- 3 months ago
- Introduction A free trade agreement (FTA) is an agreement between two or more economies to remove or reduce barriers to trade with the objective of increasing the cross-border movement of goods and services between the economies. Exports are the expenditure made by foreigners on domestic goods and services. Imports are the expenditure made by domestic residents on foreign goods and services. Aggregate demand is the total demand for the goods and services produced in the economy over a period of time and is comprised of consumption expenditure, investment expenditure, government expenditure on goods and services and net exports. Many students think that signing more free trade agreements will not increase aggregate demand if it leads to a greater increase in imports than exports. This economic misconception will be discussed in economics tuition. Exposition Take Singapore for example. When tariffs on Singapore’s goods are removed or reduced in the FTA member countries, firms that import and sell Singapore’s goods in the FTA member countries will decrease prices to maintain competitiveness. Therefore, signing FTAs in Singapore will make Singapore’s goods cheaper in the FTA memb[...]
Category archives: Latest Articles
- 5 months ago
- Introduction Interest rate is the cost of borrowing and the reward for lending. Aggregate supply is the total supply of goods and services in the economy over a period of time and is determined by the production capacity and the cost of production in the economy. Many students think that an increase in interest rates will lead to a rise in the cost of production in the economy which will result in a decrease in aggregate supply. Mr. Edmund Quek will discuss this economic misconception in greater detail with the students in economics tuition. Exposition Firms employ factor inputs to produce output. These factor inputs include plants and machinery which are often financed through loans. As an increase in interest rates will lead to an increase in interest payments on loans, the cost of production in the economy will rise. Many students think that this will lead to a fall in aggregate supply. This is erroneous. To understand this, we simply need to draw a distinction between fixed costs and variable costs. Fixed costs are costs that do not vary with the output level. In other words, an increase in the output level will not lead to an increase in fixed costs. Fixed[...]
- 9 months ago
- Introduction The multiplier effect is the effect of an increase in autonomous expenditure resulting in a larger increase in national output and hence national income. The multiplier is the number of times by which national output and hence national income rises due to an increase in autonomous expenditure. Many students think that a small multiplier is undesirable for the economy. This economic misconception will be discussed in greater detail in economics tuition. Exposition An increase in autonomous expenditure will lead to an increase in aggregate demand. When aggregate demand rises, firms will employ more factor inputs from households to increase production and hence will pay households more factor income. When households’ income rises, they will increase consumption expenditure. Due to the increase in consumption expenditure and hence aggregate demand, firms will employ even more factor inputs from households to further increase production and hence will pay households even more factor income. When this happens, households’ income will rise further which will induce them to further increase consumption expenditure. Therefore, the initial increase in aggregate demand due [...]
- 12 months ago
- Introduction Tariffs are taxes imposed on imports. Many students think that an increase in tariffs will lead to an increase in import expenditure if the demand for imports is price inelastic. This economic misconception will be explained in economics tuition in greater detail. Exposition A persistent balance of payments deficit may lead to problems such as high imported inflation, lower national output and hence national income, higher unemployment and rising public debt, depending on the exchange rate system. Therefore, in the face of a persistent balance of payments deficit, the government may increase tariffs to correct the deficit. If the government increases tariffs, the prices of imports will rise. When this happens, households and firms will switch from imports to domestic goods which will lead to a decrease in import expenditure resulting in an improvement in the current account and hence the balance of payments. Many students think that if the demand for imports is price inelastic, an increase in the price will lead to a smaller proportionate decrease in the quantity demanded. If this happens, import expenditure will rise which will worsen the current account an[...]
- 1 year ago
- The exchange rate of a currency is the rate at which the currency can be exchanged for another currency. It is also defined as the price of the currency in terms of another currency. This is known as the nominal exchange rate. For instance, the nominal exchange rate of the Singapore dollar against the Malaysian ringgit is about RM2.50/S$ which means that 2.5 Malaysian ringgits are required to exchange for or purchase 1 Singapore dollar. It is important to note that the exchange rate of a currency is expressed as the amount of foreign currency that is required to purchase one unit of the currency. Unlike the nominal exchange rate of a currency which refers to the amount of foreign currency that is required to exchange for or purchase one unit of the currency, the real exchange rate of a currency refers to the amount of foreign goods and services that is required to exchange for or purchase one unit of domestic goods and services. Mathematically, it can be expressed as N[...]
- 1 year ago
- The answer is not necessarily. The Marshall-Lerner condition states that for a devaluation of domestic currency to improve the balance of payments, the sum of the price elasticities of demand for exports and imports must be greater than one. A fall in the exchange rate will increase the price of imports in domestic currency which will lead to a decrease in the quantity demanded. If the demand for imports is price elastic, which means that the increase in the price will lead to a larger proportionate decrease in the quantity demanded, import expenditure will fall which will improve the balance of trade. If the demand for imports is price inelastic, which means that the increase in the price will lead to a smaller proportionate decrease in the quantity demanded, import expenditure will rise. However, this may not worsen the balance of trade as export revenue will also rise. A fall in the exchange rate will decrease the price of exports in foreign currency which will lead to an increase in the quantity demanded. As the price of exports in domestic currency will not be affected by a fall in the exchange rate, an increase in the quantity demanded will lead to an increase in export reven[...]
- 1 year ago
- The reason is that many students do not fully understand the difference between current prices and base-year prices in the balance of payments and aggregate demand. The Marshall-Lerner condition states that for a devaluation of domestic currency to improve the balance of payments, the sum of the price elasticities of demand for exports and imports must be greater than one. A fall in the exchange rate will increase the price of imports in domestic currency which will lead to a decrease in the quantity demanded. If the demand for imports is price elastic, which means that the increase in the price will lead to a larger proportionate decrease in the quantity demanded, import expenditure will fall which will improve the balance of trade. If the demand for imports is price inelastic, which means that the increase in the price will lead to a smaller proportionate decrease in the quantity demanded, import expenditure will rise. However, this may not worsen the balance of trade as export revenue will also rise. A fall in the exchange rate will decrease the price of exports in foreign currency which will lead to an increase in the quantity demanded. As the price of exports in domestic cur[...]
- 1 year ago
- Fact 1 The US dollar has been depreciating against the major currencies in the world over the last few decades. This is mainly due to the rising imports in the US and hence the increasing supply of US dollars in the forex market. Fact 2 Australia is well endowed with natural resources such as minerals, metals and fuels. Therefore, the exchange rate of the Australian dollar depends to a large extent on the exports of these resources. Note: The two facts above will be explained in greater detail in economics tuition. Prediction Suppose you predict that the world economy will move into a recession soon. Question How can you make use of these facts and prediction to increase your wealth? Answer Well, you can convert your savings in Singapore dollars to US dollars. If the US economy moves into a recession, the imports will fall which will lead to a decrease in the demand for foreign currencies. When this happens, the supply of US dollars will fall which will lead to a rise in the exchange rate. These will lead to an increase in your wealth (which will be in US dollars) in terms of Singapore dollars. The story does not end here. If the US economy moves into a recession, so will the w[...]
- 2 years ago
- Public goods will not be produced in the absence of government intervention. Public goods are goods that are non-excludable and non-rivalrous. A good is non-excludable when it is impossible or prohibitively costly to prevent non-payers from consuming the good once it has been produced. A good is non-rivalrous when the consumption of the good by a consumer will not reduce the amount available to other consumers. Examples of public goods include national defence and street lighting. As public goods are non-excludable, consumers can consume them without paying for them. Therefore, consumers will want to consume public goods without contributing to their production which is known as the free-rider problem. As consumers have no incentive to pay for public goods, private firms which are profit-oriented have no incentive to produce them. Therefore, in the absence of government intervention, public goods will not be produced due to the characteristic of non-excludability. Many students think that the characteristic of non-rivalry of public goods leads to non-provision in the absence of government intervention. Mr. Edmund Quek will discuss this economic misconception in econo[...]
- 2 years ago
- Introduction A budget deficit occurs when government expenditure exceeds government revenue. Public debt refers to the amount of money that the government owes. It is also known as national debt, sovereign debt and government debt. Many students think that a decrease in budget deficit will lead to a fall in public debt. There will be a discussion on this economic misconception in economics tuition at Economics Cafe. Exposition When the government runs a budget deficit, it will borrow by issuing securities (i.e. bonds and bills) to finance the deficit, assuming it does not have sufficient reserves. When this happens, the public debt will rise. A decrease in budget deficit may occur due to a decrease in government expenditure, an increase in government revenue, or both. Many students think that a decrease in budget deficit will lead to a fall in public debt. This is erroneous. When the budget deficit falls, the public debt will not fall. Rather, a decrease in budget deficit will lead to a slower rise in the public debt. This is because when the government runs a smaller budget deficit, what it means basically is that it will borrow a smaller amount of money to finance[...]
- 3 years ago
- Introduction Labour productivity refers to output per hour of labour. Many students think that an increase in labour productivity indicates an increase in the skills and knowledge of labour. This is an economic misconception which will be discussed in economics tuition at Economics Cafe Learning Centre. Exposition An increase in the skills and knowledge of labour will lead to an increase in labour productivity. When workers become more skillful and knowledgeable, the amount of output produced with one hour of labour will rise resulting in an increase in labour productivity. The skills and knowledge of labour may increase due to education and training which will lead to greater human capital. Many governments provide education and training directly, by setting up educational institutes, and indirectly, by giving subsidies or tax incentives to firms to induce them to send their workers for education and training. Although an increase in labour productivity may be due to an increase in the skills and knowledge of labour, this is not always the case. There are various factors which will lead to an increase in labour productivity. Apart from an increase in the skills and knowledge[...]
- 3 years ago
- Introduction Aggregate demand is the total demand for the goods and services produced in the economy over a period of time and is comprised of consumption expenditure, investment expenditure, government expenditure on goods and services and net exports. Imports are foreign goods and services which are produced in other economies. Many students think that aggregate demand includes imports. The Principal Economics Tutor will discuss this economic misconception in economics tuition with the students. Exposition As aggregate demand refers to the total demand for the goods and services produced in the economy, it does not include imports. However, the components of aggregate demand which are consumption expenditure, investment expenditure, government expenditure on goods and services and exports include imports. Therefore, to derive aggregate demand, imports are subtracted from consumption expenditure, investment expenditure, government expenditure on goods and services and exports. AD = C + I + G + (X – M) In the above function, aggregate demand (AD) is the sum of consumption expenditure (C), investment expenditure (I), government expenditure on goods and services (G) a[...]