JC Economics Standard of Living & Economic Growth Essay Model Answers
A sample question on MACROECONOMIC INDICATORS, and its application to macro economic performance and Standard of Living (SOL).
Question
Journey times in PyeongChang, South Korea, have been slashed after extensive rail improvements, with high-speed services running between the host city, each with improved road transport network supporting the newly built, modern stadia. With a boost of over US$30 billion worth of capital spending and public expenditure, the country can look forward to more growth in the next few years. 2018 Winter Olympics.
(a) Explain how hosting the 2018 Winter Olympics event can lead to economic growth in PyeongChang. [10]
(b) Discuss whether hosting this event will necessarily lead to improvement in standards of living for South Koreans as compared to citizens of another country. [15]
JC Economics Essay – Economic Growth
Suggested Answer Part (a)
Part A: Causes & Effects Question
Cause(s): Hosting of 2018 Winter Olympics (event); Effect(s): Economic Growth in S Korea
Define economic growth, in terms of both actual and potential growth.
Actual growth occurs when there is a rise in any of the components of aggregate demand (AD) in the short run (SR) in PyeongChang, when she is operating at less than full employment, i.e. she is operating with spare capacity. Since AD=C+IG+ (X-M), any rise in household consumption (C), firms’ investment (I), government expenditure (G) or net exports (X-M), will raise AD.
Due to this event, government spending (G), in terms of public expenditure will rise. The expenditure includes those on sports venues and infrastructure improvements, building of new, and maintenance of existing roads, a larger rail and improved network, airports upgrading, etc.
In addition, there will also be a rise in capital spending, or investments (I) from private firms as they expect higher demand for goods & services from the event organisers, participating teams, spectator and tourists, etc. Specifically, there will a greater stock of capital equipment and machinery that are used in the production of goods and services. The building of new hotels, investment in new machines for goods production, etc see a significant improvement in both quantity & quality of capital factors of production (FOPs).
PyeongChang will also experience a rise in consumption spending (C) relating to the soccer event. E.g. soccer merchandise, increased spending from locals. Also, consumption also rises due to higher levels of consumer expenditure by tourists. (can treat tourist spending as higher X)
(Sketch the diagram that shows a rise in AD.)
The injections (J) of higher C, I, G (and X) will lead to a multiple rise in the level of national income, via the multiplier (k) effect. These initial rise in C, 1, G and possibly (X-M) will be circulated and re-circulated as household spend part of their higher consumer incomes, resulting in multiple rounds on expenditures by others who have received the income, resulting eventually in multiple increase in actual output.
Once the initial injections equal the total sum of withdrawals, the final income level will rise by a product of AJ x k, whereby k = 1/mpw. This brings PyeongChang closer to full employment, level of national output, and actual growth occurs, as GDP growth rate is now higher.
The Olympics event will also see PyeongChang achieving a higher potential growth rate as she expands her productive capacity.
Possible Points:
Higher investments → Rise in potential output in the LR due to higher productive capacity leading to potential growth.
Also, COP falls with productivity improvement
Facilitates the assimilation of new and advanced technology.
New production techniques, improvement in performance of machines, better organisation and management, more efficient transport and communication systems etc.
Enhances PyeongChang’s image as a preferred choice for investment and tourism development → An intangible effect of attracting more FDIs in future, as well as attracting more quality, skilled labour, at least from Europe.
The expansion of the ability to produce leads of the rightward shift in the LRAS, as seen in Figure…
(Sketch Ad-As diagram)
(Can show effect on actual and potential growth, on the same AD-AS diagram.)
In summary, hosting the soccer event can lead to both actual and potential growth for PyeongChang.
JC Economics Essay – Analysis of Standard of Living
Define SOL of a country: It refers to the average quality of life, in terms of the level of material and non-material well-being enjoyed by its citizens. The material aspect of SOL is represented by the amount of goods and services a typical individual has for consumption, whereas the non-material aspects refers to the qualitative aspects of quality living, such as the environment and cleanliness, the amount of leisure time, etc.
(Introduction: key concepts hat have not been defined in part a)
As already explained in earlier, PyeongChang enjoy a higher economic growth rate due to the soccer event. To examine whether economic growth indicates an improvement in SOL as compared to another country, we will need to make international comparison meaningful. Economic growth can be attributed to higher consumer spending on consumer goods and services. If PyeongChang has a level of GDP over time as compared to another country, we can infer that her SOL have improved at least materially as compared to that country as more goods and services are made available for consumption for S Koreans.
To be more conclusive in SOL comparison over time between countries, the growth rates over a few years after the event can be used.
(THESIS: There is necessarily an improvement in SOL (based on what is given)
However, mere changes in the GDP growth rate may not fully indicate improvements in the quantitative aspect of SOL. More data is needed to make stronger conclusions.
(ANTI-THESIS 1 – No! Growth does not necessarily mean SOL is higher (Material)
For eg, there may be differences in rate of change in population. Population tends to differ in different countries, to ascertain the difference in material SOL for different countries; one has to consider how the rate of change of population affected the rate of change of national income for each country. In the use of real per capita GDP to measure changes in economic welfare, the steps involved in obtaining this measure are as follows:
(Approximately) Real per capita GDP growth = Real GDP growth – Population growth
For example, if PyeongChang’s population grows faster than its real GDP, the individual’s share of real national income will be falling. Thus, a more accurate indicator of SOL is real GP per capita. For international comparison, Indonesia obviously has a much higher real GDP as compared to PyeongChang, but given its huge population growth, Indonesia has a much lower rise in real GDP per capita.
Another important area of international comparison is that there is the difficulty of having different currencies. The South African GDP figures will be denominated in its national currency (Hryvnia) while S’pore’s GDP will be in SS. It is an accepted practice to convert GNP estimates in the respective national currencies to a universally accepted currency. e.g. the US$ at the current exchange rates, for comparison.
But the exchange rate may be a poor indicator of purchasing power at home. As an alternative, the Purchasing Power Parity (PPP) is often used to indicate the amount of goods and services can be bought by a unit of currency at home compared with the purchasing power of other countries’ currency. After each country’s currency has been adjusted by taking into the relative purchasing power, the ability to purchase goods for consumption can then be compared more clearly.
Others:
Inflation rate
Distribution of income,
Composition of G and M expenditure, Size of monetized sector.
Even if the material aspect is conclusive of an improvement in SOL, we still need to examine the non-material aspects of SOL, such as negative externalities.
(ANTI-THESIS 2 – No! Growth does not necessarily mean SOL is higher (Non material)
Usually, GDP figures take no account of externalities produced by the economy. Many production processes and consumption activities create harmful by-products, which harm the environment. Such external costs are difficult to measure and are also not captured in the national income figures, which only reflect private costs. For instance, in PyeongChang is likely to experience increased economic activities before and during the hosting of the event. Prior to it, we can expect a heightened noise and air pollution levels and destruction to the natural environment was likely, due to increased buildings of transportation infrastructures, sports amenities and hotels etc.
Furthermore, during the event, with increased human and vehicular traffic flow, over congestions and pollutions was likely to be serious. Thus, if an increase in output in PyeongChang was accompanied by increased in negative externalities, then the resultant rise in national income would overstate the rise in the welfare of society. Comparing to another country where real per capita GDP may be growing at a slower pace but may not be experiencing the higher levels of noise and air pollution, the SOL may not be higher.
Others:
Lesser leisure hours.
Expenditure of essential services such as healthcare, education and housing.
JC H2 Econs Essay – Evaluation SOL Concept
Evaluation:
The non-material or qualitative aspect is limited in usefulness when used to compare SOL across countries. While the material aspect is objective and can reflect accurately the amount of good and services available for consumption an individual can afford, it cannot reflect fully the qualitative preferences of the individual.
Some individuals in PyeongChang may prefer a slower pace of life while others prefer a faster pace of lifestyle, a more efficient transport network, etc. Also, S Koreans and citizens of another nation are likely to place value of importance on different items. For eg, they may prefer a strong national identity, culture and heritage while Singaporeans may prefer more personal growth and development and self-actualisation. To improve on the SOL comparison, other indicators such as the MEW and HDI may have to be used, instead of merely GDP figures.
In summary, economic growth does not necessarily mean a higher SOL for PyeongChang as compared to another nation. Other indicators of material aspects are needed to improve comparison of quantitative aspects. Furthermore, NI statistics alone, will still fail to take into account the qualitative SOL which further complicates international comparison.
As different individuals of different nationalities value different areas of non-material aspects, other indicators such as HDI should be used together with NI statistics to gauge changes in SOL across countries.
Remarks from our H2 Econs Essay tutor:
1. Many considerations to make comparison more meaningful. Check the pre-amble to choose the most relevant improvements required.
Different countries – PPP, size of monetized sector, composition of G and M.
Different time periods – inflation rate, population, distribution.
2. Can instead use GNP figures if wish to take into account S Koreans in other parts of the world.
3. Aim: make sure none of T, AT and EV is empty!
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