GCE A'Level CSQ 2023 Question 2 - Suggested Answers
Economic impact of an ageing population
(a) With reference to Extract 5:
(i) calculate and compare the old-age dependency ratio for Singapore in 1990 with that in 2020. [3]
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Old-age dependency ratio given as:
Residents aged 65 years & over per hundred residents aged 20 - 64 years
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Calculation:
1990: 164/1720 x 100% = 9.53, round up to 10
2020: 614/2626 x100% = 23.38, round down to 23
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Compare:
That ratio has more than doubled over time.
(ii) Explain one reason for the change in the old-age dependency ratio for Singapore between 1990 and 2020. [2]
Higher quality healthcare in Singapore prolongs elderly life. Life expectancy in Singapore would have increased, thus resulting in a higher number of individuals living 65 years & older. This can be seen from a large increase in the number of individuals 65 years and above from 2010 to 2020. A larger numerator, while a “slower labour force growth” contributing to a smaller denominator would have caused the old-age dependency ratio to increase.
(b) Explain how the changes in the populations of countries shown in Figure 3 might affect aggregate supply and aggregate demand in those countries. [4]
Figure 3 shows the projected population decline of selected countries, where for example Russia is expected to have a decline in population of 18 million people between 2006 and 2030.
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A population decline would reduce the quantity and quality of laborers in the economy. This will cause the productive capacity of the country to fall, thus causing the aggregate supply; which is the willingness and ability of all producers in the country to produce goods and services at various price levels, to fall.
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A population decline would also reduce consumption expenditure in the country, as fewer households would contribute to overall consumption levels. Since aggregate demand is the total demand for all goods and services produced in the country at various price levels, which comprises consumption expenditure, AD would fall.
(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]
An ageing population is likely to rein in excessive consumption of goods and services; the elderly are more likely to spend their retirement income on necessities such as healthcare. This may cause future “output and consumption to slow down and paint a poor business outlook”. Investors would project a fall in expected future rate of return. Despite a fall in interest rates, the marginal efficiency of the investment curve would fall and shift inwards thus causing the volume of investment expenditures to fall significantly.
(d) Discuss whether the benefits to an economy of having an ageing population outweigh the costs. [8]
Thesis: An ageing population results in macroeconomic costs to a country.
An ageing population would have caused the aggregate demand of the country to fall. The elderly tend to spend less excessively on goods and services as their income levels decline or they have to live frugally via their monthly pension payouts. Working-age people are also expected to pay more in taxes to support the elderly, particularly in “Europe where there is a heavy reliance on public sector transfer payments to pay for consumption by the elderly”. Higher taxes will reduce the disposable income of the working population, which decreases their purchasing power and hence consumption expenditure. Furthermore, “firms choose to cut back in investment expenditure in response to a slower output and consumption growth caused by an ageing population” as their expected future returns fall. This will cause AD to overall fall over time. There will be an unplanned rise in inventories that will lead to producers cutting back on output. This will cause real national income to fall by a multiplied amount via the reverse multiplier effect where one person’s reduction in spending is another person’s reduction in income. This process will occur in multiple successive rounds of fall in income-induced consumption causing overall real national income to fall from Y0 to Y1. This may put a country at risk of a recession or long-term slow growth. Furthermore, in response to a fall in output produced, producers will reduce their derived demand for labor, thus causing demand-deficient unemployment to rise.
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A large proportion of the government budget is allocated to support the needs of an ageing population in the form of pensions, healthcare, and long-term care. This puts a strain on the government’s budget or even in a deficit position. This would require the government to raise direct or indirect taxes or even borrow money to finance their spending. As government budgets worsen, it causes both consumer and investor confidence to fall; further exacerbating the fall in AD mentioned earlier, causing a vicious cycle of reduced economic activity.
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An ageing population would also negatively impact the aggregate supply of a country. Older workers may exit the labor force once they hit the retirement age causing the quantity and quality of labour to fall. Existing older workers may experience diminished productivity and higher absenteeism due to long-term chronic health issues. This will cause firms to experience higher unit cost of production. The AS curve will shift leftwards and upwards from AS0 to AS1. This may lead to cost-push inflation as firms pass on higher cost of production to consumers in the form of higher prices from P0 to P1 as well as hindering the potential growth, causing full employment level to fall from Yf0 to Yf1. Economies are more vulnerable to supply bottlenecks and are less able to maintain price stability or achieve sustained economic growth in the long run.
Anti-Thesis: An ageing population may result in some macroeconomic benefits to a country as it responds to such challenges.
Economies such as Japan are investing heavily in capital that can potentially substitute or increase the productivity of human labor which brings about “greater productivity and wages”. Higher wages and investments may drive more consumption and investment spending in the country. This will increase AD and contribute to higher economic growth and lower unemployment levels in the long term. An increase in the quantity and quality of capital coupled with higher technological advances can also increase the productive capacity of the country causing AS to rise. This may allow the economy to achieve potential growth. With the realization of both actual and potential growth, sustained growth can be achieved.
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In conclusion, the costs of an ageing population largely outweigh the benefits it may bring. An ageing population increases the tax burden of the working population, puts a strain on the government budget, and increases business pessimism in a country. All of which are detrimental to a country’s overall AD and AS. This will negatively impact the macroeconomic economic goals to a larger extent compared to the smaller benefits brought by more investments in capital. In response to an ageing population, companies may choose to replace labor with more capital in their production processes. High-skilled workers are highly sought after (business executives, producers of capital, owners of capital) while low-skilled workers are unfortunately retrenched. This may bring about structural unemployment and higher income inequality, further exacerbating the problems of an aging population. Unless the government has huge reserves to support an aging society or has found ways to raise population levels to reduce the old-age dependency ratio, this demographic problem will continue to pose a threat to a country’s long-term economic prosperity.
(e) Discuss whether immigration is the best way of promoting economic growth in an economy with an ageing population. [10]
Economic Growth is defined as the positive change in real national income or GDP of a country between two years. Economic growth may come in various types - actual, potential, and even sustained growth.
Thesis: Immigration policies may help promote economic growth in an economy with ageing population.
With reference to Extract 8, “immigration policies allow countries to increase the number of workers in their country” thereby increasing the quantity and quality of workers in the labour market. This increases the supply of labour which will help to address “labour shortages” and help reduce the overall wage costs in a country. Highly qualified, experienced expat workers may also value-add to the firm’s overall productivity. The unit cost of production falls and causes the SRAS to rise and shift downwards from SRAS0 to SRAS1. As producers face a lower cost of production, they are more willing and able to produce more output causing real national income to rise from Y0 to Y1. This promotes actual growth. Furthermore, the productive capacity of a country will also rise, where the full employment level will increase from Yf0 to Yf1. Potential growth is achieved.
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However, there are some limitations towards this immigration policy to promote economic growth. Firstly, the type and quantity of workers matters. If migrant workers are mostly low-skilled and are used to fill in labor gaps that are too costly to be employed by locals, then the extent of increase in AS would be marginal. Secondly, income earned by non-resident migrant workers tends to be repatriated back to their home country. This will reduce the extent of the increase in consumption levels caused by a larger population size, further diminishing the increase in actual growth. Lastly, immigration policies may face public backlash as immigrants may compete away job opportunities from citizens of a country. They are seen as politically unpopular and the government may be selective on the quality/number of migrants to be granted work visas and the types of jobs available to them (usually high-skilled individuals are favored). Consequently, net immigration inflows are too small to make a noticeable contribution to a country’s labor market and growth.
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Anti-Thesis: Supply-side policies are better policies to promote economic growth in an economy with an ageing population.
With reference to Extract 7, the Singapore government has implemented interventionist supply-side policies - particularly investing in the upgrading of human capital. It takes in the form of the SkillsFuture credit scheme where individuals aged 25 and above can have their course fees subsidized. This can help to upskill older workers/PMETs and allow them to learn relevant skill sets that employers are currently seeking. This increases the quality of human capital which will help increase the productivity of workers and lower the unit cost of production of firms. SRAS will rise and shift downwards, causing an overall increase in real national output and promoting actual growth. Furthermore, this will also cause the productive capacity of Singapore to increase, causing the LRAS curve to shift rightwards from LRAS0 to LRAS1. This will help promote sustained growth.
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This is relevant to Singapore’s context since Singapore is constantly moving up the value chain and companies are forward-looking and always seeking better, more efficient ways of production. With older workers catching up with the pace of technological and advanced processes, they will be employable for longer periods and experience career and wage growth. This allows the older workers to contribute more to their own consumption; through earning higher wages, paying taxes, or contributing to their CPF account that can be drawn down to pay for their expenses after retirement. However, there are some caveats to this policy. Firstly, the SkillsFuture credit of $500.00 may contribute too little to allow older workers to learn a skill set that is tangible and applicable in the workplace. The courses that they can apply are usually short-term (e.g. 3-day Excel courses, marketing courses) that might not tangibly contribute to increased productivity from the firm’s perspective that would warrant promotions, wage hikes, or a reduction in the firm’s costs. Taking a degree or diploma would more likely have that effect. Thus, the uptake and responsiveness towards such courses might be low. Furthermore, there might be some time lag involved between learning the new skill sets and having them applied in the workplace. So the positive gains of this supply-side policy can only be felt in the long run. Lastly, investment in human capital involves heavy and long-term financial commitment from the government. This might add more strain to the existing government budget. Unless the benefits (higher income growth and tax revenue collected) outweigh the financial and opportunity costs of such intervention, this will drain the government's resources.
In conclusion, both immigration and cultivating human capital produce similar effects to promote growth when viewed from the AD/AS framework. From the perspective of time lags, the immigration policy would seem to have a shorter time lag in boosting overall labor productivity and promoting growth. The cultivation of highly skilled labor is a time-consuming process and can be overcome by importing expats that already possess the required skill sets. They may eventually choose to be a long-term resident and start a family here which can help an ageing country like Singapore increase its total population replacement rate. However, there are various push and pull factors influencing immigration flows. Bureaucratic red tapes, the high cost of living in some cities, and cultural factors are some examples that reduce the geographical mobility of labour. For example, Singapore is currently one of the costliest cities to live in globally due to high private transport and housing costs. Thus, net immigration flows in some countries may be small. On the other hand, investing in human capital has a greater certainty in promoting long-term growth. By adapting to this demographic problem and investing in older workers, “they can potentially increase overall labor productivity over longer lifespans” which would result in higher growth. This can be combined by increasing the retirement age in the country. Thus, immigration may not be the best way of promoting economic growth in an economy with an ageing population. Ultimately, the only way to tackle the root cause of the problem is to encourage more births. A slew of other policies such as enhanced baby bonuses, 4-day work weeks, provision of fertility tests, and longer maternal and paternal leave can certainly help.
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