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Ch6: Factors affecting SOL, Unemployment - Coggle Diagram

- - - - AD factors. Increase in AD
        
        Short run affecting actual growth, long run indirectly affecting the economy's productive capacity
        
        E.g. in the long run, there is incentive for firms to invest in capital stock
        
        Without increase in AD, actual output may not rise as fast as the increase in productive capacity
        
        the higher production potential created by supplyfactors cannot be actualised if it is not purchased by the 4 sectors of the economy.
        
        Gap between potential and actual growth will widen
    - - Increase in quantity of factors of production
        
        Increasing availability of natural resources
        
        Increase in capital stock: investment in physical capital and economic infrastructure
        
        Increasing labour force
      - Increase in quality of factors of production
        
        Increase in labour productivity, through education and upskilling of workers
        
        Increase in land productivity, efficient utilisation of land, e.g. terracing land on hills to make it suitable for cultivating crops
        
        Advancements in technology, improving capital efficiency and productivity
    - - Favourable cultural, social and political environment
        
        Legal institutions to maintain law and order to enforce contracts between parties
        
        Enforcement of property rights create incentives to work hard and accumulate wealth.
        
        Cultural attitudes and a good social structure allow for fluid upward and downward job mobility
    - - Volume of imports and exports
  - - - Median household income
        
        Poverty rate
        
        Income Gini
        
        Wealth Gini
    - - Dependency ratio (Eldery: Young)
        
        Carbon intensity (pollution)
        
        Scale of borrowing
    - - GDP per capita
        
        Labour productivity
        
        Employment
        
        Measure of quality of life
  - - - Increased consumption leading to higher SOL, more income and G&S per household (CH4)
      - Avoid other macroeconomic problems, e.g. economic growth improves wages (no wage strikes), net exports and reduces industrial disputes
      - Actual growth avoids unemployment
      - Easier redistribution of income
        
        Increase income from economic growth increase gov tax revenues, which can be spent on programmes that alleviate poverty
      - Society can afford to care more for the environment, less preoccupied with own needs
    - - Current opportunity costs of growth
        
        Faster growth requires more investment in capital resources. More resources diverted to make capital goods, which results in less consumer goods produced
      - Costs and depletion of non-renewable resources
        
        Higher consumption, higher production, more production waste produced, more environmental damage
      - Income distribution
        
        Parts of the economy that grows faster will have faster growing wages than the slower growing sectors
        
        Unemployment from declining industries
        
        Wider gap
        
        People with more sources of income benefit more from the growing economy
      - Employement
        
        Underskilled and labourous workers are replaced by technology. They find themselves structurally unemployed
      - Social Effects
        
        Increase in stress and anxiety, increase in materialism, increase in crime, loneliness, stress-related diseases, suicides, divorce
      - Impact on net exports
        
        Decrease if economic growth is achieved by primarily using the imported goods
        
        Rising incomes increase imports
- - - - Effects on internal macro goals: Actual/ potential growth
        
        Via effects of investment:
        
        sudden and large increase in GPL makes the investment climate uncertain
        
        firms are uncertain about the prices of raw materials and of their output (final G&S to be sold)
        
        firms do not want to take the risk
        
        reduced investment —> fall in AD —> lower levels of output and employment —> reduced actual economic growth
        
        in the long term, lesser capital is accumulated —> lesser quantity of resources —> fall in productive capacity —> reduced potential economic growth
        
        *Mild inflation has the opposite effect (stimulates investment instead):
        
        indicates that the economy is growing at a healthy pace
        
        provides firms with positive business outlook
        
        firms expect DD to increase
        
        increase investment in better equipment to expand output
      - Effects on resource allocation
        
        Effects on allocative efficiency:
        
        inflation may cause distortion of relative prices (due to structural rigidities/ speculative activities)
        
        GPL of some G&S increase —> encourages firms to expand output —> resources are allocated to produce these G&S
        
        HOWEVER, long term DD for these G&S may not have necessarily increased
        
        resources are allocated inefficiently
        
        Menu cost inflation:
        
        cost involved in constantly revising price lists
        
        inflation causes prices to fluctuate, firms/ restaurants have to keep adjusting prices of G&S
        
        time/ resources wasted on reprinting menus, bar codes, catalogues etc
        
        Shoe-leather inflation:
        
        inflation causes erosion of purchasing power of money
        
        more cash is needed to pay for the same unit of G&S
        
        ppl make more trips to the bank to withdraw money
        
        time is wasted
      - Effects on welfare
        
        Via redistribution effects:
        
        generally, pp of money decreases
        
        lower income households have to work longer hours/ extra jobs to keep up with the rise in cost of living
        
        stress and anxiety incurred, fall in NM- SOL
        
        On fixed nominal income earners: income is fixed despite rising costs of living —> lower material SOL
        
        On flexible income receivers: able to stay afloat as workers are employed in expanding industries —> sustained material SOL
        
        On savers: real value of money decreases, disadvantageous to those who saved a lot (retirees etc)
        
        On debtors/ creditors: debtors return the money in times of eroded pp of money, no losses for them
    - - Effects on net exports:
        
        inflation in country A causes GPL of all G&S to rise
        
        trading partners are less inclined to purchase expensive G&S (exports)
        
        imports are also relatively cheaper
        
        fall in net exports
  - - - Consumption
        
        Consumers are optimistic about the future
        
        Will spend more now; expenditure increases
        
        A.D. increases
        
        As AD increases, firms respond by raising prices ad increasing output
        
        At full employment, output cannot be increased sufficiently to meet demands
        
        GPL increases due to bidding up of prices
      - Investment
        
        Expected rates of return increases
        
        Firms will increase investment
        
        A.D. increases
      - Net Exports
        
        Foreigners increase in Y
        
        Exports increase
        
        A.D. increase
      - Govt. Expenditure
        
        Increased expenditure on sectors (e.g. Healthcare, education, infrastructures)
        
        A.D. increases
    - - Import price push
        
        Import prices increases
        
        COP increases
        
        Explanation
        
        Firms respond partly by passing on to consumers in the form of increases prices and cutting back on production
        
        SRAS (and/or LRAS) shifts left
        
        GPL increases
      - Increase in
        Structural Rigidities
        
        Increase in govt policies
        
        For e.g. CPF contribution rates,
        minimum wage laws
        
        Results in increase COP
      - Wage Push
        
        Trade unions may push for increase in wages
        
        Output increases
        
        However at full employment, there will not be increase in output
        
        The price of products will increase to compensate for the increase in wages (i.e. labor COP)
      - Currency depreciation
        
        Weaker local currency means prices of import for raw goods increase
        
        COP increase
      - Supply-side shocks
        
        Decreases the availability of FOPs and hence output
        
        Fall in SRAS and higher GPL
        
        If productive resources are destroyed
        
        Productive capacity decreases and LRAS shifts too
  - - - Demand
        
        Autonomous decrease in AD
        
        Consumer
        
        Decrease expenditure due to decreased confidence
        
        Investment
        
        Firms invest less due to lower confidence in expected returns
        
        Govt expenditure
        
        Govts can reduce amount of govt borrowing to reduce debt
        
        Expenditure decreases
        
        Net exports
        
        Countries may want to reduce imports
        
        Exports of other countries will fall
      - Supply
        
        Decrease in COP
        
        Cheaper imports
        
        Currency appreciation
        
        Discovery of new resources
        
        Technological advances
        
        Technology
        
        More output can be produced with the same amount of input
        
        More efficient and lower COP
        
        SRAS increases and GPL decreases
    - - External stability
        
        Effect on net export
        
        Domestic goods of country A becomes cheaper
        
        Imports are more expensive
        
        Increase in net exports
      - Internal stability
        
        Consumers
        
        May expect prolonged deflation and choose not to spend
        
        May expect future wages to fall and choose to spend less
        
        fall in C component of AD
        
        Result
        
        Fall in AD and national income/ output
        
        lesser labour is employed for production, leads to unemployment issues
        
        Increases debt and risk of bank failure
        
        Leads to downward spiral of falling income, falling demand, falling prices, falling investment and falling employment and output
        
        Firms
        
        With less demand, firms are forced to lower prices
        
        inventories pile up and cut back on production
        
        fall in GPL also reduces profit margins of firms
        
        firms are less confident about proceeding with future investments, less likely to invest
        
        fall in I component of AD
- - - - Change is Aggregate condition of supply
        
        Regional unemployment
        
        Technological Unemployment
      - Regional Unemployment
      - Change in pattern of demand