2023 A-Level H2 Economics CSQ2 Questions & Answers

a) With reference to Extract 5:

(i)  calculate and compare the old-age dependency ratio for Singapore in 1990 with that in 2020. [3]

1990 old-age dependency ratio = [164,000 / 1,720,000] x 100 = 9.5 [1]
2020 old-age dependency ratio = [614,000 / 2,626,000] x 100 = 23.3 [1]

Singapore’s old-age dependency ratio has increased significantly from 1990 – 2020. [1]


(ii)  explain one reason for the change in the old-age dependency ratio for Singapore between 1990 and 2020. [2]

The population of Singaporeans aged 65 years and over increased at an increasing rate [1] while there was slower increase of working-age Singaporeans aged 20 – 64. [1]

(b) Explain how the changes in the populations of countries shown in Figure 3 might affect aggregate supply and aggregate demand in these countries. [4]

Figure 3 shows a projected population decline of several countries between 2006 and 2030.

Given the fall in population in the countries, we can expect the size of the labour force to decrease (fall in quantity of labour), [1] leading to the fall in the productive capacity of the economy, reducing the Long-run part (vertical) of the Aggregate Supply. [1]

In addition, the population decline will lead to lower consumption as there are fewer households. [1] Hence, this will lead to a fall in the C component of Aggregate Demand (AD), reducing the AD as well. [1]

(c) With reference to Extract 5, explain why firms may choose ‘to cut investment in the domestic economy substantially, even as interest rates fall’. [3]

As interest rates fall, the cost of borrowing falls and more investment projects will tend to become profitable, leading to a rise in investments. [1]

However, an ageing population tends to consume less leading to lower expected demand and revenues for the firms and the labour force might not be as productive as a younger workforce leading to higher unit costs of production. [1] Hence, the expected rate of return on investment falls and despite the lower cost of borrowing, more investment projects are unprofitable, leading to a fall in investments. [1]

(d) Discuss whether the benefits to an economy of having an ageing population outweigh the costs. [8]

Introduction

The benefits and costs to an economy will be assessed based on impact on the macroeconomic goals.

R1: Benefits

An ageing population incentivises governments to spend to improve the productivity of the labour force (Ext 5, para 6). These can come in the form of retraining programs (Ext 7, para 3), which will increase the productivity of workers and in turn reduce the unit cost of production (assuming that productivity growth rate exceeds that of the wage rate). Hence, the horizontal AS will shift down. In addition, as the quality of labour improves, productivity increases, leading to a rise in the productive capacity of the economy and a corresponding rightward shift of the vertical AS. [1]

Overall, as AS increases, as illustrated by a downward and rightward shift of the AS curve from AS0 to AS1 in the figure above, assuming that AD remains constant, through the wealth, interest rate and international substitution effects, real national income is expected to increase from Y0 to Y1, thus generating actual economic growth. The increase in the full employment level of national income from Yf0 to Yf1 indicates potential growth. The fall in GPL from P0 to P1 also suggests that this contributed to non-inflationary economic growth. [1]

Diagram [1]

In addition, with a higher accumulation of wealth and savings (Ext 7, para 1), there is possibility for the interest rates to fall with an increase in supply of loanable funds, which could incentivise more investments, leading further to actual and potential econoic growth (as the rate of capital accumulation increases.) [1]

R1: Costs

However, with an ageing population, governments will be less able to spend on projects for the longer term due to the need to dedicate a larger proportion of their expenditure to healthcare spending and pension payments (Extract 5, para 2). This shift away from long-term investment (e.g. education for the youth or development of new infrastructure) will limit the rate of increase in the capital stock. In the worst case, the rate of capital accumulation will fall below the rate of capital depreciation, leading to a decline in capital stock and the consequent fall in the productive capacity of the economy, resulting in negative potential economic growth. [1]

Other adverse consequences to the economy have also been covered in earlier questions, parts b) and c). [1]

Evaluative Conclusion

Whether the benefits to an economy of an ageing population outweighs the costs largely depends on how the increase social and welfare spending is funded. [1] An ageing population that is able to fund their consumption based on their past savings will exert a smaller economic and fiscal burden on the government, which will then have sufficient budget to find ways to boost productivity and economic growth. Hence, economies that are able to develop institutions to encourage retirement and medical savings will stand to benefit more from an ageing population. [1]

(e) Discuss whether immigration is the best way of promoting economic growth in an economy with an ageing population. [10]

When there is an inflow of foreign talent / workers into an economy, there will be an increase in the quantity and quality of labour. This can offset the effects caused by the ageing population, increasing the productive capacity of the economy and the vertical section of AS will shift right. Furthermore, a larger labour force can already increase the supply of labour within the economy, leading to downward pressure on wages and consequently reduce the unit cost of production. Hence, the horizontal portion of the AS is expected to shift down as well. As explained in (d), this will lead to an increase in real national income from Y0 to Y1, boosting actual economic growth, and the increase in Yf will lead to potential economic growth.

In addition, a larger population size from immigration can bring about an increase in domestic consumption (Cd), increasing AD and causing an unplanned fall in inventories and an increase in production in order to restore inventories. Thus real GDP increases , and in the process more factor income is paid to households, and national income will rise. This causes another round of increased spending and rise in national income. Via the multiplier process, real GDP will increase by a multiple of the initial increase in C from Y to Y’, boosting actual economic growth. Together with the potential growth explained earlier, this leads to sustained economic growth, where real GDP can continue to increase over time without high inflationary pressures.

However, inward migration of workers tends to be of a short-term nature. Migrant workers might choose to reside in the country for a short duration before moving back to their home country. As mentioned in Ext 2, net migration to the UK fell in recent years. In addition, most migrant workers might remit their income to their home country which limits the extent to which it can increase the consumption. Furthermore, migrant workers tend to fill positions that are low-skilled. Hence, immigration might not bring about much increase in productivity and not that significant a boost to potential economic growth. There are also unintended conseqeunces such as causing social and political instability, which ultimately will deter investments and economic growth due to increased uncertainty over the policies and prospects of the economy.

Instead, governments can consider employing other supply-side policies such as grants to enable firms to obtain more capital goods, which together with incentives for training, could allow older workers to continue staying in a job “beyond retirement age”. This should eventually allow for the raising of retirement wage. In addition, there can be deliberate policies to provide women with more education opportunities and to “shift cultural norms” such as not confining women’s roles to just housekeeping and child-minding so to raise the female labour force participation rates. These policies will increase or mitigate the fall in the quantity of labour. R&D grants to achieve more labour-saving high-tech production methods could also be implemented so that the economy can raise productivity, enabling more output to be produced even with lesser labour.

However, such policies may take a very long time to see results. For example, changing of cultural norms will require mindset changes, which will not be easy to achieve in the short-term. R&D also comes with long gestation periods. These policies also pose a large strain on government budget since alot of government funding would be involved, which will be already be strained by an ageing population as explained in part d). Therefore, unsustainable government debts as well as opportunity costs are concerns that have to be weighed. In constrast, immigration frirendly policies do not pose significant strain on government budget and likely increase tax revenues by widening the tax base.

Evaluative Conclusion

Due to the problems and limitations explained above, immigration is unlike to be the best policy but it does serve as a stop-gap measure as it does help, in the short-term, to make up for labour shortage that would otherwise hinder economic growth. The best way is a multipronged solution that encompasses longer-term solutions such as all the other supply-side measures explained above. Essentially, besides augmenting quantity of labour, there is also a need to focus on building a more capital and technology driven economy to sustain economic growth.

💡 Chief Tutor’s A-Level (H2) Breakdown: 3 marks are alloted for 10 mark case study questions. Hence, one needs to be providing more evaluative points either at the concluding section or in the body of the answer.

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