Friday, September 29, 2006

LMS reborn...

this is a windfall for all you lazy ones out there..

i found that the old LMS (with all my wonderful uploaded tutorials, articles and what-nots since last year) is still alive at this other link..

i don't know for how much longer ...but if you still need any J1 or J2 stuff, go download it now.. and i mean NOW....

Wednesday, September 27, 2006

MCQ Practice Papers Available!

I've placed the full set of 2004 and 2005 Other JCs Prelim Paper 1 (MCQs) at the PrintShop for your order and purchase. I'll put the 2006 set there as well as soon as I grab hold of a copy of it...


It comes up to a whopping $13.90 ... however, I assure you that it would be money well spent ... but only assuming you DO get down to working on the questions.

As I've said many times.. the only way to improve on your MCQs is PRACTICE, PRACTICE, PRACTICE...

Nonetheless, I encourage ALL OF YOU to go and print a set for yourself.. AT THE VERY LEAST, you will know which areas or topics you're still not clear about and can go and review the areas!

I'm always ready to help clarify ANY DOUBTS you have. just sms me.

In my opinion, I feel this is better than me choosing a random bunch of MCQs to let you try out in class.. you get to cover a lot more topics and can zoom in yourself on which areas you're unclear about..

Happy Revision.. and please tell me how else i can help you. thanks.

Monday, September 25, 2006

How do these people survive?

Recently, when I went to McDonald's I saw on the menu that you could
have an order of 6, 9 or 12 Chicken McNuggets. I asked for a half dozen
nuggets. "We don't have half dozen nuggets," said the teenager at the
counter. "You don't?" I replied. "We only have six, nine, or twelve," was
the reply. "So I can't order a half dozen nuggets, but I can order six?"
"That's right." So I shook my head and ordered six McNuggets

I was checking out at the local Wal-Mart with just a few items and the
lady behind me put her things on the belt close to mine. I picked up one of
those "dividers" that they keep by the cash register and placed it between
our things so they wouldn't get mixed. After the girl had scanned all of my
items, she picked up the "divider", looking it all over for the bar code so
she could scan it. Not finding the bar code she said to me, "Do you know
how much this is?" I said to her "I've changed my mind, I don't think I'll
buy that today." She said "OK," and I paid her for the things and left. She
had no clue to what had just happened.

A lady at work was seen putting a credit card into her floppy drive
and pulling it out very quickly. When I inquired as to what she was doing,
she said she was shopping on the Internet and they kept asking for a credit
card number, so she was using the ATM "thingy."

I recently saw a distraught young lady weeping beside her car. "Do you
need some help?" I asked. She replied, "I knew I should have replaced the
battery to this remote door unlocker. Now I can't get into my car. Do you
think they (pointing to a distant convenience store) would have a battery
to fit this?" "Hmmm, I dunno. Do you have an alarm, too?" I asked. "No,
just this remote thingy," she answered, handing it and the car keys to me.
As I took the key and manually unlocked the door, I replied, "Why don't you
drive over there and check about the batteries. It's a long walk."

Several years ago, we had an Intern who was none too swift. One day
she was typing and turned to a secretary and said, "I'm almost out of
typing paper. What do I do?" "Just use copier machine paper," the secretary
told her. With that, the intern took her last remaining blank piece of
paper, put it on the photocopier and proceeded to make five "blank" copies.

A mother calls 911 very worried asking the dispatcher if she needs to
take her kid to the emergency room, the kid was eating ants. The dispatcher
tells her to give the kid some Benadryl and should be fine, the mother
says, I just gave him some ant killer..... Dispatcher: Rush him in to

Life is tough...

it's tougher if you're stupid."

Monday, September 11, 2006

Appropriate Policies to achieve Higher Employment with Low Inflation

Situation 1: Stagflation - High Inflation + High Unemployment

A term used in the 1970s to refer to the combination of stagnation (low real GDP growth and high unemployment) and high inflation. It is caused by cost-push inflation or imported inflation.

Photobucket - Video and Image Hosting
Cost Push Inflation

Oil prices: Between 1973 and 1974, the price of oil rose from $3 to $12 per barrel, and between 1978 and 1980, it rose from $13 to $31 per barrel. This not only raised cost of production, thus causing cost-push inflation, but also caused recession in 1975 and 1979-81 as business climate became uncertain and governments throughout the world deflated (right move?) to the inflation.

Domestically generated cost-push pressures: Cost-push inflationary pressures can also increase as a result of the following: growing trade union power and militancy; the desire for real wage increases each year in excess of the economy's real growth; low productivity growth.

Appropriate Policy

Prices and Incomes Policy: It is a policy aimed at regulating the prices of goods & services and the wages of the economy by the use of legislation. For example, by legislation, the government fixes the prices of goods especially essential goods and all producers and sellers are to stick to these officially fixed prices. In Singapore, the incomes policy, in addition to other policies, was used to fight the recession in 1985. The NWC, with the consensus of the government, trade unions and employers association, recommended and was accepted by all, a freeze on wage increases for 2 years in order to prevent the cost of production from further rising in Singapore. This caused the cost of production to fall, shifting the AS curve down from AS2 to AS1, resulting in lower inflation and also higher level of real output and employment (shown as Y2 to Y1 above)

Situation 2: Near full employment - High Inflation + Slow Growth

Photobucket - Video and Image Hosting

Demand Pull Inflation

As economy nears full employment (Y1 to Y2), excessively high levels of aggregate demand (such as rising consumption of the people and excessive government expenditure) from AD1 to AD2 would only cause general price level to rise and demand pull inflation results. The economy cannot increase its real output further without higher and higher levels of inflation.

Appropriate Policy

Supply-side Policy: Focuses on expanding the productive capacity of the economy (click for more info and refer to your Compact Revision Notes 2006). Supply-side policy is the only long term means by which the economy can keep expanding (rise in AD) without rising rates of inflation. As shown below, a rightward shift of AS lowers the price from P2 to P1 while increasing real output and employment from Y1 to Y2.

Photobucket - Video and Image Hosting

Sunday, September 10, 2006

Terms of Trade (TOT) & Balance of Payments (BOP)

The terms of trade (TOT) measures the rate of exchange of one good or service for another when two countries trade with each other.

For international trade to be mutually beneficial for each country, the terms of trade must lie within the opportunity cost ratios for both country.

Balance of Payments (BOP)

The value of a country's exports and imports, and consequently the flows of money into and out of a country that are recorded in the balance of payments (BOP), is determined by the quantity of the good or service traded and their prices.

Changes in the relative prices of exports and imports are important factors in influencing the values of exports and imports and the balance of payments of a country. The terms of trade (TOT) is a measure of the relative prices of imports and exports.

The coefficient of income elasticity can be calculated by the following formula:

Terms of Trade index = (Index of Export Prices / Index of Import Prices) x 100

Improvement of TOT

If the terms of trade index number increases (DPx>DPm i.e. export prices are rising faster than import prices) it is described as a favourable movement (a unit of exports will buy more imports). In other words, fewer exports have to be given up in exchange for a given volume of imports.

Worsening of TOT

If the terms of trade index number decreases (DPx<DPm, i.e. import prices rise faster than export prices) it is described as a worsening or deterioration of the terms of trade (a unit of exports will buy fewer imports). In other words, a greater volume of exports has to be sold to finance a given amount of imported goods and services.

Movements of TOT & Impact on BOP

This terminology is somewhat ambiguous as it is important to bear in mind that a favourable or worsening of a countries TOT does not necessarily mean that anything is better or worse in term of the balance of payments situation. Both the price and the quantity of goods traded must be taken into account when considering the balance of payments situation.

An increase or favourable change in the TOT index caused by an increase in the price of exports may bring about a proportionately greater fall in the demand for exports leading to a worsening of the balance of payments situation. Conversely, a worsening of the terms of trade index caused by a fall in export prices may lead to a proportionately greater increase in the demand for exports and an improvement in the balance of payments.

It is important to consider how responsive the quantity demanded is to changes in the price of exports and imports. The price elasticity of demand of exports and imports is thus crucial.

Oil Prices and the TOT

Some developing countries are heavily dependent on exporting oil (which is generally a price inelastic commodity). Volatility in international commodity markets create serious problems with these countries’ terms of trade. In the chart below, notice how closely the annual % change in the terms of trade follows the movement in oil export prices.

Photobucket - Video and Image Hosting

When oil values collapsed in 1998, these developing countries faced the enormous problem of having to export much more oil to pay for a given volume of imports. The worsening in the terms of trade will have adversely affected living standards in these countries. There has been a sharp rebound in global oil prices this year, helping to boost the terms of trade for oil exporters.

Terms of Trade for Developing Countries

Developing countries which are dependent on the export of commodities and agricultural produce can be caught in a trap where average price levels for their main exports decline in the long run. This depressed the real value of their exports and worsens the terms of trade. A greater volume of exports have to be given up to finance essential imports of raw materials, components and fixed capital goods.

(see REPORT on how TOT have moved for countries in the world over the past decade)

The problems intensified in 1998 with the collapse in the currencies of many Asian developing countries. A big fall in the terms of trade signifies a reduction in real living standards since imports of goods and services have become relatively more expensive.

Marginal Efficiency of Investment (MEI) vs. Marginal Efficiency of Capital (MEC)

The MEI curve represents the interest elasticity of demand for investment (or capital goods), or in other words, how responsive investment is to a change in interest rates. Interest rates represent the cost of borrowing. Theoretically, the lower the rate of interest, the cheaper it is for firms to finance investment, and the more profitable the investment will be. Hence, the level of investment will rise.

Photobucket - Video and Image Hosting

Keynes, however, suggested that investment is in fact relatively unresponsive to changes in interest rates, particularly at the extreme ends of the Trade Cycle. During a recession, businessmen are generally pessimistic about the future outlook and there is also likely to be excessive unused productive capacity, which prevents a fall in interest rates from stimulating I. On the other hand, during a boom, their optimism may cause them to disregard high interest rates. Hence, MEI is more likely to look like the relatively inelastic MEI1 than the relatively elastic MEI2. (Note: Graph has been mislabelled in Page 1 of Compact Revision Notes!! :( Apologies - MEI is the relatively inelastic curve while MEI1 is the relatively elastic curve.. Thanks to Danielle for pointing out error!)

Keynes instead emphasized the importance of expectations (entrepreneurship mood), which is affected by the state of the market for their product (which is in turn determined by factors like political stability, cost of production, conducive business climate etc). The expected rate of returns from investment is measured by Marginal Efficiency of Capital (MEC).

MEC is a downward sloping curve because, as the firm invests more, MEC will fall due to diminishing returns (i.e. the first few projects invested in tend to give a higher rate of returns, with subsequent projects yielding lower and lower returns).

Photobucket - Video and Image Hosting

The decision to invest is determined by a comparison of MEC and the opportunity cost of the investment (i.e. interest rate). As long as the MEC is greater than interest rates, firms will invest more (i.e. the project is regarded as worthwhile). It will stop investing when the MEC = i/r. Hence, as seen in the above diagram, if interest rates fall from r1 to r2, projects with lower expected returns, seen previously as unprofitable, will NOW appear viable, and so, more I will occur. This increases I from I1 to I2.

Increasing optimism translates into higher expected returns and the MEC can shift to the right. Similarly, a collapse of business confidence causes a downward revision of future returns and the MEC curve shifts to the left.

Photobucket - Video and Image Hosting

Hence, it can be seen above that a rise in interest rates may not dampen I if, at the same time, MEC has increased.

Friday, September 08, 2006

Supply side policy

(Please include this under Pg 15 of your “Compact Revision Notes 2006” I gave out via email)

Recall: Supply side policies are long term measures intended to increase the productive capacity of the economy. This can be done through rapid technological advances, accumulation of capital stock, and continuous rise in labour productivity, which will shift the AS curve to the right.

Other than measures targeted at increasing labour productivity (i.e. through promoting quality education; and constant training & upgrading of the workforce), supply side policies would also include those targeted at increasing investment (including inflow of foreign direct investment), encouraging entrepreneurship; and encouraging technological advancement (i.e. R&D). Govt spending on infrastructure for the economy (e.g. highways, transport and communication networks) is also part of supply side policies.

The chief characteristics of supply-side economics (in Singapore) are:

  • Cuts in tax rates: This is done with the intention of encouraging work effort (i.e. people to work harder, for longer hours) and to increase savings, as well as to encouraging firms to invest. In Singapore, corporate tax was reduced from as high as 40% many years ago to the recent 20%.
  • Use of tax and financial incentives: Used for a variety of reasons, e.g. tax holidays (of up to 10 years) for high-tech firms or headquarters operations to be set up in Singapore, loans for capital investment, financial grants for innovation and R&D, as well as grants for workers’ training & upgrading.
  • Work Incentives: Various types of incentives, bonus or profit-sharing schemes are used to encourage labour to work harder and become more skilled, e.g. the NWC encourages firms to tie annual wage increases for workers to increases in their productivity.
  • Encouraging the entrepreneurship spirit by relaxing the bankruptcy act, and by promoting enterprise in schools and tertiary institutes.
  • Building and maintaining world-class economic infrastructure and services. This is evidenced by the fact that development expenditure accounted for around one-third of government expenditure on average over the last three decades
  • To reduce the role of the government so that the private sector will play a greater role: This is done by deregulation.
    In Singapore, government expenditure is directed primarily at promoting long-term economic growth (supply side policies), rather than cyclical adjustment (fiscal policies) or distributing income (e.g. unemployment benefits).

    However, as with limitations of policies to encourage workers to upgrade and retrain, the above policies may also have their limitations. These include:

    • “Tax incentive war” between countries as they compete fiercely for foreign investment. For example, besides Singapore, Malaysia, Hong Kong, Thailand, Australia, China and even Vietnam are offering similar tax incentives to attract foreign investment. Hence, a low tax rate as well as a range of tax and financial incentives alone is not sufficient to encourage FDI. Other factors such as political stability and having a conducive business environment are just as critical, if not more so.
    • Encouraging entrepreneurship to raise the AS is a slow long-drawn process. Due to the high comfort zone that Singaporeans have enjoyed as a result of continuous increases in living standards over the past 30 to 40 years, individuals may be reluctant to take the risks of being entrepreneurs, especially if they can find work easily in multinational corporations (MNCs) or as civil servants. A mindset change in society is hence needed to bring about the risk-taking spirit among the population.