H2 Economics (J1) – Efficiency vs Equity
In my H2 Econs tuition classes, when trying to help students understand the chapter on National Income, I would always remind them to understand the thinking behind how this topic is designed.
Recall that in the first introductory topic to Microeconomics, we were introduced to the key microeconomic outcomes of Equity and Efficiency. Efficiency is a scientific and measurable concept. For example, allocative efficiency is achieved when Price of a good equates its marginal cost. This is balanced off against a relatively more normative (subjective) concept of equity or fairness.
This is an outcome subject to interpretation e.g. is it inequitable if most Singaporeans are unable to afford a car? Or is the current public transport system sufficient to fill the transport needs of Singaporeans? Would our analysis change if the family has elderly grandparents residing with them (for whom travelling to a nearby train station for frequent health check-ups may be difficult)?
Hence, in the microeconomic realm, the emphasis on equity adds a more humanistic touch to the analysis.
H2 Economics (J2) – Performance of Economy vs SOL
Likewise, in macroeconomics, other than assessing the performance of an economy (which can be measured tangibly using the key economic indicators – real GDP growth rate, inflation rate, unemployment rate, and the country’s balance of trade), we consider living standards.
Living standards are considered in both material and non-material terms and capture the well-being of an individual. Intangibles affecting living standards range from stress levels experienced to the level of pollution and healthcare, as well as education standards in a country.
Measuring the living standards in an economy involves a closer look at indicators such as real GDP per capita and the Gini coefficient. Real GDP growth rate plays a crucial role in determining the economic health of a nation, while the Gini coefficient sheds light on income inequality within society. These indicators help us gauge not only the economic well-being of a country but also the distribution of wealth among its citizens.
The addition of living standards as a key learning objective prompts us to consider not just the cold, hard facts of economic performance but also the fairness and well-being of individuals within the economy.
Realizing that real GDP is a common thread in assessing both living standards and economic performance underscores its significance in macroeconomics.
Understanding how to measure equilibrium GDP is hence essential for accurate conclusions to be drawn about the economy and average resident’s well-being. We hence move on to the two key models used to capture the equilibrium level of real GDP – the circular flow model and the AD-AS mode.
The reason we have two models to measure the same outcome is because both models are designed to serve different purposes.
The circular flow model illustrates the multiplier process, while the AD-AS model helps us analyse the internal performance of an economy and the impact of policies.
In conclusion, understanding how this topic is designed in macroeconomics is crucial for building a strong foundation in the subject, which is something I emphasise in all my H2 Econs tuition classes.