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

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

Possible Questions in Section B Data Response Unit 3: Business Economics and Economics Efficiency

All right. Here comes Part B

(1) How to choose between the two?

As mentioned in earlier posts on Unit 2, have a look at the questions for both Q9 and Q10. I don’t encourage candidates to go through the extracts first. It would be a great waste of time going through everything and end up making a u-turn if the questions turned to be difficult. The aim of reading those questions is to get the ‘feel’ of how approachable they are. Normally I will pick those questions where I can roughly draft the answers in my head without making much reference to the extract. For instance, ‘Assess the price and non-price method that the brewery firms can adopt...” or perhaps something like “Discuss whether the industry is contestable...”. If both questions are equally student-friendly, then maybe it is time to quickly read through the extract. Pick the one where most answers are available in the texts. It will make your life much easier since you are likely to take lesser time crunching for points and all you have to do is elaborate

(2) How many questions to expect?

Under the new specification, there are only four questions (a) to (d). This is not a good news to me since that indicates each question especially the one with evaluations is likely to carry higher weight say 12/14/16 marks

(3) What is the breakdown?

First question is meant to help candidates and therefore is likely to be easy. It carries 4m. For subsequent questions they are normally evaluative types. Marks will be split equally. For example, a (12m) question will be (6m) for explanation and (6m) for evaluation. Within the (6m) itself, candidates can adopt (1+2+3) or even (2+2+2) or (3+3) and this is applicable for both explanation and evaluation. If the question were to be (16m) then the breakdown would be (8m) for explanation and (8m) for evaluation. The (8m) itself can be (4+4) or (2+2+2+2) or even (3+3+2). If there is keyword in the question, please don’t forget to provide definition and this may be awarded with (1m) or (2m). If explanation carries (6m) or (8m), this may act as a complementary or substitute. Total mark for explanation will always be (6m) or (8m) in this case

(4) Possible questions?

(a) Identification of market structure. This is most likely to appear as the first question. It carries (4m). Usually the answer will be oligopoly or monopoly (1m). Candidates are required to provide definition or explanation of its characteristics (1m) and finally making reference to extract or figures provided (2m)

(b) Definition related. This will also likely to appear as the first question. They may ask you to make reference from the extract and you will have to identify the concept from the statement given. For instance something to do with forward vertical integration (1m). Then candidates are required to define that (1m) and finally strengthen the explanation by making reference to certain lines from the extract. Other possible definitions are like EOS, sunk costs, price cap of RPI-X, RPI+K, concentration ratio etc. Remember, they must be monopoly or oligopoly related definitions since it is highly unlikely that the extract is something about perfect competition or monopolistic

(c) Contestability. Candidates will have to mention that the industry is not contestable due to reasons like high advertising expenditure, high research costs, patents etc. These points maybe available directly from the extract. In evaluation, candidates may contradict by providing evidence that the industry is contestable to certain extent. Again do make reference to the extract. Chances are, what you need is available either directly or indirectly from the extract

(4) Price and non price competition. The easiest of the lot. Provide answers like limit pricing, predatory pricing, sales maximisation, buy 2 free 1. As for non-price competition, mention about mergers to eliminate competitors, advertisement, improve quality of goods, research on production techniques, loyalty cards etc. Also candidates have to be street smart. Some points are universal while some are not. Consider loyalty card. It is more suitable for issues like consumer goods and not for utilities like electricity and water. The same goes for marketing and promotional campaign. It is more suitable for chocolate, cars and electrical goods rather than products with homogenous features like water and electricity. Expect the concept of Game Theory to be incorporated together with this

(5) Price discrimination. Candidates must be ready to provide the definition for this and assumptions behind the operation of price discrimination. Diagram is expected. As for evaluations, one can argue that lower price in the market with elastic demand may attract the attention of regulators if it set too low, the gap of prices between the one with inelastic demand and elastic demand should not be too large if the firm has considerable reputation, or else the good will be perceived as ‘cheap’ etc

(6) Role and power of OFT and Competition Commission. Mentioned that the role is to ensure healthy competition and protect consumers’ interest. It has power like confiscating documents, fine up to 10% of global sales revenue, imprisonment of directors etc

(7) Thinking skills. Some of the answer may be available in the extract
• Evidence that price fixing has taken place
• Benefits from horizontal merger
• Impact of high prices onto producers and consumers
• Evidence of high sunk costs
• Why Firm X is charging higher price in one market and lower in another?
• Is it inevitable that smaller firms in oligopoly market will exit in the industry in long run?

Well that’s all. My time is really tight in these two weeks. Hope I can still sneak some time in between tomorrow to upload another posting on the 6 most effective evaluation techniques , some standard evaluation for Unit 3 and common errors

Tips to Score Well for MCQ Unit 3: Business Economics and Economics Efficiency (Edexcel)

General technique

(1m) for correct option, (1m) for relevant definition and (2m) for explaining why the correct option is chosen

Specific techniques

I find that students are generally struggling especially to secure the remaining (2m) from explanation. Well, worry no more. I can assure you that if the techniques below are carefully applied, I can help you to increase your chance of scoring by 50%

• If you can support your answer with a diagram, please provide one. This is very applicable to questions related to topics like revenue and costs, perfect competition, monopoly and monopolistic
• If you are given a diagram, try to annotate or add curves. It may carry (1m) or (2m). Again this is applicable to topics outlined above
• If you are given a table with total costs or/ and total revenue, try to perform calculation such as marginal cost, average cost, marginal revenue and average revenue
• If you think that it is hard for you to explain a scenario say economies of scale, why AFC is falling as output increases etc try to provide simple numerical explanation. It will definitely help you
• If you have chosen the wrong option, under the new Edexcel Unit 3 specification, you can still secure up to (3m) from (4m). As such there is no need to panic if you are really not sure about the option
• If you have chosen the correct option but do not know how to explain it correctly, you can gain a maximum of (2m) by explaining why the other options are incorrect. Having said so, you ought to be careful in choosing which option to be eliminated. Make sure that you have sufficient knowledge. Secondly, you are reminded that not all options can be corrected as some of the answers are totally irrelevant that there is no way it can be corrected

What are the possible questions in MCQ?

Perfect competition
Watch out for topics like productive and allocative efficient. Also candidates must exhibit knowledge like why perfect market firms are only making normal profits in the long run. There is possibility that candidates may have to choose one out of five options, which resembles perfect market. They may provide options like coal mining, pharmaceutical, hairdressing, newspaper firms and wheat. Remember to choose answers that are agriculture related. Remember to draw diagram for questions on productive and allocative efficient as well as issues like supernormal or normal profit

Monopoly
Watch out for price discrimination. Remember the definition, assumptions, diagram and it what way price discrimination has been practiced. Productive and allocative efficient also likely to come out. Definitions of these two are essential and remember to draw diagram to support your answer. In the past, exam questions are extremely popular on change in objectives say from profit max to revenue max etc and change in costs (MC and AC) or change in revenue (MR and AR). However I have strong feeling that these topics are unlikely to be tested under new specification

Oligopoly
Make sure you know the following facts well. Oligopoly firms are few in the industry, they are highly interdependent, have high barriers to entry, price collusion/ price fixing/ tacit collusion is common, prefer non price competition, not contestable and has high sunk costs, high concentration ratio and often draw the attention of OFT, Competition Commission and European Commission. Watch out for few types of questions like benefits of mergers, game theory, concept of branding or advertisement and how is it related to high barriers of entry and in what way their act attracts the attention of regulators. It could be price fixing, agreements with distributors etc. Kinked demand curve is no longer in specification and therefore will not be tested

Monopolistic
Again, watch out for topics like productive and allocative efficient. Candidates have to remember that all firms that have price making ability are generally not efficient in both productive and allocative. Also you are reminded that only normal profits are made in the long run due to low barriers of entry and exit (perfect market has no barriers to entry and exit). Also they may ask you to choose which of the possible five options that represent monopolistic firm. It is easy to differentiate. Look for the business that is likely to have the lowest possible costs among the five

Regulators
Make sure you are familiar with roles of regulators like maintaining healthy competition and to safeguard consumers’ interest. Also expect possible questions on price capping like RPI-X and RPI+K. There are many ways to confuse students with these two terminologies. Under the new specification, candidates are required to have knowledge on price capping as well as profit capping and be able to identify the pros and cons between these two. Somehow the possibility of profit capping to reappear in this round of Unit 3 is remote since nothing much can be asked and considering that it is just recently tested (January 2010)

Hope this helps!! I will upload the next posting on Section B in a couple of hours. Stay tune.

Common Problems in Unit 2: Managing the Economy (Edexcel) and How To Improve It

(1) Not knowing which question to choose
This is the largest dilemma for candidates. If wrong question is picked, 10-15 minutes would have been wasted just like that before a U-turn. Candidates would normally panic, unable to think rationally and carefully, unable to finish the paper and end up re-attempting the paper in the next seating. So I strongly suggest students to look at questions first rather than the extracts. This is meant to get the ‘feel’ which question is easier and more appealing. How appealing or how easy depends on how much time candidates have spent revising and which part of Unit 2 they spend more time on. Provided that the student is well-armed for the paper, definitely there will be one question that is more appealing than the other entirely. Practice past year papers sufficiently. At least 7-8 sets will do. Look for exam questions that are familiar and perhaps have repeated themselves, for instance weaknesses of GDP to measure standards of living, definition of GDP, difference between claimant count and ILO measure of unemployment, issues MPC will look at before interest rate decision etc

(2) Are extracts trivial?
To be honest, yes. I realise that most of the questions can actually be answered without referring to the extract. It is provided for minor purposes, for instance allowing candidates to make statistical reference or strengthening explanation. Macroeconomics involves explanation of a process and extracts will not provide you with transmission mechanisms. For instance how does fall in income tax can affect current account, joblessness worsening government finances, high prices leading to wage-price spiral etc.

(3) Do not understand extract
Most candidates have this problem. The reason is because they are reading it too fast lacking the sense of appreciation and therefore not being analytical enough. Consider this sentence:

“Global output growth falls and jobs in UK will be adversely affected”
Full interpretation should be like this. Major economies around the world such as US, France, Germany and many other trading partners of UK are not performing well. Fall in output growth means fall in income. Demand for British goods will fall and manufacturing sector especially is expected to shed more jobs

Spain’s record economic growth of 2.8% in 2006 explains for its high inflation and worsening current account deficit
Candidate should be able to see this. Growth and inflation come together. If growth is high, the economy must be ready to tolerate high inflation. Or it could be high growth leads to higher income and therefore the economy must have experienced demand-pull inflation. Current account deficit worsen probably due to higher income. More imported goods are demanded. At the same time, when inflation is high, Spanish goods lose competitiveness. Demand for exports falls

(4) Doing essay first
I wouldn’t suggest candidate to do essay first. There is always a temptation to finish what we have started, more over an essay that carries 30m. I’m afraid that a candidate might have spent too much time with the essay, lacking the time for other questions. I have a student who took 1 hour for the essay leaving only 30 minutes for the rest of the paper. That is extremely dangerous. The thumb rule is 1m = 1 minute. The paper carries 80m and candidates have 90 minutes. So that means for a 30m essay, candidates should not spend anything more than 35-40 minutes.

(5) Wrong approach in practice
Normally we go paper by paper, year by year but in my class I go question by question. As mentioned earlier there are many questions that do not require any reference to the extract. It is more effective that way. Doing question by specialisation allows for better understanding of the trend of questions and also allowing the entire sets of papers to be completed faster


(6) Not knowing how to approach the question
Very simple. Remember the acronym of REDD. R-reference, E-valuation, D-define and D-diagram. A question always consists of one or more of these four elements. So, before writing the answer check out for these four things

(7) Not knowing when to evaluate
Here is another acronym. JE-DATE which stands for Justify, Examine, Discuss, Assess, To what extent and Evaluate. I realise that evaluation is always 4m for short questions. Candidates can provide one evaluation point if it is worth to be considered 4m or two evaluations which carry 2m each

(8) No systematic approach towards 30m essay
I have seen candidates evaluating at the beginning of the essay!!! Very ambitious I must say. Keep things simple. Write with simple English and yet providing powerful explanation. Lots of marks will be awarded to candidates that have good economics command words, being able to explain clearly and showing good working knowledge. I propose the 6-12-12 approach. 6m for definition/ explaining phrase (2m) and diagram of AD-AS (4m). Explanation carries 12m. My suggestion is 4+4+4 rather than 6+6 unless the candidate is very confident of the explanation. The same goes for evaluation of 12m

(9) Poor usage of link words
Poor candidates may use words like HOWEVER or HAVING SAID SO in their explanation. Bear in mind that these words are more suitable to be used as evaluation. Common link words I use in my explanation are furthermore, besides, this leads to, this is because, as such, therefore, first, secondly, last but not least etc.

(10) Lack of economics vocabulary
Sometimes we or even the examiners might get too tired using or seeing the word increase, increase, increase and increase all over the place. Some other words that can be considered are like sky-rocket, bullish, rise, raise, heading upward etc. For the opposite, candidates may consider nose-dive, bearish, fall, downturn, plummet other than decrease. Other than that, it is strongly advised that more economics terminologies are used in writing. This will exhibit the ability of candidates to relate theories to working knowledge and is something that often impress the examiners

(11) Superficial explanation
There are certain explanations that are logical but they are just “highly unlikely” to happen:

“Rise in unemployment will lead to higher suicidal rate....” (unless to the extent of Great Depression)
“Failure to meet the inflation target will cause Mervyn King to resign...” (unless the target is not met for ages and the Governor shows incompetency)
“Due to the ballooning budget deficit, UK government is likely to bankrupt...” (unless UK faces the same fate to the scale of Iceland)

Avoid the above at all cost!! More queries can email me at igniz_low@yahoo.com or drop a message at the query box.

Possible Questions For Edexcel Economics Unit 1: Competitive Markets-How They Work and Why They Fail? (Data Response, Section B)

Examination tips (highly possible questions) :

Commodities

(1) Demand and supply diagram to show changes in price. However, it is more likely an increase than decrease. Normally is the first question and as such no evaluation is needed. Sometimes the marking schemes indicate that students must give ALL the points for DD or SS while some other time either one point will do. In such circumstance, my advice is to give ALL since we do not know exactly what to expect from the marking scheme. 100% to appear in examination and will usually carry 6m-8m. Marks can be used as a guide as whether both DD and SS will move or either one. 6m likely one curve to move while 8m both

(2) Price elasticity of demand for the commodity. First thing to do is define. Then explain that it is inelastic due to its nature being a necessity. May need to refer to extract and figure. Evaluation is expected. Normally carries 6m-8m

(3) Cross elasticity of demand. Is possible to be tested if the extract mentions together diamond and gold, aluminium and tin etc. Most likely to be substitute than complementary. Must mention that they have positive XED and are substitutes. Explain the relationship say a rise in price of gold leads to rise in demand for diamond by jewellers. Candidates may be asked to make reference. Evaluation is expected

(4) Price elasticity of supply. Providing definition is the first action to be taken. Then, explain that it is inelastic in supply in the short run and elastic in the long run. Commodities, houses and agricultural products have this sort of nature. In evaluation, candidates can argue that this nature may not be true. For instance, better technology can expedite growth of crop or improve chances of oil discovery. As such short run it may not be inelastic. The same goes for long run. While the crops are ready to be harvested and supplied to the market, hurricane or some natural disaster may take place. As such it will be inelastic in supply even though in long run. Likely to carry 8m-10m

(5) Buffer stock. Explain what is meant by buffer stock. Draw a diagram and provide explanation how it works. This question normally carries 12m where 6m are catered for evaluation. Typical evaluation can be used, for instance expensive to set up, costly to maintain due to storage, administration and logistic etc, likely to fail based on experience with other form of commodities, may not have enough stocks to release into the market during shortage etc

(6) Minimum guaranteed price. Provide definition for this, then draw the diagram with a horizontal line above the equilibrium price. Explain the purpose of the scheme and how it is related to the question. Normally we provide supportive argument. In evaluation, I recommend contradiction as one of the possible techniques. Candidates may say it increase complacency, fall in quality of crops, opportunity cost of government spending, damage the livelihood of farmers in other poor developing countries due to dumping etc. Likely to carry 10m-12m

(7) Calculation. Students are expected to perform simple calculation involving percentage. For instance, percentage of change in price or income or quantity demanded etc. Likely to carry 2m

(8) Possible economic effects. It may carry 10m-12m. Questions may sound like ‘what are the economic effects of rising oil prices/ increase in production costs/ increase in congestion charge’ etc. 6m of evaluation is expected

Market failure

(1) Definition of PC and EC or PB and EB. May carry up to 4m for both definitions

(2) Examples of PC and EC or PB and EB. Candidates may be asked to show relevant examples which may have been provided in the extract. In some situation, candidates will have to think one of their own. For instance, private costs of consuming more oil may include rise in production costs and external costs are like air pollution, noise pollution, respiratory illnesses, fall in value of property facing main road etc. May carry up to 4m

(3) Cost-benefit diagram. Candidates will be asked to provide either a diagram of cost or benefit. The diagram is expected to carry 4m. Students may need to provide some relevant explanation which may carry 2m-4m. Evaluation is definitely available. In all, this question carries 10m-12m

(4) Government failure. Students will have to make reference to the extract and explains as in why such government intervention would have led to more problems. In evaluation, again I suggest contradictive statements. Explain why it is not entirely government failure. Most probably 10m

(5) Taxation/ subsidy. Provide definition for taxation/ subsidy. Draw a diagram to strengthen your explanation. Try not to leave the diagram unattended and if can provide short explanation. May need to make reference to extract. Last part will be evaluation. Normally carries 10m-12m

(6) Assess a solution. A student may be given some solutions to congestion or pollution in the extract and then asked to evaluate it. Most challenging questions may come from here since the extract is unlikely to explain the remedies in detail. Candidates are expected to have equipped themselves with specific knowledge on the remedy which include how it works to solve the problem and problems that may arise. 8m-12m is expected

To be continued..............

How To Remember Economics Defintions Effortlessly?

Why some economics students find it extremely hard to remember definitions?

(1) Memorising without understanding. It is a fact that most students are looking for an easy way out. While it is true that they can remember definitions faster via ‘blind memorising’, it is highly unlikely that they are able to retain what they have memorised. In some cases, one would have forgotten entirely what they had memorised hours ago while those who have photographic memory may be able to retain them slightly longer, perhaps days. The impact of such action is obvious. In exams, lecturers or examiners are often fed with wrong definitions. Some candidates provide the definition of monetary policy for fiscal policy or even supply side policy while in some situation use the inappropriate words or even left out certain key words

(2) Lack of appreciation. Some students may be able understand the terms, concepts or phrases but they just can’t retain it. This is because they fail to relate it to their personal life or events around them which can actually enforce learning and understanding. In short, candidates do not think out-of-box and they see everything as if it is textbook-like

(3) Too tired. This may not be a very significant reason but it does contribute to poor memory. Those who study last minute, and in fact 90% candidates fall into that category will choose to revise during wee hours where the brain should be laid to rest

How can a person remember so many definitions easily?

(1) Imagining a curve/ graph. Consider the definition of PPF (production possibility frontier). It is a curve (yes it is) that shows the combination of two goods (refer to the horizontal and vertical axis) that can be produced in an economy (the part where it concave from the origin shows an economy) if all resources are fully and efficiently utilised. Let’s take another example, say consumer surplus. It is the difference between what consumers are willing to pay (look at the part where demand curve intersects the vertical price axis) and the actual market price (now imagine the equilibrium price which is lower)

(2) Some common sense. Sometimes we cannot look at the definitions from ‘economics’ angle but rather ‘English’. Consider tradable pollution permit. What is permit? It means allowance and so pollution permit must be allowance to permit. Tradable means can be traded in market or bought and sold in the market. So in full it would be an allowance to pollute that can be bought and sold in the market. Now consider government failure. In layman term, it means government has failed as in failed to achieve their objectives. Tax onto cigarettes failed to reduce number of smokers or fail to raise revenue needed. In proper, it would be when government intervention to solve an economic problem leads to net welfare loss. Why net welfare loss? It brings more ‘bad’ than ‘good’ overall.

How about monetary policy? Here we have monetary as in MONEY. As such it must be related to interest rates. It is rather amusing when I see definitions like monetary policy is the manipulation of tax and government spending to influence movement of AD. Consider marginal revenue. Again understand word by word. What is marginal? It means every additional one. So marginal revenue must be additional revenue due to extra one unit of output sold. Simple isn’t it?? Ok, what about contestable market? First what is contestable? It means easy to contest or easy to compete. Put it together, it means a market which is easy to compete with one another and this can only happen when the barriers of entry and exit are low. So the official definition is a market where there are low barriers to entry and exit

These are just some examples from the non-exhaustive of list that I can think of. Good luck

Strategies to Score Well for MCQ Unit 1: Competitive Markets- How They Work and Why They Fail?

1. Each multiple choice question (MCQ) carries 4m. Candidates can generally achieve full 4m by choosing the correct option (1m), provide relevant definition for the concept tested (1m) and explain why or how that answer is related to the question (2m)

2. After years of observation and answering experience, I soon come to realise that there are actually unique techniques that can be employed to improve the answering ability of students. I break them into five, with two diagram techniques, two figure techniques and last one is rejection method

3. Diagram techniques
Is highly applicable to topics related to PPF, opportunity cost, demand and supply, consumer surplus, producer surplus, PED, XED, YED, PES, taxation, subsidy, market failure involving externalities

(a) If a diagram is provided, try to figure out what you can do to that diagram. Normally, you can get 1m-2m by annotating the diagram, shading an area e.g. additional area of consumer surplus, total subsidy payout by government, welfare gain/ loss area etc or adding curves e.g. showing changes in demand or supply or outward shift of PPF

(b) If you can support your answer using a diagram, do not hesitate to draw one. Again it is usually applied in questions related to the topics I highlighted above. It will get you around 1m-2m depending on complexities. For instance, PPF is used to show opportunity cost. As such you can get 1/2m by drawing a PPF and mark on your diagram, how an increase in the production of one good, leads to the fall in the production of another good. Similarly, if the question is about natural disaster striking a country and the impact onto PPF, you can get 1/2m by drawing a PPF shifting inward and of course you have to label the initial PPF and the PPF after disaster

(4) Calculation techniques
Is very applicable to topics highlighted above except market failure involving externalities

(a) If figures are provided, you will usually get 1m by making reference. For instance by saying, “the opportunity cost of producing the first 10million tonnes of agricultural goods is 2millions units of manufactured goods foregone”. You can also score up to 2m by performing calculation. For instance, YED = 0.4 is given in the text. In the answer, you have to put up figure, say YED = 20%/ 50%. In short, you have to explain how is the 0.4 is obtained

(b) In some other situations, you can actually use your own figure to replace word explanations. For instance, PED for petrol is inelastic. Then, in the answer you can put up your own figure, say PED oil = -10%/ 50% = -0.2 as a support to the option chosen although the -0.2 is not there

(5) Rejection method
Candidates can get up to 3m for explaining and correcting the other 3 wrong options. Consider the following examples:

(a) A production possibility frontier can be used to illustrate the concept of (Edexcel, Unit 1, Q1, May 2010)
A. External cost
B. Producer surplus
C. Opportunity cost
D. Equilibrium price

(C) is 1m. Opportunity cost is the next best alternative foregone once a decision is made. Option A is incorrect because external cost is illustrated using the cost-benefit diagram. Option B is also ruled out since producer surplus can only be shown using a demand-supply diagram

(b) Which of the following factors is most likely to cause the price of gold to fall without a shift in the demand curve? (Edexcel, Unit 1, Q2, May 2010)
A. An increase in national income
B. A decrease in price of silver
C. An increase in wages of gold miners
D. A decrease in the cost of machinery used in gold mining

(D)-1m. When machineries are cheaper, it decreases production costs. This creates an incentive to mine for more gold (2m). Option A is incorrect since rise in national income means more income per person. As such more gold will be demanded and its price will increase. This conflicts with the question (1m)

(6) Even if candidates have chosen the wrong option, still candidates can get up to 3m for explaining the incorrect option

(7) Usually there will be 5 questions from How They Work and 3 questions from Why They Fail. Candidates normally don’t do well for questions from Why They Fail. This is because of lack of understanding in terms of what public good is, how pollution permits function or even confused by the way those answers are put up. Sometimes they may sound tricky. As such I strongly suggest students to read up topics like positive and negative externalities and understand how does the cost-benefit diagram works, concept of free rider and public goods, asymmetric information, in what way the free market has failed etc

(8) Sometimes, there might be more than one concept tested at the same time (sometimes even three). For instance, opportunity cost and PPF might go together or mixed economies, free market and market failure might appear simultaneously in the same question. As such it is highly recommended to define all these keywords. The reason is because, we do not know what to expect from the marking schemes. I have seen in some situations, one might score 2m for providing definition of opportunity costs AND PPF and in some cases, they indicate "define either opportunity cost OR PPF for 1m"

Hope this helps!!!

Economics of Insurance

Lately, an insurance agent whom I knew through a friend of mine approached me with some ‘awesome’ savings plan offered by his company. Honestly, I couldn’t recall much of the conversation and financial planning tips thrown to me. It is more of his bragging about the potential return and how many people have actually hooked up the product that seized my attention. I was ‘enticed’ while going through the figures he computed.

It wasn’t any medical card or life insurance policy, but an alternative to the conventional savings like fixed deposits in the banks. It offers 4% return for the first 5 years, 5% the next few years and 6% on the following years. The maximum it offers is 6%. My friend, who sat next to me at that time was so eager to sign up considering the 4%-6% offered. I quietly told him to reconsider.

Source: theStar

In Malaysia, CPI (price level) increases on the average of 3% every year. That has been the trend for the last three decades. It is even more important to note that rise in general price level does not reflect the actual situation face by average Malaysians as some will be more affected than the others. For instance middle-income households with large families or those parents who need to travel extensively everyday will be more affected than small families or those who stay within the vicinity say, 20km from their workplace. The CPI is just a weighted average!! It is fair if I say that personal expenses inflation is a better barometer

In that case, I believe that rise in expenditure on food, fuel and transport is definitely surpassing 3% every year. This is because subsidies on fuel, flour, sugar, rice and other necessities have been cut. Let’s not forget that we do not just consume flour, sugar, prawn, fish etc in its raw form but also in value-added items. Food that we consume in fine restaurants or even coffee shops are levied at market price but is not captured by CPI. Transport which carries the weight of 15.9% does not consider the ‘actual price’ of the cars when they are hire-purchased. Prices of construction materials such as cements and clinkers are price controlled, but the prices of house and rental is subjected to market force which is not regulated. Also, surprisingly mobile downloads and phone bills are not included in the communication category although they are integral part of our life

In a nutshell, price level will continue to increase and having a fixed return for a predetermined period is a BIG NO NO from me. If I were given an option, I would rather engage in investment like unit trusts that carry very little risks and yet potentially yield much better return. Let’s invest to beat the inflation

The Tale Of The Rising Yen

The recent Bank of Japan’s massive intervention into money market is one politically bold move which is least expected by many. It creates a surprise, since BoJ has been passive all these years. The last round it intervened was in 2004. Nonetheless, such action is greatly applauded by Japanese exporters, especially those in car (Toyota) and electronics industry (Sony). A weak yen is desired since it gives manufacturing industry a competitive edge. Japanese goods will look artificially cheaper especially to Americans and as such US will hopefully continue to buy from Japan, thus paving way for export-led recovery. It is done by using the yen to buy dollar

Why does yen appreciate?

(1) Profits are coming home. It is reported that Japanese firms will bring back at least 1.5 trillion yen ($16.7 billion) of overseas profits. More repatriation is expected since the government’s announcement of tax breaks last year. It is a measure to boost an economy in conundrum. Lower tax leads to higher retained profits, and hopefully companies will have greater incentive to invest. It could be on the purchase of new capital equipments, new building to accommodate enlarged scale of operations etc, although the effectiveness is subjected to debate. Earnings in dollar and euros will have to be converted back to yen. Therefore yen appreciates due to escalating demand for it

(2) End of carry trade. Before we go into details, it is best to understand what is meant by yen carry trade. It is a practice of borrowing money at low interest rates and lend them out in high interest rates. All these years, interest rates were purposely kept low to revive spending into the economy. As a matter of fact, it is reckoned that Japan has the lowest interest rates at all time in the world, ‘no thanks’ to its slumbering economy. Many people borrow from the Japanese banks and park their money elsewhere, say UK, US or even the Eurozone. In a more technical way it would be, borrow the money from Japan, lend it to the banks in Western economies to do business. In return, those people get higher interest rates gain, and some of it will be paid back to Japanese banks. The reward is the difference between those two interest rates. However, interest rates offered by major Western banks are equally low now. Hence, there is not much gain after all. Furthermore there is always a risk of lending money to a foreign economy that could face the risk of collapsing. Those arbitrageurs now call back their capital to repay their loan to Japanese banks. Again, we use foreign currency to demand for yen, leading to its appreciation

(3) Safe haven. Switzerland is well known as safe haven in the current credit turmoil, and ‘congratulation’ to Japan for joining the rank. The interesting issue here is why investors seem to lose interest with US? Normally, currency investors who seek for stable investment would like to park their money in US given the credibility of the world’s largest economy. Somehow, the dollar has been slumping against many other major currencies in recent weeks as interest rates continue to fall. This makes the dollar as less attractive investment compared to other currencies. Although Japanese debt as a percentage of GDP is twice as large as the US, let’s not forget that most of the debts are owned by domestic investors, given the high-savings ratio in the economy. Therefore Japan is very unlikely to become the victim of capital flight. Secondly, Japan is experiencing deflation. This means although interest rates are low, but real interest rates are high. Put it simple. Even though your money does not grow in terms of amount, things around you are getting cheaper. In short, with the same amount of money you have, you still get to purchase more goods and services. Hence, it creates an ‘illusion’ that Japan’s interest rate is actually higher than the rest of the world

(4) Purchase of government bond. We all know that Chinese monetary officials are the hiding-hands that lead to the steady appreciation of dollar against the yuan. They persistently keep the yuan low by buying US bonds, which subsequently lead to rising dollar. This move has been largely criticised by US lately since it gives the Chinese exporters an unfair advantage. Americans importers are trapped. They have ‘no other options’ but to continuously buy from China since it is artificially cheap. That explains why US is in large deficit and China is in large surplus. No wonder China has the world’s largest dollar reserves (more than 2 trillion dollar). But due to mounting political pressure, China seems to lose appetite for US dollars and begin to diversify into other currencies, including the Japanese yen. This contributes to rising yen against the yuan. However it is argued that the purchase of Japanese bonds is on small scale, and hence is unlikely to have a long lasting effect on yen

In the current credit crisis, rising value of home currency is the last thing all influential economies would like to see. Export-led economies like Japan and China would resist the most since their economic growth largely depends on it. The same goes for US that would like to export itself out of trouble

Is Pakistan Economy Ready To Embrace The Worse?

It seems that the flood-nightmare in Pakistan is not over yet. Although the Indus River is already at its 50-year high, it is expected that the water level will continue to rise. With the scale of such calamity, Pakistan is now officially known as the sickest economy in South Asia. Although millions have been contributed by international agencies and governments, still it is insufficient to restore homes, food, buildings and casualties which were washed away by the flood. In some areas, people complain that the aid has not reached them

Potential problems with Pakistan economy:

(1) Militants recruit. There is no perfect atmosphere other than now for jihadists to exploit the situation by spreading seeds of anger and recruiting militants. It is reported that some Islamist charities with suspected links to militant groups have stepped up by providing tents and food for those victims particularly in the northwest, an area dominated by the terror groups. If the Pakistan government does not act fast enough to reduce the scale of the disaster and reach those areas where help is needed the most, I strongly believe that they will have more problems to deal with in the future. Once the number of militant increases, Pakistan and US government will have to spend more money to strengthen the defence

(2) Disruption to economic activities. Pakistan has a broad primary sector where it mainly produces wheat, rice, cotton, sugar and livestock. It contributes to about 22% of her GDP and is the largest employer, hiring 45% of total workforce. Unfortunately, the flood has hit the agriculture heartland very badly. 500 000 tonnes of wheat, 2 million bales of cottons and 200 000 livestock were gone just like that. It affects the livelihood and income of thousands of farmers as well as employment in related sectors such as food processing. Decline in the farming output will probably put Pakistan’s economy to a halt and say ‘goodbye’ to the targeted growth of 4.5%

(3) Reduction in potential capacity. Most of the productive economic resources like land, labour and capital are devastated in just a matter of two weeks. Up to date (27th August), the flood has officially claimed 1600 lives and it is strongly believed that this figure will rise significantly once the water level recede, allowing for other bodies to be counted. It will also further rise due to the slow emergency aid for clean water supply and considering the fact that many are consuming from contaminated water, thus carving path for water-borne diseases. On the other hand, the flood has engulfed huge arable farming pastures. As such, many types of agricultural activities will be ‘forbidden’ in many seasons to come, due to the drastic change in the structure of soil e.g. water-logged. The government’s official assessment estimates that roughly 5000 miles of roads and railways, 7000 schools, 400 health facilities and thousands of agricultural tools like water mills are washed away. This has many implications. Without roads and railways, agricultural output cannot be delivered to designated areas. Factories output will be stranded while waiting to be sent to port. Inability to acquire basic education and healthcare will further reduce the productivity of the people while not having sufficient machineries to work with further reduce Pakistan’s output. It is best illustrated by an inward shifting PPF

(4) Inflation and ballooning deficit. Inflation is defined as a sustained increase in price level. In June, inflation rate was at 12.67% higher than a year earlier, while in July it rose another 12.34%. With such scale of destruction, consensus is now somewhere around 20% in the nearest future. It is largely contributed by escalating food prices and the destruction of food supply distribution network. While it is a great relief to hear that the Pakistani government will gear towards an immediate reconstruction, such news must be treated with great caution. Due to the insufficient foreign assistance, the rise in fiscal expenditure will have to be borrowed from the Central Bank, leading to the increase in money supply thus potentially push the inflation higher. Even the initial forecasted budget deficit for the year 2010/11 is considered as far too optimistic. With the inevitable rise in government spending and fall in tax receipts due destroyed output, it may be at least 6% of GDP now. The deficit reduction was part of the agreement between the government and IMF due to the extension of loan in 2008. Seems that the noble goal has to be brushed aside for a more severe humanity crisis

US Is A Step Closer To Japanification

To me 2010 is a ‘fascinating’ year. It represents economic threats as well as opportunities for countries around the world that are closely linked to one another via international trade. Heat of debates seem to have moved from topics like ballooning national debt, possibility of hyperinflation through quantitative easing, current account deficit to one where deflation is inevitable

Deflation vs. disinflation
Before I go into the details, it will be interesting to explore the difference between disinflation and deflation. They are not quite the same. The former means prices of goods and services are rising but at a slower rate. Meanwhile deflation is a complete fall in prices of goods and services, hence is a negative inflation rate. If disinflationary period continues until inflation rate is zero, only then the economy is said to have entered into a deflationary period

The Japanese experience
The word deflation is synonymous with the Japanese economy and I mean VERY. Before the so called Long-Lost-Decade which began in early 1990s, Japan had gone through a period of economic miracle until late 1980s. Savings in the banks were at all time high. Since loans and credits were easily available, speculation was imminent particularly in the real estate market and Tokyo Stock Exchange. At the peak of the bubble, Nikkei stock index was over-rated and value of real estates was extremely over-valued fetching up to USD $139, 000 per square foot. It was acknowledged that property prices in Japan were the highest in the world at that time

There are many versions of arguments surrounding the meltdown of Japanese economy. The most popular is that income did not grow fast enough to service the increasing debt load which resulted in growing defaults and delinquencies. People and companies that had borrowed from the banks to invest in real estate were unable to repay the banks when property prices fell. Even banks became insolvent due to credit shortage and lack of liquidity in the entire financial system

Recession to depression and deflation

Recession is generally known as two successive quarters of negative economic growth while depression is viewed as a sustained long term decline in economic activities which is followed by events like shrinking consumption, bankruptcies, large scale unemployment and banks on the run. It is lengthier than recession. Somehow, there is no consensus over how long an economy should be in recession before turning into a depression

Source: economicshelp

It is strongly associated with collapsed of spending into the economy, thus driving AD leftward. This is usually followed by a fall in price level. To be honest, deflation/ disinflation is much more difficult to be tackled than inflation. It is extremely difficult to revive consumer and business confidence once it had totally collapsed. The Great Depression in US and Japan tell all the tales.

Why deflation is disastrous?

(1) Exacerbate depression. When general prices fall, consumers will expect goods and services across the economy will be cheaper somewhere in the near future. As such they choose to defer current consumption. It will not be the case of one or two individuals but the entire nation will think alike. As people defer spending, consumption which is one of the drivers of economic growth falls, further shifting AD to the left. It does not take a genius to see that price level falls. They cycle continues

It is also worth to note that, in such period return from savings is higher. Even when the nominal interest rate is 0% and deflation is say, 3%, the real interest rate is would be 3%. What I’m trying to say is that, although the value of money does not grow (0%), prices of things in the economy become cheaper (-3%). In other words, for every 100 yen, one gets to purchase more goods. Purchasing power has increased. No wonder there is an incentive to save!!!

(2) Increasing the value of debts. During inflation, value of debts will be eroded since the same amount of money that bank receives worth lesser over the time. On the contrary, deflation causes mortgage repayment to be a problem. In depression, wages are falling. Assuming that one owes the same amount of money, the monthly commitment expressed as a percentage of total income will rise

(3) The end of monetary policy. During the period of high inflation, interest rates can be raised indefinitely to slow down spending and investment. However, in deflation, interest rates cannot go lower than 0%. It just does not make sense to have negative nominal interest rates. Therefore this marks the end of the conventional monetary tool and the Central Bank will have to depend on non-conventional method like quantitative easing (print more money). Such new monetary policy action belongs to the realm of experimentation (considering the Fed consulted Japan last year over this) and therefore is prone to error. Policymakers are now left with fiscal tools

Will US turn Japanese this round?

I hate to say this but too bad US is no longer an engine for global economy. Despite still being the world’s largest consumer, it began to lose its steam few years ago. Its dominance is gradually shadowed by the emergence of China and India which easily register an 8% to 10% real GDP growth every year. To make things worse, US economy seems to inherit the Japanese-style meltdown ‘disease’. There are just too many evidence leading to this

(1) Similar origin. Both economies experienced a period of unsustainable economic growth which eventually led to a drastic rise in income. High consumer confidence coupled with liquidity rush in financial institutions largely explain why Americans and the Japanese dare to assume debts beyond their appetite. Rise in income however wasn’t for long but too much debt had already been taken to finance the purchase of residential and commercial properties. One by one began to default in loan repayment. Banks now face cash shortages and hence unable to generate lending. Demand for real estate falls. The property bubble finally burst. Arguably the condition in US is said to be worse due to the introduction of various unsafe loans as well as mutation of debts

(2) Ageing population. Although population is still growing in US, its rate is slowing down markedly, somewhere close to 1%. This is exactly what Japan had experienced in the 1990s. The only difference is that Japan has entered into the era of shrinking population and it may not be too distant in the future before US joins the league. Why is this bad? We first look at the population pyramid. Too many elderly people indicate more trouble for government finances. Bulk of the money will be channelled towards unproductive use like pension payments and the setting up of certain healthcare department to address elderly-related disease. This way of spending will not lead any economy out of trouble. Secondly, where to get the needed finances? Raising the income tax is a big NO-NO from me. Shrinking workforce may mean that working individuals will have to devote 50-60% of their wages to tax so that it can sufficiently cover the expenditure for the retirees. Finally, shrinking population means US will no longer be a consumption driven economy. All these points to frail recovery

(3) Forever rising debt. The current level of US national debt is about USD $ 13 trillion or 89% of her GDP. It is the sum of all the outstanding debt owed by the Federal Government when it runs budget deficit every year (G>T). Two-thirds of the debt is owed to firms, people and foreign governments who bought the bonds issued by US government while the rest is owed to itself via Social Security. Whatever money that has been borrowed will have to be paid back some dates in the future. Right at the moment, there is still no clear solution over the pension payment to Baby Boomers. Number of retirees will increase significantly over the next two decades. Theoretically, taxes must increase. It is just a matter of time before US discovers that foreign government will gradually shy away from all those bonds. Fall in the demand for these securities will cause its price to fall (law of demand) and interest rates to go up (inversely related). This will eventually worsen the state of economy. Furthermore, lessening of demand for bonds will put downward pressure for dollar. Therefore, foreign holders get paid back in currency which worth lesser. Demand for bonds fall further. In a nutshell, ballooning national debt will put a brake to US economic growth

(4) End of traditional monetary policy. Policy makers is US seem to head towards a ‘dead-end’. It faces almost the identical problems experienced by Japanese economy. Like I mentioned earlier, zero interest rate policy does not do any good. Economic activities remain weak partly because some of the banks are still reluctant to pass on the rate cut or while some others just make it more difficult to get credit by imposing various conditions. On the other hand, consumer confidence is at record low. Job losses are on the rise which further undermine borrowing and spending into the economy. Perhaps the Fed will have to keep interest rate low (0% -0.25%) until certain level of inflation is achieved. Although quantitative easing has been aggressively conducted, credit growth and broader money creation still fall. Velocity of circulation for money slows significantly

All these are clear indicators that US economy is ‘ushering’ an era of deflation. It will not happen today, tomorrow or next few months. But for sure, it is underway