the UK. Firms will now require more manpower to produce the output. Unemployment is expected to fall

3. Currency depreciation vs. current account deficit. In theory, the weakening of home currency will promote international price competitiveness. Foreigners will now perceive British goods as artificially cheap and so, this may lead to greater exports. In contrast, Britons will consider any imported goods and services to be artificially expensive with the fall in pound. This discourages the consumption of imports. Assuming other factors to be constant, a rise in inflows coupled with a decline in outflows will overall reduce the size of the UK’s current account deficit

4. Currency depreciation vs. inflation. The fall in the value of pound can generally lead to three types of inflation within the UK. First, as exports become artificially cheap while imports artificially expensive, value of (X-M) will increase. This will shift AD to the right thus contributing to demand-pull inflation. Second, a weak pound will indicate that imported final goods, raw materials, spare parts and semi-finished goods are now artificially more expensive. Businesses, facing higher production costs will normally pass this on in the form of higher price to ensure a healthy margin of profits. Cost-push inflation is resulted. Interestingly, if the imported goods become expensive due to relatively higher inflation in other countries or due to weaknesses of home currency, that will contribute to imported inflation, which is also a type of cost-push inflation

5. Currency depreciation vs. government finances. The weakening of pound will promote the international competitiveness of British goods. A rise in factory orders is expected to increase the margin for factories. At the same time, unemployment is likely to fall in this key area due to more manpower needed. If one was to consider carefully, this will probably contribute to greater tax revenue due to higher corporate tax and higher income tax collected. At the same time, the government is expected to pay less in terms of Job Seekers’ Allowance as well as subsidies to prevent bankruptcy

More to come in my next posting. I will introduce fiscal policy and monetary policy and how it works to reduce current account deficit. On top of that, I will also show you how they can actually create effects onto other macroeconomic variables. This is one of the most crucial areas that is not properly introduced in CIE