Wednesday, April 27, 2011

Why US Will 'Never Default' On Its Debt?

Over the past few weeks, the whole world was again shocked with the news that a default in national debt is imminent for the world’s largest economy. The IMF and Republicans are warning that US had survived all the ups and downs thus far, but is unlikely going to make it this time with the size of its debt spiralling towards the size of its GDP. The two most significant events that cause government spending to swollen are war in Iraq and costs of bailing out inefficient private institutions in recent times

Despite all the heated arguments, I would like to be a contrarian this time. After doing some investigation, I find that such claims are more likely to be ‘theoretical’ than facts.

Here’s why:

(1) Raise in debt ceiling

The Congress has allowed an increase in debt ceiling for the past 10 years and I don’t see the reason why they will not allow it this time. The only ruckus is that, it has been more contentious this round, since the government fails to fulfil its election promise to run down the fiscal deficit. It has to be passed, no matter the cause. Failing to lift the ceiling will cause US to be unable to meet the obligations of Social Security and interest debt payments. US will default for the first time in modern history, sending a negative multiplier effect to the world since all countries are so interdependent

(2) It’s not about the size of debt

Let’s consider an interesting development. Portugal’s budget deficit is about 8.6% of its GDP, far greater than what is stipulated under Growth and Stability Pact. It causes the government to go broke and finally go to IMF, EU government and ECB with a begging bowl. Here’s more, Ireland and Greece with a budget deficit of about 14% of its GDP. But wait. US’ fiscal deficit was just 8.9% as of 2010 and is has not defaulted up to date. So it is crystal clear that, size of budget deficit and national debt expressed as a percentage of GDP isn’t that matter to investors but rather the confidence factor!!

Here are some more convincing examples. UK survived World War 2 with national debt of 240% of her GDP and US exited the same war with debt over 100% of the GDP. Both didn’t default. Interestingly, Japan being the developed country has the highest national debt in the world (200% of GDP) and yet able to secure loans or interest rates that are close to zero

(3) Printing own currency

Well, US is in a special position unlike those peripheral countries within the Eurozone. It has the privilege of borrowing in its own currency and print dollar to inflate itself out of debt rather than defaulting. In other words, it has the alternative of paying back with dollars worth much less than what it has borrowed earlier. As long as this does not get completely out of control such as occurrence of hyperinflation, I don’t see why this is not a preferred alternative

(4) Everyone world needs US

Major economies such as China, Japan and Saudi Arabia need US badly. Frankly speaking, there is no way they will get exhausted buying these IOUs. If the US cannot get the needed finances, then its economy will cripple and there will be no other major economies that can purchase the cheap Chinese goods, electronic products and cars from Japan and oil in a profitable quantity like US does. In layman, they need to lend money to US so that US can grow itself out economically to pay off some debts and to purchase goods from these countries. We cannot mess with such system, failing which may indicate a new form of de-globalisation

The 3 Most Recommended Reading Materials For Knowledge Enhancement, Unit 4: Global Economy (GCE Edexcel)

Saturday, April 23, 2011

The Ultimate Guide For Long Essay in Section A, Unit 4: Global Economy (GCE Edexcel)

(1) What is the format of Section A?

The legacy syllabus of Unit 5B: Development Economics and Unit 6: UK in the Global Economy has been merged into a new unit called Unit 4: Global Economy. It has exactly the same format like the previous paper 6, where it is divided into two sections namely Section A and Section B. Section A is the essay while Section B is data response (I will discuss about Section B in near future)

Candidates will be given three pairs of essays and are asked to choose one pair out of those three. In the past, essay (a) and (b) carried 40 marks and 60 marks respectively. Under the new unit, both are 20 marks and 30 marks. For the 20 marks essay, candidates have to provide three explanations and two evaluations while for the latter, four explanations and three evaluations. That means, roughly 12 paragraphs considering both together. These are to be completed within about 60 minutes, which means each paragraph is roughly about 5 minutes. Well, time is really scarce in this case!!! I would advise candidates to ‘steal’ about 5-8 minutes allocated for Section B to choose, brainstorm for points and drafting out the essay

(2) How do they make these essays difficult?

(a) Adding distracting sentences

June 2005 Q1 (a)

Evaluate the significance of the factors which have contributed to increased globalisation in recent years (Pretty straight forward)

June 2008 Q2 (a)

The value of world trade has been growing at a rate faster than world GDP. Assess the factors which might explain this trend (Candidates were asked to explain what could have contributed to rising world trade which means rising globalisation)

(b) Making it sound so factual

June 2006 Q3 (a)

In 2000/01 the UK’s public expenditure was 37% of GDP. This is forecast to increase to over 42% of GDP by 2007/2008. Examine the likely economic implications, apart from increased taxation of this trend (20m)

June 2007 Q2 (a)

Between 1999 and 2001 the UK had a fiscal surplus but from 2002 there has been an increasing fiscal deficit. Examine the likely cause of this trend (20m)

June 2007 Q3 (a)

In April 2006, the unemployment rate was 16.5% in Poland, 8.2% in Germany but only 5.2% in the UK. Examine the factors which might explain the differing unemployment rates in these EU countries (20m)

June 2008 Q1 (a)

In March 2007, the UK’s inflation rate was 3.1% whereas it was 1.2% in France and 1.7% in Italy. Assess the factors which might explain the differing inflation rates in these EU countries (20m)

Normally candidates WOULD AVOID answering ALL THESE questions since they thought that they ‘must’ possess the general knowledge of the economic circumstance around that time or in that country. The good news is that, you DON’T HAVE TO. You can of course, always write using the ACTUAL KNOWLEDGE (if you really know) or argue THEORETICALLY or the combination of both. If the theoretical approach, my advice use words/ phrase like perhaps/ may be due to/ likely

(3) How to decide?

This is the most subjective part of our discussion. Assuming that a candidate is REALLY WELL PREPARED, definitely there will be one pair of essay which is more appealing. What I’m trying to say is, probably you have done past year questions somewhat similar to that or some points and evaluations might start to linger around your head as you read through

Worse come to worse, pick a question that is related to trade. I am not saying 100%, but I have 80% confidence, based on previous trend and weightage of the curriculum, there is likely to be one pair of essay pertaining to globalisation and international trade, current account deficit and international trade, WTO, trading bloc and international trade or solving problems related to current account deficit

(4) How do I allocate my time?

As discussed earlier, tentatively about 25-30 minutes for essay (a) and 35-40 minutes for essay (b)

(5) How long is each paragraph?

Given the severe time constraint, I think a normal candidate will only be able to produce four or five sentences. However, some really good candidates are able to work like a printing press, ending up seven or eight sentences. In a nutshell, you should not be too concern with how long but rather asking yourself whether you have explained each point/ evaluation sufficiently or not

(6) Some writing tips

(a) Powerful adjective words. Some candidates are not that good but fortunately they really know how to twist with their language skills. Those who took up Literature may have and added advantage over this. Although marks are allocated to clarity of expressions, good usage of grammars/ vocabulary can more or less ‘influence’ the quality of your overall essay. It might get 1/2 marks extra. I give some random examples like, the gold price has increased to an unprecedented level in recent weeks, the level of national debt has skyrocket to an unchartered territory, Portugal and Greece are two out of five peripheral areas in Eurozone etc

(b) Good working knowledge. Consider these two candidates:

The central bank has slashed interest rates to 0.5% (normal)

The Bank of England’s latest rate of 0.5% is the lowest in the history of 316 years ever since the Bank was last founded (better version)

UK has experienced good economic growth before the crisis (normal)

UK has experienced an uninterrupted economic growth since 1992, equivalent to 63 quarters before taking a u-turn (better)

You don’t have to worry about the fact that you are putting in. Examiners are normally very experienced. In fact when I was a delegate, I had had a good opportunity exchanging thoughts with Brian Ellis (Chief Examiner for Economics) when he came down to KL, Malaysia two years ago. He told me that examiners will clarify those facts/ statement by researching up

(c) Use lots of link words/ phrase. This is meant to create steady flow of thought which will make your essay more look more systematic. Besides it does help the examiners to identify which are your points and which are evaluations. Do use subsequently, this leads to, next, this is because, as a result, although etc

(d) Economic jargons. Use lots of this to make your essay more appealing and attractive to the reader. Insert more words like deflation, sustainable development, expansionary monetary policy, paradox of thrift, Golden Rule, structural unemployment etc. But before doing so, please improve your mastery and understanding of these words/ concepts

(e) Diagrams. There are possibly four types of diagrams that can be used in Unit 4. They are the usual demand-supply diagram, J-curve, AD-AS analysis and Laffer curve. Use diagram wherever possible to help improve your communication with the examiner

(f) Think one step ahead. Before start writing, choose those points where you already know its evaluation(s)

(7) What to do when I get stuck with a sentence?

From my writing experience, it has a lot to do with how you start the sentence, e.g. usage of incorrect link words can ‘halt’ your idea sometimes. In such circumstance, waste no more time. Erase part or the entire sentence. It could also be due to choosing points that you are not so familiar of

(8) So, how do I organise my essay?

Writing style. It is fine if you would like to write all explanations followed by all evaluations. The good thing is, probably clearer flow of ideas. If you were to provide an evaluation after each explanation, you may ending up taking so long for each evaluative comments. The only thing is, your essay may look a little bit ‘awkward’ with such sequence

If not, you may also consider the alternate style. Each explanation is soon followed by an evaluation. Here, the essay may be more presentable. The only backdrop is you may take too long brainstorming for an evaluation

(9) Do we need to provide introduction?

A brief one will do. You may want to define certain key words in the question or adopt a method I called ‘copy the line’. For instance, assess the reasons for rise of China with there are few reasons that explain the awakening of China etc. Ending/ summary/ drawing conclusion is optional

Wednesday, April 13, 2011

How To Write A Good 30m Essay for Unit 2: Managing the Economy (GCE Edexcel)

1. Why is this essay important?

· (a) It is the only question that carries the largest weightage (30/80) and will therefore significantly affect the overall marks for Unit 2 and grading for AS

· (b) It shows how well you understand those economic policies and being able to apply them into real life situations like promoting economic growth, reducing unemployment, narrowing the current account deficit, lowering the inflation etc

· (c) Being able to write or score in this essay will indicate your writing ability. This is an early indication whether or not you will perform in Unit 4: Global Economy, since these two units are heavily inter-related

2. What is the breakdown of marks?

It follows the 6-12-12 formation. For the first 6 marks, 2 marks are meant for definition of economic policies (fiscal, monetary and supply side) or sometimes explaining a phrase which will be indicated in “................”. The remaining 4 marks are for AD-AS diagram

Next will be the explanations. If candidates can explain very well, then two explanations will suffice (6+6). If not, candidates may provide three but less detailed explanations. So, each will be 4 marks. The 12 marks evaluations have the similar breakdown

3. How to write a good essay?

There are few key areas that examiners are looking for. Students will be judged on their ability to express their opinions clearly. In other words, examiners should not find great difficulty trying to comprehend the contents of your writing

Ability to use economics terms accurately is also vital to ensure higher marks. Try to use words like savings ratio, structural unemployment, the Great Recession, expansionary fiscal policy, paradox of thrift, automatic stabiliser etc wherever possible. To examiners, usage of these jargons indicates that a candidate is able to relate theories to application

Link words such as therefore, this is because, this leads to, as such, furthermore, next, nonetheless etc must be used to highlight the flow of ideas. Having said so, one must use it correctly. There are many circumstances where I have seen these words used inappropriately. One the clumsiest examples I came across is:

Bank of England can also consider a slash in interest rates. Furthermore this will lead to cheap and borrowing and an increase in private spending.......(it sounds so wrong!!!!)

In fact, AD-AS diagram can be used more than once to support an explanation or evaluation. Appearing once, usually at the heading does not indicate that students cannot use it once more. Normally, I will draw another diagram in evaluation to indicate the vertical part of AS to show that growth is difficult once full employment is achieved

(4) How long for each paragraph?

There is no limit. To me, as long as the objective of the question is met, then it may be time to move on to the next explanation/ evaluation. Normally, each paragraph contains around 4 or 5 sentences. But again, this depends on personal efficiency. Some people can write 8 sentences with the equal length of time

(5) Should I do essay first?

There is no such rule. Candidates can begin the paper as usual from question (a) or start from essay. It is all about preference. However, in my opinion, one should not start with essay first. There is always a tendency to finish whatever we have started and that means one may take longer than 35-40 minutes, if the question is a troublesome one (it is always for students!!!). That means not much time left for other shorter questions. Let’s not forget that the others form 50 marks altogether

(6) What is the biggest problem in essay?

Most of the candidates are unable to ‘twist’ the transmission mechanism to suit the need of the question. Consider this:

Using any one supply side policy, explain how the UK macroeconomic objectives can be met

The UK government may consider increasing the budget onto education sector. This may include more research grants to universities, higher pay for top professors, financial assistance to needy students and the provision of training programmes. If this is implemented correctly, the nation will have higher number of world class workforce. Rise in productivity will lead to more output, hence economic growth

This leads us to the next discussion. Skilled workers are able to understand complex instructions and perform their task efficiently compared to, say a non-graduate worker. This will lead to lower unit labour costs. From another angle, we can also say firms save lots of money, not requiring to send these workers for remedial training. Final output will be cheaper, hence a lower level of inflation for UK economy

(7) How to be better-prepared?

Read up all those economic policies and be sure that you are able to use them to solve economic problems like rising unemployment, looming recession and widening current account deficit. On top of that, familiarise yourself with some ‘standard’ evaluations like time lags, depending on where UK economy is operating at (elastic or inelastic part of AS), comparison between policies and which is more superior