MACROECONOMICS

For people who think hwachong notes suck.

© Wong Yun Sheng Calvin [06S61/21], Page 1

 MACROECONOMICS
A comprehensive A-Level guide, or what you do when hwachong notes suck.
As written by Wong Yun Sheng Calvin [06S61/21]

Chapter 1: Things you simply have to mug.

Concepts of National Income

This is, in all honesty, pure memory work.

Gross Domestic Product (GDP) Gross National Product (GNP)

The total market value of all final goods and services newly produced
The total market value of all
during a specified period, usually one year, by productive factors
final goods and services newly
owned by residents of the country, irrespective of where the factors
produced within the
are located, before provision for capital consumption.
geographical boundaries of a
Definitions

country during a specified

GNP = GDP + Net Property Income from abroad (NPIA) = GDP +
period, usually one year, before
Property income from abroad – Property income paid abroad
provision for capital
consumption.
Property income paid abroad by foreign companies in country that
transfer profit and dividends out to foreign owners. Property income
I.e. all goods and services
from abroad from residents making foreign investments.
produced by capital invested
locally
GDP higher only if NPIA is positive. If negative, GNP higher.

Market Price: value of output at shop level; price purchasers have to pay for the G&S sold on the market
Factor Cost: what the factors of production received for the produced G&S cost
Market Price

Market price and factor cost different due to indirect taxes (taxes levied on G&S that raise market price) and
subsidies (financial aids given by government that lower the market price).

GDP/GNP (Market Price) – Indirect Taxes + Subsidies = GDP/GNP (Factor Cost)

Capital consumption: loss in value of physical assets (plant and equipment) due to wear and tear;
obsolescence. To maintain productive capacity of country, depreciation must be made good occasionally.
Provision for depreciation = allowance for capital consumption. This also allows for a better picture of the
Gross VS. Net

net flow of goods and services.

GROSS National Product – Depreciation = NET National Product

In referring to NI, Net National Product at Factor Cost is always used. NNP is a better measure of country’s output,
but GNP usually used because it is difficult to ascertain accurately the value of depreciation. Estimates tend to be
imprecise and influenced by income tax laws.

Nominal: total market value of all final goods and services, and therefore has PRICE and QUANTITY
components.
Change in Nominal GDP/GNP may be due to rise in price level, rise in physical output, or both. Therefore to
Real VS. Nominal

determine whether changes are price of quantity related, it is useful to obtain GNP figures in current and
constant prices.

Nominal GDP/GNP: value of output measured at prevailing/current prices

Real GDP/GNP: level of output in terms of physical quantities, effects of price changes removed

MoneyGNP
Re alGNP = Χ100
GNPDeflator

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Difficulties in Measuring NI (not very necessary if you ask me)

1. Arbitrary Definitions
− Different definitions of what is included in NI
− E.g. including activities which are not exchanged for money – therefore no market price and require
imputed value
2. Imputed Values
− Owner Occupied Housing; Employees’ remuneration in kind such as food and lodgings; Goods consumed by
producers themselves; Service of buildings owned and occupied by public authorities
− Difficult to find accurate valuation for these activities, which are likely to differ across countries and be
inaccurate
3. Omissions in measurement of NI
− Non marketed activities: housewives work, community work
− Illegal activities: gambling and smuggling
− Unreported activities: summer jobs, private tuition. Unreported to avoid the taxman, and constitutes a
hidden black economy
4. Difficulty in obtaining reliable and complete information
− Data obtained through sampling, not designed fully for NI calculations
− E.g. income tax returns may fail to cover lower income groups, or people under-report incomes to avoid
higher taxes
5. Difficulty in calculating depreciation
− Different firms use different methods in calculating depreciation, therefore giving different data
− This makes national measurement of depreciation difficult and arbitrary, and makes dealing with gross
output easier
6. Danger of double counting
− Final and intermediate products – intermediate products counted even though they do not contribute
directly to output
− Earned and transfer incomes – no good/service provided when income is transferred

Uses of NI statistics (not very necessary if you ask me)

1. Indicate overall SOL of people

− Real per capita national income used since people’s SOL dependent on amount of goods and services
Real GNP
− Real GNP per capita =
Population
2. Measure the rate of economic growth
− Economic growth represented by outward shift of PPC (achieved through increases in LLCE)
− This growth measured in terms of percentage increase in real output
3. Calculate rate and direction in which national income is growing
− Using output method, we can see contributions made by each sector of the economy
− Can therefore tell the economic condition of each sector (stagnating, growing, declining) and allow effective
policies to be made
4. Indicate distribution of factor incomes among wage earners and property owners
− Using income method, we can obtain the income distribution amongst different workers
5. Assist in formulating policies
− To achieve various internal and external macroeconomic goals, governments can refer to NI figures when
formulating policies (taxation, foreign trade, public investment etc.)
6. Assist firms in marketing and research
− Income level of individuals help businesses determine pattern of consumption
− E.g. disposable income of consumers gives a gauge of their ability to buy – helps firms to decide when to
release new products
7. Assist international economic planning
− E.g. individual country contribution to the UN’s aid and assistance programmes determined by the size of its
NI

Comparisons of National Income (this, on the contrary, is extremely necessary)

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 1. Changes in Price Level
− NOMINAL GDP/GNP misleading especially when country experiences high inflation rate. Therefore
use REAL figures for comparison
− REAL national income measures value at constant prices, i.e. increase = rise in output and therefore
rise in living standards
− NOMINAL increase could simply mean a rise in prices without rise in living standards
2. Changes in Population
− Population grows over time, so real GNP per capita should be used to see if individual share of real NI
is growing or falling
3. Composition of GNP
− National income: measures level of production. May not be good indicator of consumption level
− Country’s output includes both consumption and investment goods, but CURRENT living
standards depend only on consumption
− Rise in NI from rise in exports will not increase SOL if income generated not spent on increased
imports. Fall in NI due to rise in imports does not necessarily reduce SOL
− For comparing changes in consumer welfare, must determine size of GNP for consumer use, i.e.
amount of consumer goods
Over Time

4. Distribution of GNP
− Judge whether there is an equitable distribution, i.e. does the average person benefit from increase
in NI, or is it just the elite few
5. Non-monetary versus monetary transactions
− NI statistics only involve monetary transactions
− Production that does not pass through a market is not counted in NI statistics even though they
contribute to the total output of final G&S in the economy
− E.g. housewives’ work and charity work
− Therefore true level of production in economy may be understated
6. Nature and Reliability of data
− Data obtained through sampling, not designed fully for NI calculations
− E.g. income tax returns may fail to cover lower income groups, or people under-report incomes to
avoid higher taxes
− Made worse in developing countries without proper accounting and data collection systems
7. Intangibles
− Real per capita NI cannot measure changes in intangibles that also affect SOL
− E.g. increased production may increase pollution and other negative externalities that could
undermine rise in SOL brought about by rise in real per capita NI
− E.g. increased production brought about by disamenities (longer working hours and more stress)
could also undermine rise in SOL

1. Different accounting practices

− E.g. different provisions for depreciation, different tax laws. More advisable to use GROSS NI to
compare between countries
2. Different size of non-monetised sector
− E.g. the barter trade system may be much more prevalent in developing countries and not captured
in NI statistics
Over Space (Countries)

3. Different currencies involved

− NI statistics have to be converted to universally accepted currency, e.g. the greenback
− However may not be satisfactory as exchange rate between currencies can fluctuate for various
reasons and change converted NI value. Official exchange rates not always reliable as they as subject
to government manipulation
− Purchasing Power Parity (PPP) can be used to eliminate some of these problems as it measures
how much goods and services can be bought by a unit of currency at home compared to other
currencies
4. Differences in composition of NI
− How much capital/investment goods and how much consumption goods
5. Different distribution of income
6. Different amount of intangibles
7. Differences in availability of data

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 Other indicators
Net Economic Welfare: adds to GNP certain items such as leisure and housewives’ services, deducts costs of
pollution and other disamenities

Physical Quality of Life Index: considers life expectancy at age one, infant mortality rate and literacy rate.

Factors influencing size and growth of NI

Internal Factors
1. Improvement in quality and quantity of factors of production
− Land: soil, climate, minerals, oil
− Labour: education and training, health and welfare standards, specialisation and division of labour
− Capital: rate of net investment (different between gross investment and depreciation) – whether plant
equipment, communications systems and other infrastructure maintained along with increased investment;
labour adaptability to new work procedures and retraining; scientific and technical research for new
processes and technology
2. Enterprise: entrepreneurship, foreign investment brought about by liberal economic policies
3. Government policies: how well government maintains economic and political stability; taxation and expenditure
policies

External Factors
1. Foreign loans and investment: what is the NPIA? Positive or negative? Excess income – purchase more imports?
2. Terms of trade: rate at which exports can be exchanged for imports, dependent on relative export/import prices.
Improvement in TOT implies that country can get more imports per unit of export, therefore increasing amount
of G&S available and raising SOL

National income determination

By now you should be completely familiar with how to draw a Y = AE graph, and an AD/AS graph. Don’t bother with the 2,
3 and 4 sector economy things – that’s wasting your time. All you need for this chapter is to memorise the definitions, some
key factors and how to explain the multiplier effect. Also be familiar with using AS/AD to explain inflation, and the three
ranges of the AS curve (Keynesian, intermediate, classical).

AE = C + I + G + (X – M)
− Withdrawal / leakage: any siphoning off of expenditures from the income flow between firms and households,
e.g. savings.
− Injection: any fresh of additional expenditure going into or added onto the domestic income flow, e.g.
investment spending.

Definitions
− Consumption function: a function C = a + bY showing the relationship between consumption and income, ceteris
paribus. It has an autonomous component (the minimum amount spent even if income is zero) and an induced
component (consumption that changes with income).
− Savings function: if consumption function is C = a + bY in a 2 sector economy, then S = (-a) + (1 – b)Y. This is
because MPC + MPS = 1.
− Average propensity to consume: proportion of total income consumed, AE
C/Y. Y = AE
− Marginal propensity to consume: change in consumption as income
AE2
changes, ∆C/ ∆Y.
AEFE
IG AE1
More definitions:
− Deflationary gap: this occurs when current planned expenditure brings DG
about an equilibrium level of NI that is insufficient to produce full
employment – i.e. not on the PPC.
− Inflationary gap: occurs due to excess demand in an economy at FE,
causing demand-pull inflation. NI
YFE
Factors shifting consumption and savings functions
− Wealth: increases and decreases in wealth.

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− General price level: increase in prices obviously causes consumption to fall.
− Expectations of future income: if we expect greater income, we will spend more now.
− Consumer Credit: if more consumer credit is available we are likely to borrow more and buy more durables,
especially if interest rates are low.
− Taxes: decreasing taxes will increase consumption, particularly for direct taxes.

Factors affecting MEI curve

− Business expectations
− Cost of new capital goods
− Innovation and technology
− Taxes

Multiplier

The multiplier is the number of times a rise in income exceeds

the rise in injections that produced it. It is measured by K = ∆Y/
∆J, or K = 1/(1 – MPC) = 1/MPW.

To illustrate how the multiplier works, we assume an economy

not at full employment with a marginal propensity to consume
of 0.8. All other economic conditions remain constant
throughout the period for which the multiplier acts. The
government decides to reduce unemployment by spending 10
billion it on road building.
− In the first stage, 10 billion is received as income by building
workers and contractors.
− In the second stage, these workers spend 8 billion out of the
10 billion on consumer goods with 2 billion leaking into
savings, since MPC = 0.8.
− In the second stage, owners of these shops and cafes will
spend 6.4 billion on other goods.
− In subsequent stages, less and less income is generated, as
some part will leak into savings.
− Total increase in NI is given by K times ∆J.

Stage Initial Change Change in NI (billions) Change in C (billions) Change in S (billions)

1 10 billion 10 8 2
2 8 6.4 1.6
3 6.4 5.12 1.28
4

Total 50 40 10

AS/AD analysis
− To memorise: AD shows the relationship between the price level and real equilibrium output levels at which
planned spending equals actual output. Only points at which AE is in equilibrium with total output of a country
contribute to AD when price levels change.
− AS/AD is always drawn with Y-axis being general price level, and X-axis being real output.
− Ranges of AS curve: Keynesian (where there is excess capacity), Intermediate (Where there is some excess capacity
that is being taken up as economy moves towards FE), Classical (no excess capacity)

Factors affecting AD
− Changes in economic outlook
− Changes in expected inflation: if higher inflation expected in the future, people buy more now
− Government policies: changes in government expenditure and taxation policies
− Changes in money supply (interest rates)
− Changes in exchange rates
− Changes in our trading partners’ economic status

Factors affecting short run AS

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− Changes in costs of production
− Supply shocks

Factors affecting long run AS

− Incentives for work: e.g. lower income tax
− Working and business environment: e.g. reduction in regulation and bureaucracy
− Changes in human and industrial capital: e.g. more machines, more productive workers, new technology
− Increased labour force: e.g. more women working

Taxation and Public Finance

I don’t think A Level examiners will be stupid enough to give you a question asking you to describe the wonders of taxation
(and there’s no such question in the TYS), so you can count your lucky stars. They have asked for comparisons between
direct and indirect tax systems though, so I suppose you just need to mug that.

Taxes: compulsory transfers of money from private individuals, groups of institutions to the government.
− Direct: taxes paid directly by the group on which the tax falls. The burden cannot be shifted to another. These
taxes include income tax and corporation profits tax.
− Indirect: there are taxes on an individual’s expenditure, levied on goods and services. Tax incidence can be
shifted from seller to buyer depending on PED. For example, GST.

Characteristics of a good tax system

− Equity: taxation is based on one’s ability to pay
− Economical: low administrative costs
− Convenience: little administrative hassle for taxpayers
− Clarity: taxpayers have perfect information about their tax liabilities
− No disincentives: taxpayers are not discouraged from working, saving, consuming and investing.

Advantages Disadvantages

− As they affect real income, they act as

− Progressive in nature, hence reduces income
disincentives, and may stifle investment and
Direct Taxes

inequality
consumption
− Clarity achieved since tax is deducted each time
− Tax evasion is a likely possibility
a worker receives pay
− Higher administrative costs as each taxpayer’s
− Effective demand management instrument as
liability must be calculated
they act as automatic stabilizers
− May cause wage price spiral

− Less disincentive than direct taxes as they are

hidden in the prices of goods, and people are
thus less aware of the amount being paid − Regressive in nature since everyone pays same
Indirect Taxes

− Less administrative costs as they are easier to amount of tax – poor are less protected
collect. Also more flexible as they can be − Producers may try to transfer tax incidence to
changed before the next budget comes out consumers, reducing consumer welfare
− If consumption is reduced and channelled into − May cause cost push inflation
savings, it acts as a source for loanable funds, − May harm production if producers lose
stimulating investment economies of scale as a result of fall in output
− Can be used to protect domestic industries, and
reduce consumption of demerit goods

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 MACROECONOMICS
A comprehensive A-Level guide, or what you do when hwachong notes suck.
As written by Wong Yun Sheng Calvin [06S61/21]

Chapter 2: Macroeconomic Goals

There are 4 main macroeconomic goals: low inflation, low unemployment, economic growth and balance of payments
equilibrium. What we need to know:
− Effects of these goals on the economy
− Trade off with other goals
− The policies we use to achieve them and their effectiveness
− These goals in the Singaporean context
A good evaluation of any macroeconomic goals must involve the above four segments. It’s not necessary to memorise all
the effects of each goal (e.g. expected and unexpected inflation and its effects).

These goals are important when evaluating the effect of events on the economy:
− We evaluate first the effects on C, I, G, (X – M) / effect on the 4 macroeconomic goals
− The reasons for these effects (e.g. change in interest rate, change in exchange rate)
− The effect on standard of living
− Other miscellaneous effects (e.g. an increase in oil prices worldwide increases amount of R&D on oil substitutes)

Goal 1: Inflation
A sustained increase in the general price level, typically measured with the CPI (consumer price index)

Production, investment, employment

− Higher productivity: people feel more confident about the state of the economy and less worried about
the value of their money.
− Low cost-push inflation: investment increases since investors are more confident of returns. Also
borrowing and lending of credit goes on as usual, stimulates investment.
− Low amount of demand-pull inflation: justifies why inflation should not be zero – a small amount of
demand-pull inflation stimulate investment and potential economic growth due to gains in the SR. Also
Economic effects

decreases unemployment in the SR.

− Unemployment: if economy not at FE, cost-push inflation increases unN, demand-pull decreases unN.

BOP & exchange rate

− If we have lower inflation than other countries, our exports become more competitive, and our domestic
goods more competitive (since imports are relatively more expensive), therefore BOP improves.
Exchange rate will appreciate.

Other effects
− Shoe leather costs (incurred when people convert money to other assets), menu costs (incurred as price
tags, catalogues etc. are updated). These costs may cause misallocation of resources if they distort price
signals, and also waste resources due to constant changing needed.
− Income redistribution: fixed vs. variable income earners, creditors vs. debtors

− Unemployment: e.g. to decrease inflation, decrease money supply and increase i/r
investment and
Trade offs

consumption fall, unN increases.

− Balance of payments: e.g. to decrease cost-push inflation, appreciate exchange rate
exports less price
competitive, BOP worsens if Marshall Lerner condition not satisfied
− Economic growth: higher i/r
lower C & I, stifles both potential and actual economic growth

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 Fiscal Policy
− Use to reduce demand-pull inflation
− But subject to various technical problems (refer to Chapter 3)
− In SG: used with supply side effects to ensure long-term growth and provide room for potential growth,
thus hedging against cost-push inflation as well. E.g. government spending on capital goods

Monetary Policy
− Use to reduce demand-pull inflation
− But subject to various technical problems, as well as flaws in surrounding interest rate theories (refer to
Chapter 3)
− Monetarists: believe in the direct transmission mechanism MV = PT. Since V and T are assumed to be
constant, inflation is money related. Also, since investment is i/r elastic, MP will be effective in influencing
GPL via the indirect transmission mechanism.
− Keynesians: only believe in indirect mechanism, but they believe investment is i/r inelastic, therefore MP
Policies to achieve

is ineffective. Also, decreased demand due to increase in i/r will decrease prices, decreasing transactions
demand for money. Therefore i/r decrease, offsetting effect of MP on inflation.
− In SG: MP not effective since we cannot do OMO effectively. Being a small open country also means any
slight deviation from international i/r would trigger huge capital inflows or outflows. Therefore we are a
price taker of i/r.
− In SG: domestic demand constitutes very little of AD since our external exports sector is 2 times of GDP.
Therefore MP in Singapore affects AD very little.

Supply Side Policy

− Use to reduce domestic cost-push inflation
− In SG: used together with fiscal policy. Real-wage push inflation is kept in check by the tripartite
agreement between employers, unions and the government, as well as the National Wages Council.

Exchange Rate Policy

− Use to reduce imported cost-push inflation, the main source of cost-push inflation in SG
− In SG: this is the main tool to control inflation since most of our inflation is imported (our X+M combined
is four times our GDP)
− In SG: import-price push inflation and imported demand-pull inflation are kept in balance via a relatively
strong exchange rate managed within a band against a trade-weighted basket of currencies (BBC model).

− Definitely: keeps investor and consumer confidence up which is important to the SG economy
− However, rather than using an i/r centred MP to managed inflation, our low inflation is a consequence of
our exchange rate centred MP and fiscal-supply-side policies – both of which are intended to promote
Important goal in SG?

economic growth.
− Our MP: using exchange rates to control imported inflation and therefore controlling the largest cause of
inflation in SG.
− Our fiscal policy: has supply side effects so AS is continuously shifting rightwards, providing room for
potential growth and keeping domestic cost-push inflation in check. Other policies include education
and retraining, thus promoting efficiency and productivity.
− Also, fiscal prudence on the part of the government prevents overspending.
− Therefore: economic growth (both actual and potential) remains SG’s main macroeconomic goal. In
achieving economic growth we achieve low inflation as well.

Goal 2: Unemployment
The number of people of working age who are without work, but willing and able to take up employment
Types and Causes

− Frictional: arises because of imperfect information. Time is needed to match people to the appropriate
jobs as they go around searching.
− Seasonal: self-explanatory.
− Structural: when changes in technology/industries change the set of skills needed by workers, workers
without these skills become unemployed.
− Cyclical: unemployment caused by up and down swings in the business cycle.

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Economic effects − Loss in production and income: national income falls, and SOL falls too
− Loss in human capital: unemployed people may lose their skills over extended periods of time, reducing
economy’s potential output. Vicious cycle, as older workers may be less preferred to their cheaper,
younger counterparts.
− Loss in tax revenues: as income falls, revenues from taxes fall.
− Loss in social stability: may cause more crime and other social issues.

− Inflation: e.g. to decrease unemployment, increase money supply and decrease i/r
investment and
consumption increase. If economy at FE, demand-pull inflation results
Trade offs

− Balance of payments: e.g. devalue currency to make exports more price competitive, reducing unN in the
export sector. But if Marshall-Lerner condition not satisfied, cost-push inflation from imports will worsen
the BOT and therefore the BOP.
− Economic growth: as economy powers ahead, older workers tend to get structurally unN, as they cannot
keep up with the new skills needed for new industries.

Fiscal Policy
− Use to reduce cyclical unN
− But subject to various technical problems (refer to Chapter 3)
− In SG: used with supply side effects to ensure long-term growth and provide room for potential growth,
thus hedging against structural unN as well. E.g. government retraining of workers, lifelong learning.

Monetary Policy
− Use to reduce cyclical unN
Policies to achieve

− But subject to various technical problems, as well as flaws in surrounding interest rate theories (refer to
Chapter 3)
− In SG: MP not effective since we cannot do OMO effectively. Being a small open country also means any
slight deviation from international i/r would trigger huge capital inflows or outflows. Therefore we are a
price taker of i/r.
− In SG: domestic demand constitutes very little of AD since our external exports sector is 2 times of GDP.
Therefore MP in Singapore affects AD very little.

Supply Side Policy

− Use to reduce structural unN
− In SG: used together with fiscal policy. Real-wage push inflation is kept in check by the tripartite
agreement between employers, unions and the government, as well as the National Wages Council.
Continued retraining and skills development subsidised heavily by government.

− Definitely: due to above factors that are important to SG.

− However, our low unN is a consequence of our focus on continued economic growth (both potential and
Important goal in SG?

actual). Our fiscal policies have supply side effects and focus on providing a good infrastructure and
educated workforce for the private sector. As such we can continue to attract FDI and other investment,
while hedging against structural unN.
− Since our external sector is 4 times the size of our domestic sector, cyclical unN in Singapore tends to be
externally induced. Hence economic diversification also reduces our dependence on any one foreign
economy.
− Therefore: actual economic growth (to prevent cyclical unN via diversification) and potential growth (to
prevent structural unN via supply side policies) remains SG’s main macroeconomic goal. In achieving
economic growth we achieve low unN as well.

Goal 3: Balance of Payments

Statement that records all economic transactions between a country’s residents and the world during a time period
Trade offs

− Inflation: e.g. to correct BOP deficit, devalue exchange rate. Import-price push inflation results.
− Unemployment: e.g. use demand deflationary policies. Domestic demand falls, unN increases.
− Economic growth: to reduce BOP deficit, deflate demand. Economic growth slows down.

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 Current account
− Trade in goods (visible trade = X – M) and trade in services (invisible trade)
− Income flows: w, r, i, p, includes investment returns.
− Current transfers
Capital Account
Structure

− Very small category, includes debt forgiveness, disposal of non-financial assets

Financial account
− Direct investment
− Portfolio investment (i.e. in stocks, shares etc.)
− Other short term investments (e.g. hot money, bank deposits)
Official reserves account
− Accommodates any surplus or deficits in the BOP by using reserves

BOP Deficit
Causes include:
− Different rates of inflation and growth between countries
− Income elasticity of demand for imports higher than for exports. E.g. developing countries’ demand for
capital and manufactured goods increases rapidly with income, but demand for their exports (usually
primary goods) grows at a much slower rate
− Trading blocs may put up trading barriers to other countries
Effects include:
Economic effects

− If the BOP deficit is financed by borrowing from abroad, huge rates of interest might have to be paid. If
people abroad suddenly withdraw their money, it will lead to a run on the currency.
− As reserves are reduced, investor confidence may be reduced, leading to various ill effects.

BOP Surplus
Why reduce surplus?
− For a country experiencing large current account surpluses over many years, the opportunity cost
involved is the G&S it could have consumed.
− A country experience a surplus necessarily means another country is experiencing a deficit. These other
countries may pressure the country with the surplus to reduce it, or even adopt protectionist measures.
− Demand-pull inflation may result if X increases by a lot.
− Exchange rate may rise due to hot money inflows or current account surpluses, causing our local goods
to lose competitiveness. If the current account surplus is caused by high demand for one good (e.g. oil in
the UK in the 1980s), then other goods (e.g. non-oil products) will lose price competitiveness.

Expenditure Reducing Measures: contractionary MP and FP

Advantages:
− Demand for imports reduced, while demand for domestic goods falls as well. Hence producers can sell
more goods overseas, increasing exports.
− Domestic inflation rate will also fall relative to other countries, increasing price competitiveness of
exports.
− Increased interest rates (brought about by MP) will attract capital inflows, increasing funds for portfolio
investment.
Policies to achieve

Disadvantages:
− Higher unemployment and slower economic growth will result.
− Expenditure reducing not effective if demand for imports is income-inelastic
− Other evaluation of MP and FP (refer to Chapter 3)

Expenditure Switching Measures: raise the price of imports relative to domestic goods
− Impose tariffs: may invite retaliation from other countries, and cause complacency and inefficiency in
domestic firms.
− Devalue domestic currency: must comply with Marshall-Lerner condition, and trading partners must not
devalue as well. Also subject to J-curve effect, which states that BOT deteriorates in the SR after
devaluation.
− Import Quotas
− Policies to make exports easier and more profitable: e.g. provide information about foreign markets.

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 − Definitely: due to above factors that are important to SG.
− However, our BOP equilibrium results from an exchange rate centred MP that focuses on providing room
Important goal in SG?

for economic growth in Singapore.

− Our trade balances have generally been healthy, and our currency relatively strong to ensure a healthy
BOT. Since our exports have high import content, a strong currency is more a boon than a bane to them.
Making SG an attractive place for investment to stimulate economic growth (e.g. promoting us as a
financial hub, cutting the corporate tax rate to 18%) also attracts capital inflows regularly.
− However, our main worry is that excessive export driven growth could cause overheating via demand-
pull inflation. Hence we use effective supply-side policy to provide potential growth.
− Therefore: economic growth (both actual and potential) remains SG’s main macroeconomic goal. In
achieving economic growth we achieve a stable BOP as well.

Goal 4: Economic Growth

The sustained annual percentage increase in an economy’s level of real output over time

− Actual: the annual percentage increase in national output, i.e. rate of growth of actual output.
Types

− Potential: the percentage annual increase in the economy’s capacity to produce

The above can be illustrated with use of a PPC, or AD/AS curve.

Benefits
− Increased consumption levels: leads to increased SOL.
− More income for all: this is possible with a progressive tax system and an equitable income distribution.
Economic effects

− Reduces unN: increase in AD (actual growth) reduces cyclical unN, while increase in AS (potential growth)
may help to reduce structural unN.
− Environmental consciousness: people start caring more about things other than their Ferrari.

Costs
− Reduced current consumption: use PPC to illustrate trade off between capital and consumption goods if
country wants potential growth.
− Worsen income disparities: especially for low skilled workers.
− Environmental Pollution: e.g. depletion of natural resources.

Actual Growth
− Expansionary fiscal and monetary policies: typical evaluation (Chapter 3)
Policies to achieve

− Must also be accompanied by potential growth to prevent demand-pull inflation at classical range of AS.

Potential Growth: through supply side policies

− Capital accumulation: buy capital goods to increase productivity, spend on R&D to create new
technology.
− Invest in human capital: retrain old workers and continually upgrade skills. Encourage entrepreneurship.
− Foreign trade and investment: attract FDI from overseas to establish new industries.
Important goal in SG?

− Currently, economic growth remains the most important goal in Singapore.

− However, we may need to temporarily veer of this path is there are other more urgent economic
problems at hand. For example, if there is high inflation, we will have to use deflationary policies that
compromise economic growth in the short term.

© Wong Yun Sheng Calvin [06S61/21], Page 12

 MACROECONOMICS
A comprehensive A-Level guide, or what you do when hwachong notes suck.
As written by Wong Yun Sheng Calvin [06S61/21]

Chapter 3a: Macroeconomic theories

In the A-Levels, you are sometimes expected in part (a) of essay questions to describe a particular theory. Hence it is
imperative that you are familiar with the theories below. You are also expected to know the loopholes in these theories,
and how applicable they are to Singapore – such information can be used in two main contexts:
1. Evaluations of various macroeconomic policies and their usefulness to Singapore.
2. Evaluations of how relevant the theories below are to Singapore.

Interest rate determination: the Liquidity Preference Theory

Money supply: the quantity of money held by households and firms in the economy at a given point in time.
Interest Rate: the cost of obtaining a loan to a borrower, and the return from the giving the loan for the lender.
Liquidity Preference: the desire to hold non-interest bearing cash balances instead of interest bearing bonds.
− Transactions: for planned daily expenses.
− Precautionary: for unplanned expenses.
− Speculative: used to buy assets (e.g. bonds) to make capital gains

i/r i/r i/r

La

+ =

Ls Lp

Qty $$ Qty $$ Qty $$

Transactions + Precautionary = Speculative = Idle Balances, Ls
Active Balances, LA Bond prices and i/r vary
Interest-inelastic inversely

Factors affecting LP curve

− Level of real income: as real income increases, Lp shifts rightwards.
− General price level: as GPL increase, Lp shifts rightwards.
− Expectations of GPL: if they increase, Lp increases.

Equilibrium i/r
− Determined by intersection of money supply and Lp.
− Money supply is insensitive to i/r since it is mainly determined by Central Bank.

LP theory in the economy

1. Monetarist Direct Transmission Mechanism
− Believes in the quantity theory of money: MV = PT (money supply X velocity = price level X total real volume of
goods and services).
− V and T are relatively constant in the economy. V is assumed to be determined largely by institutional factors,
while T is constant as the economy is assumed to be at full employment.
− Hence when M increases, P increases.
− Therefore “inflation is always and everywhere a monetary phenomenon”.
− When money supply increases, people spend the excess money on G&S, causing AD to rise. Therefore GPL rises
as well.
− Keynesians however did not believe in the direct transmission mechanism.

© Wong Yun Sheng Calvin [06S61/21], Page 13

2. Indirect Transmission Mechanism

i/r i/r Planned AE

Y = AE
MS1 MS2
AE2

AE1
i/r1
i/r2 MEI
Lp
Qty $$ Qty of I NI

− The monetarists believed that C and I were interest elastic, and hence the indirect transmission mechanism
provided a strong link between MS changes and changes in AD.
− Keynesians believed that C and I were interest inelastic as business sentiments were more important. Hence they
believed that there was a very weak and unstable link between MS and AD at best.
− Keynesians also argued that at the liquidity trap (where i/r is so low people consider it to be rock bottom, hence
expecting i/r to rise, causing bond prices to fall) people would simply hold cash to safeguard their wealth. Hence
there would be no change in i/r and no change in AD.
− Excess demand created from fall in i/r would increase GPL if the economy was at FE, thus increasing transactions
demand for money and offsetting the fall in i/r!

Comments on the LP Theory

− The transactions and precautionary demand for money may not always be interest inelastic – at high levels of
interest they may be interest elastic (e.g. transactions demand to pay for consumer durables).
− Money supply in the real world in not determined solely by the Central Bank – it is also affected by international
capital movements and a government’s monetary policies.
− The LP theory tends not to be very relevant to Singapore; due to our small and underdeveloped bond market
that makes it difficult to carry out an i/r centred MP.
− We are a small and open economy; hence our domestic money supply is determined largely by the influx of flow
of capital from abroad. Singapore is seen as a stable country both economically and politically with strong
financial institutions. Domestic inflation rate is low, meaning the Singapore currency is a good store of value.
Hence large amounts of foreign funds have been attracted into the country, increasing the domestic money
supply and keeping interest rates low.
− We are a price taker with no influence on i/r. Changes in Singapore’s i/r tend to follow that of the US. If their i/r is
higher than ours, money will flow out of Singapore. To pre-empt this, our i/r must be adjusted upwards to be in
line with international rates, especially that of the US.
− Hence we use an exchange rate centred MP, rather than an i/r centred MP.

Interest rate determination: the Loanable Funds Theory

Demand for Loanable Funds: the amount households, firms, the government are willing to borrow at each i/r.
Supply for Loanable Funds: comes from current and pass savings of individuals and government, undistributed
profits of firms, and other financial intermediaries that can create credit.

Equilibrium i/r
3. Determined by intersection of demand and supply, graph looks exactly the same except Y-axis is i/r, X-axis is
quantity of loanable funds.

Comments on the Loanable Funds Theory

− In Singapore, demand for loanable funds comes typically from the private sector. With the current economic
boom (particularly in the property market), demand for loans is expected to have increased.
− Business demand for loans for investment purposes will also have increased now given the economic boom.
− The Singapore government runs budget surpluses. Given the fiscal prudence of the PAP, there is also no need for
the government to borrow from the public to finance any budgets.
− Supply of loanable funds comes from the general level of savings in the country, which is high relative to the
income level. There is ample supply in the form of voluntary and involuntary savings (CPF).
− Voluntary savings happen to be the highest in the world. In 2000, the gross national savings out of GNP
amounted to 51.5%.

© Wong Yun Sheng Calvin [06S61/21], Page 14

Exchange rate determination

Foreign exchange: trading of one country’s currency for another currency. Usually takes place in the foreign
exchange market.
Exchange rate: the rate at which one currency is exchange for another. It reflects the external value of the currency.
− Nominal ER: exchange rate based on the nominal value of currency.
− Bilateral ER: exchange rate between the currencies of two countries.
− Trade weighted / Effective ER: value of a currency against a basket of other currencies of its major trading partners,
each currency weighted according to the country’s relative importance as a trading partner.
Price of Demand and supply of currency
SGD in USD
− Local demand for imports affects supply of SGD; overseas
SSGD demand for our exports affects demand of SGD.
− Inflow of speculative or investment funds by foreigners
affects demand of SGD (goes up); outflow of these funds
affects supply of SGD (goes up).
− Financial gifts to the country increase demand of our
currency and supply of the giver’s currency. E.g. USA gives
DSGD us 10 million – demand for SGD increases, supply of USD
increases.
Qty of SGD

Exchange rate systems

1. Fixed: government fixes and guarantees the official price of its currency in terms of other foreign currencies,
through continued intervention in forex markets to devalue / revalue currency.
2. Freely floating: currency is determined solely through market forces of demand and supply, and can thus
appreciate or depreciate freely.
3. Managed float: combines a freely floating system with occasional intervention by the Central Bank to moderate
unwanted fluctuations. Band for fluctuation is not disclosed, but Central Bank will only intervene when exchange
rates exceed these bands.

Drawing of graphs: fixed and freely floating systems can be illustrated with the same graphs, but with different
descriptions. Managed floats have two extra lines drawn on to illustrate the room for fluctuation.

Appreciation: occurs when market forces operate freely to increase the external value of a currency.
Depreciation: occurs when market forces operate freely to decrease the external value of a currency.
− Relative inflation rates: if our inflation rate is higher than other countries, we will demand more imports, and
other countries demand less of our exports. Hence our currency will depreciate.
− Relative economic performance: if we perform better than other countries, we will tend to demand more imports,
thus increasing supply of our currency and depreciating the currency.
− Relative interest rates: if i/r in Singapore falls relative to foreign countries, supply of SGD will increase as
Singaporeans start depositing funds overseas. Demand for SGD will also fall, as foreigners are discouraged from
placing funds here. Hence currency depreciates.
− Currency speculators: if speculators expect a fall in our exchange rate in the future, they will sell our currency
now, and wait till it truly falls to buy again. Hence supply of SGD increases, demand for SGD falls.

Advantages Disadvantages

− Confidence and certainty: international trade and − BOP: there is no automatic adjustment to
investment is more certain as there is external balance a BOP disequilibrium.
price stability, and people do not have to be − Large forex reserves needed: to keep the
Fixed ER

worried of exchange rate movements wiping exchange rate fixed, governments must
out profits. maintain large amounts of reserves for
− Less room for speculation: currency rates continued intervention in the markets. The
fluctuate less so less room for speculation. THIS opportunity cost here is spending on fiscal and
HAS HOWEVER BEEN PROVEN WRONG BY supply side policies.
THE AFC. − Vulnerable: e.g. the Asian Financial Crisis.

© Wong Yun Sheng Calvin [06S61/21], Page 15

 − BOP: there is automatic correction of any BOP
disequilibria. E.g. BOP deficit will cause the − Lack of confidence: the exchange rate will be
Freely floating ER

currency to depreciate, which reduces demand highly volatile, affecting investor confidence
for imports and hence resolves the deficit. since the value of their profits is not stable. This
− No need to hold reserves: the Central Bank does also deters long-term investment and reduces
not need to hold large amounts of foreign potential growth.
reserves. − Increased speculation: speculators will increase
− Freedom to pursue domestic policies: Central volatility of the ER and worsen investor
Bank need not worry about exchange rate and confidence.
can focus on domestic policies instead.
Managed Float

− Some stability: there is a reasonable amount of

There is still some need to hold foreign reserves,
exchange rate stability to satisfy investors,
which can be depleted if handled poorly. Managing
hence disrupting trade and investment less.
these reserves can also bring about a whole lot of
− Some freedom: there is some freedom to pursue administrative and bureaucratic problems.
domestic macroeconomic policy.

Law of Comparative Advantage

A country is said to have comparative advantage in the production of a good when she can produce the good at a
lower opportunity cost than another country. The law of comparative advantage states that trade can benefit all
countries if they specialize in the goods in which they have a comparative advantage, with terms of trade that lie
within the limits set by the domestic opportunity cost ratios.

We assume that only 2 countries (China and USA) are involved in the production of 2 goods (wheat and cloth). There
is perfect factor mobility and hence constant opportunity costs of production of each good in the country, and zero
transport costs. Before specialisation, each country devotes half her resources to the production of each good:

Wheat Cloth
China 15 30
USA 20 10
Total World Output 35 40

Each country is currently producing along its own PPC, such that:
Cloth Cloth

60 China USA

30
20
10
Wheat Wheat
15 30 20 40
We observe that the opportunity cost ratios for each country is:

1 unit of wheat 1 unit of cloth

China 2C 0.5W
USA 0.5C 2W

Therefore we can see that China has a comparative advantage in cloth production while the USA has a comparative
advantage in wheat production. Hence both parties will benefit if they specialize in one good and trade.

© Wong Yun Sheng Calvin [06S61/21], Page 16

We now assume complete specialization, so China only produces cloth and the USA only produces wheat. Hence
output is:

Wheat Cloth
China 0 60
USA 40 0
Total World Output 40 60

The two countries now have to determine their terms of trade. China will not accept less than 0.5 units of wheat for
each unit of cloth, and the USA will not pay more than 2 units of wheat. Therefore the terms of trade for cloth are: 0.5
wheat < 1 cloth < 2 wheat. Likewise for wheat: 0.5 cloth < 1 wheat < 2 cloth. We assume that they two countries
trade 1 unit of cloth for 1 unit of wheat. Now they have:

Wheat Cloth
China 15 45
USA 25 15

Both countries end up with production possibilities outside their PPC, with China enjoying 15 more units of cloth,
and the USA enjoying 5 more units of cloth and wheat. They can therefore consume at points previously outside
their PPC curve. This increase in the number of goods represents an increase in the material well being, and ceteris
paribus, and increase in the SOL of citizens in both countries.

However, we must take note that the law of CA has its limitations. In the real world, countries face factor immobility
and hence are subject to the law of increasing opportunity costs. A country will tend to lose her CA as she specialises
more and more in the production of one good, since increasingly unsuitable resources will have to be deployed, and
as factor prices are driven up for a growing industry. Transport costs incurred in trading may also undermine the
benefit brought about by trade. Finally, free trade does not always exist, and countries may adopt protectionist
measures that protect industries they do not have a CA in.

© Wong Yun Sheng Calvin [06S61/21], Page 17

 MACROECONOMICS
A comprehensive A-Level guide, or what you do when hwachong notes suck.
As written by Wong Yun Sheng Calvin [06S61/21]

Chapter 3b: Macroeconomic tools

When we discuss macroeconomic tools, we are talking about policies that can be used to manipulate the economy to
attain our macroeconomic goals described in Chapter 2. In essays, you will regularly be expected to evaluate these policies
(especially with reference to Singapore), and very commonly their theories as well (e.g. how applicable is the LP theory to
Singapore; can and should a government keep interest rates low in an economy).

Therefore when evaluating macroeconomic tools, we must evaluate:

− How practical they are;
− Any flaws or loopholes their underlying theories may have, as described in the previous part of this chapter.
− How applicable is this evaluation to Singapore.

Fiscal Policy

Automatic stabilizers: built in features of the economy that operate automatically to smooth out
fluctuations in disposable income over the business cycle.
How it works

− Direct progressive tax system: as income rises, people pay more taxes and vice versa. Hence disposable
income is reduced during expansions, increased during recessions.
− Transfer payments: these are unemployment and welfare benefits. As economy expands and unN
decreases, government gives less out. Hence disposable income approximately maintained.

Discretionary fiscal policy: deliberate manipulation of government and taxes to promote desired
macroeconomic goals (contractionary and expansionary).

1. Cure cyclical unN

− Tax holidays to encourage investment, increased government spending on say roads and infrastructure
− Taxes on imports to encourage consumption of domestic goods
Uses

2. Reduce demand-pull inflation

3. Reduce BOP deficit (expenditure reducing)
4. Promote actual economic growth
5. Resolve income disparities via automatic stabilizers

− Crowding out effect: increased government spending has costs. To raise funds, government either have to
increase taxes or borrow funds from financial institutions. If they raise taxes, it defeats the purpose of
expansionary FP. If they borrow funds, they increase demand for loanable funds, causing i/r to rise and
discouraging investment. Hence FP crowds out private consumption and investment.
Evaluation

− Tax cuts will not stimulate I or C a lot if consumers and investors have poor business outlook and poor
future income expectations.
− Budgets tend to be inflexible and changing them to accommodate FP involves huge bureaucratic delay.
− Fiscal drag: FP may be implemented at the wrong time since time is needed for the problem to be
identified. Runs the risk of say, contractionary FP being implemented when economy is recovering from
recession, slowing down growth instead.
− Countries with small multiplier will benefit little from fiscal policy.

Fiscal policy in Singapore hence aims to use a supply side approach to provide incentives for savings,
investment and enterprise, hence achieving long-term economic growth.
Relevant to SG?

− The crowding out effect is not very relevant to Singapore since the government tends to draw upon
previous budget surpluses, or on foreign reserves to finance its spending. Government also usually seeks
to have a balanced budget.
− Singapore has a very small multiplier due to its high volume of imports and large amount of savings,
hence using FP to stimulate growth during a recession is highly ineffective. We believe in developing our
private sector to maximise our resilience against recessions, through practices such as economic
diversification, continued retraining of workers, and continued upgrading of infrastructure.

© Wong Yun Sheng Calvin [06S61/21], Page 18

Monetary Policy / Exchange rate policy in Singapore

MP aims to control money supply (MS) in two ways:

Regulating demand for credit

− Central bank lending rate: the rate at which Central Bank lends reserves to commercial banks.
− If this rate is increased, banks will raise their own i/r and become selective in lending. This has a
contractionary effect on credit creation, hence curbs increase in money supply.
How it works

Regulating supply of credit

− Open market operations: if the CB wants to reduce MS, it sells bonds. Buyers pay using money (credit from
commercial banks), reducing their cash holdings and hence the credit creating ability of banks.
− Liquidity ratio: the ratio of liquid assets (cash, treasury bills etc.) to liquid deposits. Expansionary MP will
call for a lower ratio to increase credit-creating ability of banks.
− Special deposits: CB freezes a certain percentage of deposits in a special account that cannot be touched.
− Moral suasions and directives: qualitative (types of borrowers to lend to, e.g. don’t lend to subprime
borrowers) and quantitative (how much the bank should loan out).

1. Cure cyclical unN

2. Reduce demand-pull inflation
Uses

3. Reduce BOP deficit (expenditure reducing)

4. Promote actual economic growth

− Responsiveness of MD to i/r: Keynesians believed that demand for money (MD) was i/r elastic (since most
people held money for speculation), and hence a large increase in MS would be needed to cause
significant i/r fall. Monetarists believed that MD was i/r inelastic (since most people held money for
transactions and precautionary motives), hence a small increase in MS was sufficient.
− Responsiveness of I and C to i/r: via the indirect transmission mechanism. Keynes believed I and C were
Evaluation

interest inelastic, and more dependent on business sentiment and consumer outlook. During recessions,
people would not invest or spend even if i/r was low. During booms, people would spend and invest
even if i/r was high due to “irrational exuberance”. Hence MP would be ineffective. Monetarists however
believed that I and C were interest elastic and hence MP was effective.
− A small multiplier will make MP less effective.
− OMO is effective at reducing MS only if there is a viable and active bond market.
− If banks are already holding a lot of liquid assets, changes in the central bank lending rate will not affect
them much as they don’t have to borrow from the Central Bank.

− Normal MP (as described above) is not very relevant to Singapore for a number of reasons.
− Being a small and open economy, our domestic money supply is determined largely by the influx of flow
of capital from abroad. Singapore is seen as a stable country both economically and politically with
strong financial institutions. Domestic inflation rate is low, meaning the Singapore currency is a good
store of value. Hence large amounts of foreign funds have been attracted into the country, increasing the
domestic money supply and keeping interest rates low.
− We are a price taker with no influence on i/r. Changes in Singapore’s i/r tend to follow that of the US. If
Relevant to SG?

their i/r is higher than ours, money will flow out of Singapore. To pre-empt this, our i/r must be adjusted
upwards to be in line with international rates, especially that of the US.
− Also the second point above also means there is no need for us to try and attract hot money inflows by
giving high interest rates, since foreigners will park their funds here for the reasons in point two.
− Singapore also lacks an active secondary bond market to buy and sell bonds, hence making OMO
ineffective.
− Also, recalling the explanation of inflation in Singapore in Chapter 2, exchange rates are far more
effective in maintaining price stability in Singapore. Our MP thus uses exchange rates.
− Since we are too small to influence world prices, having a managed float exchange rate system enables
us to hedge against import price push inflation and keep our exports price competitive (since most of our
exports have high import content).

© Wong Yun Sheng Calvin [06S61/21], Page 19

 MP in Singapore seeks to achieve price stability and low inflation as a basis for long-term economic growth. A
strong and credible currency is one of the key pillars of our macroeconomic policy. MAS maintains a managed
float system where the Singapore currency is managed in a undisclosed band against a trade weighted
basket of currencies. Since 1981, MAS has actively pursued a gradual appreciation of the Singapore dollar.
− Strong currency curbs imported inflation, and provides price stability in Singapore where import-price
push inflation is the strongest cause of inflation.
− Since we import practically all our raw material, a strong currency reduces the cost of imported
components, encouraging the growth of domestic and export sectors.
− A strong currency also reflects strong economic fundamentals, i.e. strong economic growth and healthy
fiscal/external surpluses. It is a sign that the Singapore government pursues a disciplined economic
Exchange rate policy in SG

policy and does not outspend its revenues (which would depreciate the currency). This instills consumer
and investor confidence.

However, in appreciating the Singapore dollar we must consider the following:

− Transmission lags: devaluation of our currency will cause the J curve effect in the SR. Time is also needed
for changes in the exchange rate to show its effects on the rest of the economy.
− To appreciate, or to depreciate: appreciating the SGD benefits the import sector (since costs are reduced)
and also a significant number of goods exports since our exports tend to have high import content.
However, service exports may be hurt since they do not benefit from lower imported input prices as
manufactured exports do. This poses a dilemma to the MAS. However, MAS has always pursued a policy
of not depreciating the currency to help exporters gain. Instead, supply side and fiscal policy is pursued
to increase productivity in these sectors, and to innovate and improve to make price elasticity of demand
for exports more price inelastic.
− Large foreign reserves: since the AFC, Singapore has acquired more than USD150 billion of foreign
reserves. Large amounts of opportunity costs are incurred in the storage of such reserves. Hence the
Government Investment Corporation of Singapore has been tasked with investing these reserves to
obtain safe and respectable returns of approximately 7% per annum.
− Relinquishing control over i/r: since we can only control exchange rates or interest rates, we have to give
up our control over i/r. As mentioned earlier however, this is of smaller consequence.

Supply Side Policy

How it works

An approach that focuses directly on aggregate supply, and seeks to increase it.

1. Cure structural unN

2. Reduce cost-push inflation
Uses

3. Control aggressive trade unions and check wage price spirals

4. Promote potential economic growth

© Wong Yun Sheng Calvin [06S61/21], Page 20

 Supply side policy is an integral part of Singapore’s macroeconomic policy, used with fiscal policy to ensure
stable long-term economic growth without cost-push inflation.
− Costs are incurred in providing or subsidising retraining, which may strain the government’s budget.
Also, older workers tend to resist retraining, and is harder to convey new skills to those without basic
literacy or skills.
− Wage controls (price and incomes policy, under SSP) distort price signals, and may lead to confrontations
with trade unions. Black markets may also arise from price floors/ceilings. However, trade unions in
Singapore tend to be more cooperative due to the tripartite agreement between employers, unions and
Evaluation

the government, as well the National Wage Council. Costs of production are reduced by cutting CPF
contributions and reducing cost of utilities. Wages are cut less.
− An integral part of SSP in Singapore is the use of foreign labour. Foreign unskilled labour may bring
about social problems, while foreign talent may incite resentment from local workers.
− Education and training show their effects only over the long term, and hence need to be supplemented
with short-term measures.
− Singapore enjoys sufficient funds for SSP due to its high voluntary and involuntary savings rate, which
provide adequate funds for long-term investment. However making use of such funds also entails other
problems. For example, the government recently raised the age from which annuities would be
distributed from the CPF, in lieu of growing evidence that the CPF nest egg may not be sufficient to
support one in old age.

© Wong Yun Sheng Calvin [06S61/21], Page 21