Tuesday, October 21, 2014

List of the Most Important Definitions for Chapter 3 (A2): Government Intervention in the Price System

This is for Chapter 3 of A2:
1. Contracting out: The transfer of responsibility for the provision of a service from the public sector to the private sector

2. Deadweight loss: The fall in consumer surplus when a monopoly firm reduces output and raises price compared to what the situation would be in perfect competition thereby causing a welfare loss to the consumers

3. Deregulation: The process of removing or reducing state regulations which will then reduce the compliance costs

4. Income inequality: The extent to which income is distributed in an uneven manner among a population

5. Means-tested benefits: Benefits that are available only to individuals whose income is below a certain level

6. Monopoly: A market structure which is dominated by a single firm/ Legally a firm that owns more than 25% of the market share (monopoly and oligopoly can co-exist)

7. Natural monopoly: A situation in which the most efficient number of firm in an industry is one

8. Nationalisation: The transfer of ownership of an industry from the private sector to public sector

9. Negative income tax: The payment of money to those people on low incomes instead of taking part of their income through income tax

10. Poverty trap: A situation where a person does not have any incentive to look for better paying jobs because this would lead to higher income tax and lower benefits which will make them overall worse off than before

11. Privatisation: The transfer of ownership of an industry from the state or public sector to the private sector

12. Progressive tax: Taxing mechanism in which the government charges higher taxes as the level of income increases

13. Regressive tax: Taxing mechanism which takes a larger percentage of income from the poor rather than rich

14. Supply-side economics: The approach to change in an economy that puts the focus on the supply side rather than the demand side, such as improvement in education and training, privatisation, deregulation and lowering of tax

15. Tax credit: A sum that can be offset against the tax liability

16. Universal benefits: Benefits that are provided to everyone who is entitled to them without taking into account the income of those people

17. Unemployment trap: A situation where an unemployed person does not have any incentive at all to look for jobs because of the generous benefits given

18. Wealth inequality: The extent to which financial assets are unequally distributed among a population

19. X-inefficiency: A situation where average costs (AC) is not at its lowest point because monopoly power has given rise to inefficiency

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