COVID-19 and our economies — Understanding aggregate demand in real-world contexts
Whether you’re taking H1, H2, SL or HL Economics, understanding aggregate demand and supply is an integral part of the study of macroeconomics. While these concepts may be relatively easy to grasp, understanding the application of these theories to real-life situations can be another matter. Yet this is precisely what Economics essay questions often test.
As much as the COVID-19 pandemic has caused much damage to the lives of people, and economies, it has provided ample examples for us to ponder the applications of these models in real-world contexts. Amidst the pandemic the world now faces, the world economy has seen huge changes like never before. US unemployment rate has risen to 14.7%, the highest figures since records began; China’s GDP contracted by 6.8% in the first quarter of 2020, when the first cases of COVID-19 were confirmed in the country. Such examples provide the context for the frameworks we learn in Economics.
Falling consumption spending, due to the loss of income for many workers, has caused aggregate demand to fall; foreign countries — our trading partners — which are themselves facing economic downturns, may demand for less of our exports. This has caused export-reliant economies like Singapore to be impacted significantly; of course, we also saw a fall in our economic growth rates, as measured by real GDP.
To address the fall in aggregate demand, governments and central banks around the world have turned to the use of fiscal and monetary policies respectively. The Singapore government introduced budget measures that have provided much help to the community — examples include the Jobs Support Scheme to provide wage subsidies to firms to encourage them to continue hiring Singaporeans, and the cash pay-outs each Singapore adult will receive. The intention here, of course, is to boost the level of aggregate demand, by allowing households to continue spending on goods and services, so real GDP may eventually recover.
The policies are, of course, the first steps. Such first steps are fraught with difficulties, since they have to address the falls in consumption spending by households, investment spending by firms and export revenue. Much may depend on whether more help will be provided subsequently, and whether a vaccine can be discovered, and in time.
Desmond is an Economics tutor at AfterSkool. He graduated from Singapore Management University (SMU) with a MSc in Financial Economics, obtaining distinctions in Macroeconomics. At AfterSkool, Desmond focuses on breaking down Economics concepts into manageable portions, and refining exam answering techniques. His students have scored distinctions in the ‘A’ Levels and IB examinations. To enquire about AfterSkool’s Economics programme, please fill in our enquiry form.