Wednesday, March 28, 2007

Recommended Textbooks

AQA Advanced Economics

Ray Powell - Chief Examiner, Head of Economics at King’s College School, Wimbledon

This major new textbook has been written specifically to meet the needs of AS and A2 students following the AQA specification.

AQA Advanced Economics is carefully structured, with a specification focus at the beginning of each chapter that matches its content to AS and A2 modules. Terms, concepts and themes are clearly explained throughout and supported by the examiner's voice, identifying key points and offering exam guidance. Each chapter concludes with a summary and a set of self-testing questions that can be used to assess understanding and for revision.

This comprehensive text provides a thorough foundation for the course, and the accessible commentary, interspersed with regular exam guidance, is essential reading for AQA Economics students.

see website

Economics 1e
N. Gregory Mankiw, Harvard University
Mark P Taylor, University of Warwick
ISBN-13: 9781844801336
ISBN: 1844801330
Published by Thomson Learning EMEA, ©2006


Economics is the UK and European adaptation of Greg Mankiw’s classic textbook, expertly adapted by Mark Taylor so as to be even more relevant to a UK and European audience. A major strength of the original - that the authors present economics from the viewpoint of a reader completely new to the subject – has been maintained. Research shows that the book appeals particularly well to the more applied, business-oriented courses. The conversational yet precise writing style is superb for presenting the politics and science of economic theories to tomorrow's decision-makers. The book stands out amongst all other principles texts by encouraging students to apply an economic way of thinking in their daily lives.

see website

Tuesday, March 27, 2007

Video: Elasticity of Demand


see video link here

Using examples from a competitive seafood market and a monopolistic ferry service, this program shows the difference between elastic and inelastic demand. It quantifies the gain or loss of revenue from price increases or decreases in each situation.

Monday, March 12, 2007

Budget 2007 Essay Competition

Extracts from winning entries
Category 1 (Tertiary student)
First prize: Cheong Poh Kwan / Nanyang Technological University
Second prize: Goh Yong Han / University of California (San Diego)
Third prize: Cheng Sai Pong, Adrian / Singapore Management University

Category 2 (Junior College/Polytechnic/Secondary Student)
First prize: Daniel Isaiah Ong / Raffles Junior College
Second prize: Chew Zhi Wen, Cyril / Hwa Chong Junior College
Third prize: Philip Chan / Hwa Chong Institution

First Prize Winner (Category 1) – Cheong Poh Kwan / Nanyang Technological University

[On challenges of globalisation]

Last year, I stumbled upon a memorable line by Asad Latif in Southeast Asian Affairs. The Straits Times’ senior correspondent wrote: “In Singapore, to complain about globalisation is to criticise the sky for raining” (2004). Still, I would like to devote the following paragraphs to grumbling about globalisation; because it is essentially the culprit for many of the key challenges facing Singapore.

Singapore was once well-poised to enter the globalised world, with its bilingual workforce and friendly environment for international trade flow and investment. Singaporeans who formed part of the knowledge economy were also brimming with smiles and confidence, as the forces of globalisation opened up industries that were once fiercely protected and territorially exclusive. Those with an edge in rendering professional services in specific segments of the global supply chains realised a wealth of business opportunities before them. Such opportunities, however, have also brought about significant threats to the current state of economy. […]

As such, to strengthen Singapore’s resilience towards fluctuations in global demands, money needs to be invested to diversify the economy.

As globalisation dealt a blow on the local economy, the segment of our population that has suffered the sharpest pain is likely to be the low-income unskilled workers. Globalisation has forced Singapore to re-orientate its economy from an investment-driven to an innovation-driven one. This swift transition has led a significant portion of the low-wage workforce to become victims of structural unemployment, due to their lack of relevant technological competence and educational qualifications. Since such jobs are unlikely to return, as most labour-intensive manufacturing industries would be compelled to relocate to other developing nations, the government has had to take on the responsibility of equipping these retrenched workers with relevant skills for the newer innovation-driven industries.

In this rapidly-changing globalised era, it is not enough to have only good entrepreneurs in the government to gain comparative advantage, as policy regimes are improving elsewhere too. There is a need to plant the seed of entrepreneurship in the citizens, so that they will be able to breed strong corporations that can spontaneously respond to changing market trends, instead of blindly flocking to where the government investment vehicles are moving towards.

Second Prize Winner (Category 1) – Goh Yong Han / University of California
(San Diego)

[On Singapore’s niches]

In areas where Singapore has a head-start over other countries, it should try to continually improve and maintain its lead. By virtue of its location and excellent infrastructure, Singapore has become a hub in the areas of finance, medical, logistics, air travel, sea transhipment, education, etc, and should strive to remain as one.

Singapore can do its part for the environment by developing industries related to environmental sustenance as part of its economic development. One area which comes to mind is Singapore’s water expertise. Professor Biswas, an authority on water management, had noted that Singapore has one of the world’s best approaches to water supply and waste water management and could share its expertise with the world. On this note, Singapore had committed $330 million on water and environmental-related research last year.

In addition to security and education, we should also prioritise spending in areas which can lead to sustainable economic growth. […] Due to our limited resources, Singapore should focus on research where a payout can be expected within 5 – 10 years. We simply do not have the funds nor luxury to engage in basic research.

[On public-private partnerships]

As far as possible, the government should look towards outsourcing to the private sector non-core services and concentrating on policy implementation. The government has also successfully utilised the internet, and implemented various online services, notably with CPF, HDB and more recently GEBIZ, a one-stop e-procurement portal where all the public sector’s invitations for quotations and tenders are consolidated and posted, which have served to increase the overall productivity. Similar initiatives should continue in order to maximise public expenditure.

Third Prize Winner (Category 1) – Cheng Sai Pong, Adrian / Singapore Management University

[On Singapore’s economic performance]

The economic performance for Singapore in 2006 has been impressive. The economy expanded robustly at 7.2% in the third quarter and annual growth in GDP is expected to be 6.5% to 7.5% according to the Ministry of Trade and Industry’s (MTI) revised forecast in August 2006. Despite the volatility of oil prices and concerns over the impact of the slowdown in the US economy, growth remains robust. On the other hand, the rapid economic expansion has created 124,500 jobs in the first nine months of the year; during the third quarter alone, a record 43,000 jobs has been created. In addition, unemployment rate continues to fall, standing at 2.7% at the end of the third quarter of 2006 while the number of retrenchments has also declined. Hence, Singapore has performed remarkably well in 2006 despite the looming downside risk factors towards the end of the year.

[On fiscal prudence]

Although we have little control over global economic performance, we can cope with the potential challenges of a US downturn or a hard landing of China’s economy through our principle of prudent management of public finance. Over the years, we have been spending within our means and as a result accumulated significant amount of reserves. Should those external factors mentioned affect Singapore, we can use the reserves to implement off-budget fiscal measures to help us tide over any crisis at least in the short run. That is why in times of prosperity, there is a need to “save for the rainy day” and prepare for any unforeseeable circumstances that we have little control over.

[On alleviating the income gap]

Although Singapore is not aspiring to become a Fabian socialist welfare state, there is a need for a basic social safety net especially for the less well-off section of society. The recent hike in transport fees and fees for tertiary education has indeed imposed additional burdens on the lower income group. More scholarships, bursaries and financial loans can be allocated to students who come from low-income families. Transport subsidies should be considered for these students and for low skilled workers who have completed their training under the WDA’s programs and who are willing to take up jobs in districts far from their homes. For families in need of financial assistance, the Government can provide further subsidies in utility charges and conservation fees. With a basic social safety net and a comprehensive employment assistance program, the income gap can be better managed as substantial and practical help would be extended to the needy.

First Prize Winner (Category 2) – Daniel Isaiah Ong / Raffles Junior College

[On Singapore’s overarching challenges]

2007 presents Singapore with two overarching challenges: to continue to reap the benefits of globalisation by remaining competitive in the global economy, while addressing various socio-economic concerns such as the growing income inequality, low domestic consumption, the aging population, the growing population of foreign workers – some of which have also been brought about by globalisation. It must also continue to develop the resource poor city-state’s ability to ensure a constant supply of its essential resources such as water. The threat of terrorism also makes it imperative for anti-terrorist measures to be taken to protect Singapore, given the crucial role security plays in ensuring Singapore’s business environment.

This increased economic competition from Singapore’s neighbours makes it imperative for Singapore to continually endeavour to remain competitive in the global market. Singapore needs to make investments in telecommunications, logistics, and business infrastructure to remain competitive vis-à-vis other countries in the region. She also needs to develop its stock of human capital to ensure her labour force retains its edge over rivals in the region; and also create business friendly policies to create a compelling case for investment to come to the country.

[On objectives of Singapore’s fiscal policy]

Fiscal policy, therefore, should try to negotiate between the two overarching and competing trends that characterise the challenges that face Singapore in 2007 – the first, to keep Singapore economically competitive in the globalised world, and the second, to address the many social and security concerns that have been brought up earlier.

Keeping Singapore economically competitive in the globalised world has been integral to Singapore’s current success, and it will be fundamental if Singapore is to continue its success in future years. Being a city state of only 4 million which needs to be plugged into the global economy in order to survive, Singapore is unable to hide behind protectionist measures, or depend on her domestic economy if she is to continue the levels of prosperity that she currently enjoys today. Remaining economically viable and competitive in the global economy can be considered to be Singapore’s biggest priority, as it is the basic tenet behind her functioning as an economic entity. On the part of the government, this will mandate a pro-business stance, especially with regards to income taxation, in order to attract business and economic activity to the country.

Many of these social-economic concerns are a direct corollary of Singapore’s exposure to the globalisation – such as the vast income inequality and the needs of the low-income and middle-income groups. Ultimately, the state has to be committed to serving all its citizens, and Singapore must look into ameliorating the living conditions of needy groups in Singapore, and ensuring they get to enjoy the economic growth that has been brought about by globalisation as they are the ones who often bear the ‘brunt’ of its negative effects.

The overarching priorities for Singapore’s fiscal policy remain starkly simple: to ensure Singapore’s long term economic survival, and its survival as a cohesive social unit. Our fiscal policy must address both priorities, and balance between them when they are mutually exclusive in certain respects. We must remain competitive in a global economy which becomes increasingly aggressive every day, while continuing to take advantage of the opportunities globalisation offers us. All this time, we have to take care of each of our citizens – low income, middle income, high income – and provide the support infrastructure to maintain Singapore as an effective social unit. The suggestions and proposals made in this paper aim to achieve such an end, and so do the planners of Singapore’s fiscal policy, all working towards a Singapore that will not only be a land of opportunity and hope in the years to come, but also a land which takes care of its citizens – a land to call home.

Second Prize Winner (Category 2) – Chew Zhi Wen, Cyril / Hwa Chong Junior College

[On Singapore’s economic challenges]

When the economy prospers, not everyone benefits equally. The able, talented and enterprising are likely to forge ahead, while the lower-educated, lower-income groups are left behind. Action must be taken to narrow the income gap and appease social resentment of these lower-income groups.

With no natural resources and given our limited revenue resources, it is a formidable task having to plan the budget. Ultimately, it is very difficult to argue which area of the society/economy needs more money than the other, because they all are important, but for different reasons, and sometimes their importance are inter-linked.

[On maintaining our security expenditure]

All our efforts and revenue spent on boosting the economy and improving the living standards and social well-being of Singaporeans, would be nullified by just a single terrorist attack. It is painful but true. A farmer can invest in the best feed for his sheep, but once a pack of wolves strikes, his efforts are gone down the drain. He should therefore, invest in stronger fences to surround the barn. We can invest and grow our assets, but we must also invest in safeguarding them.

[On increasing our tax revenue]

We should not raise direct income / corporate tax because we need to remain attractive to foreign investment in the face of increased global competition. In fact, there are actually plans to further reduce it to boost our competitiveness. Also, progressive personal income tax affects work incentive, discouraging people from moving into the higher-income brackets. Together with an aging population, the income tax burden will weigh increasingly on the shrinking workforce. In contrast, GST is more efficient and self-policing, eradicating the problem of tax evasion and avoidance. Also, it is a more stable source of revenue as it is not affected by cyclical economic and income changes. Hence, if we were to raise taxes, we have to raise GST and not income or corporate tax. As Singapore’s GST is still one of the lowest in the world, there is still substantial room for further increase.

Third Prize Winner (Category 2) – Philip Chan / Hwa Chong Institution

[On changes to the Singapore economic model]

Singapore’s financial expenditure modus operandi has evolved through the years. Since the 1960s when infrastructural development was the core focus of the Government’s efforts to build the country, the ‘expenditure pattern’ has ‘matured’ in accordance with Singapore’s present-day status with changes and new challenges in the socio-political and economic scenes. These challenges have to be met in order to secure Singapore’s continued progress into the decades to come.

Consequently, to sustain economic progress, continued funding of the development of specific infrastructure is crucial in the development of specialised, high-end industries, serving as the platform upon which progress can be built and sustained. […] Further diversification of various industries must continue, in the areas of logistics, info-communications, banking and finance, tourism, even as the Government seeks to expand into the education, creative and premium healthcare industries, which serve as added impetus for sustainable economic growth.

[On education as a ladder for social mobility]

Yet, with the increasing level of education, equipping Singaporeans with relevant knowledge is not sufficient. The competitive global business climate changes rapidly; the relevance and accuracy of knowledge is no longer static. What was accepted as ‘knowledge’ in textbooks 30 years ago may not necessarily be accepted as ‘truth’ now. The mastery of knowledge, presentation, analytical and language skills is necessary; infusing this into various aspects of education curriculum in schools would stretch students’ potential further to allow them to compete effectively in the global economy of the future, thereby ensuring Singapore’s continued economic progress.

In the context of Singapore, education has always been viewed as an instrument of meritocracy, enabling people to have equal opportunities for success in life. The Government’s approach has been to emphasise education, especially for the poorer strata of society, as a means to scale the social ladder.

[On Singapore’s demographic challenges]

To address the issues of an ageing population and brain-drain, it is imperative that Singapore continues in its efforts to attract global talent. Marketing Singapore as a dynamic, modern city with a plethora of cultural experiences will only go thus far; it is crucial to ensure that the standard of living be kept high. […] It is necessary to continue maintaining Singapore’s position as a viable investment option and an attractive place to live in by providing incentives for qualified professionals. Global talent will help Singapore grow its human capital and add different dimensions and perspectives to the industries and the economy. Moreover, as these foreign talents integrate into the fabric of the society, they will add to the cultural identity and ‘quality of life’, a testament to Singapore’s unique identity as a truly ‘global city’. The injection of young, fresh blood into society will surely help Singapore prosper in the new millennium.

[On ‘Free Market Environmentalism’ in Singapore]

Singapore acceded to the Kyoto Protocol (which aims to reduce greenhouse gas emissions) on 12th April 2006. A necessary condition of adhering to this Protocol is for the signatory country to achieve stipulated levels in the reduction of greenhouse emissions. With taxation as a form of revenue, the Government could use this to achieve the environmental emissions’ targeted reductions set by the Kyoto Protocol.

Levies and taxes could be imposed on individuals or companies who fail to meet certain environmental pollution minimisation criteria, subject to standards laid down by the National Environment Agency (NEA) and the Ministry of the Environment and Water Resources (MEWR). In addition, the practice of trading of extra ‘carbon credits’ and emissions trading could be undertaken as part of ‘free market environmentalism’ in a regulated market system in Singapore. Such a practice would further allow Singapore to attain the emissions criteria set by the Kyoto Protocol with respect to minimising greenhouse emissions, and preserve Singapore’s distinct reputation as a ‘garden city’.

[On the road ahead]

While the philosophy of spending in anticipation of future demands and to “invest in the future” holds true for the Singapore Government, it remains necessary to continue evaluating and appraising the existing methods of expenditure in Singapore’s budgetary policy, to spur economic growth, help Singaporeans progress and to finance our future.

Key expenditure priority areas which have to be addressed in the next few years include education, maintenance and upgrading the economy and infrastructure, in addition to social areas of concern, namely, the ageing population and addressing the rich-poor gap. It is also necessary to ensure that expenses are trimmed to maintain the fiscal health of the Government. Addressing these key spending areas and ensuring that our finances are well-planned for future needs would suitably place Singapore in a better position to enter the decades ahead, iridescent with hope and opportunities for all.

from the Budget website

Friday, March 09, 2007

The Price Determination Story

Since the Price Determination model is going to be used quite a lot in our study of Microeconomics, we need to learn it carefully. Although it looks simple, it actually contains a lot of assumptions about how things change through time.

Those assumptions are based on the fact that both the supply and demand curves represent quantity responses to all possible prices .

In other words, the quantities consumers buy depend on price alone. The quantities suppliers make respond to price alone. Suppliers do not, according to this model, directly adjust quantity to perceived shortage or surplus. The shortage or surplus causes a price change, and the price change then causes suppliers to adjust quantity.

What you will be asked to do on the exam is TELL A STORY OF PRICE ADJUSTMENT IN THIS MARKET. Like any story it has a beginning, a middle, and an end, and the order matters.

1. In each case we will start with price at equilibrium.

2. Then, something will happen that will affect either producers or consumers. Now, in the end, both sides are going to be affected. So ask yourself: who is affected first? Does this change affect the quantity supplied for each price, or the quantity demanded for each price?

Anything that affects the cost of production of the good affects producers first. It therefore shifts the supply curve on the graph. Reason: the supply curve represents a series of quantity responses to possible prices. But if production costs change, those quantity responses to possible prices will change too.

So: tighter regulation, higher materials costs, higher labor costs, and so forth will reduce supply for each possible price of the good.

On the other hand looser regulation, lower materials costs, lower labor costs, and so forth will raise the supply for each possible price of the good.

Example: Suppose we figure out the supply curve for wheat by asking producers how much wheat they would grow for each possible price of wheat. Then the price of fertilizer fell. We would have to go back and ask them all again, and the quantities of wheat supplied would be higher for each possible price of wheat.

Anything that affects willingness to buy the good affects consumers first. It therefore shifts the demand curve on the graph. Reason: the demand curve represents a series of quantity responses to possible prices. But if willingness to buy changes, those quantity responses to possible prices will change too.

So: lower income, cheaper alternative products, or new bad information about a product will reduce demand for each possible price of the good.

On the other hand higher income, more expensive alternative products, or new good information about a product will raise demand for each possible price of the good produced.

Example: Suppose we figure out the demand curve for bread by asking consumers how much bread they would but for each possible price. Then medical researchers discover that if you eat a lot of bread you live forever. We would have to go back and ask them all again, and the quantities of bread bought would be higher for each possible price.

So, the first step in our story is to figure out which side of the market is first affected.

3. The price has not changed yet. So the next question is to figure out whether, at the old price, we have a surplus or a shortage of the good. You can do this on the graph, but the answer should make sense without looking at a graph:

- If supply increases, the result is a surplus at the old price
- If supply falls, the result is a shortage at the old price
- If demand increases, the result is a shortage at the old price
- If demand decreases, the result is a surplus at the old price.

4. Now we are ready to think about how the price changes:

A shortage will push the price up, as consumers offer to pay more to get hold of a good in short supply.

A surplus will push the price down, as sellers cut price to try to move the inventory that is piling up.

5. And finally, we can talk about how the price change resolves the problem of the surplus or shortage noted in (3).

A rising price will increase quantity supplied and lower quantity demanded. These two effects, working together, eliminate the shortage.

A falling price will reduce quantity supplied and raise quantity demanded. These two effects, working together, eliminate the surplus.

So, for practice, you can begin with Step 1, plus the "something" that will initially affect either producers or consumers. Next, tell the story through parts 2, 3, 4, and 5, showing how to get to the new price and quantity.