Aggregate Supply(Productive capacity of an economy) and Aggregate Demand are impact by the populationg growth.
Impact on AS (Aggregate Supply)
Population growth makes more people available to work and to produce output although there is a lagged response.
Eg: High birth and death rates in China in the 1930s and 1940s led to fewer people looking for jobs in the 1950s.
Eg: Fall in Death rate and rise in borth rate in the 1950s led to number of people reaching work age beginning to rise sharply in the late 1960s and 1970s.
Impact on AD (Aggregate Demand)
Population growth affects patterns of demand and investment.
Societies with low levels of per capita income spend more on consumption than on investment.
*The faster the population grows, the more investment needed to simply maintain the existing average level of capital per member of the workforce.
Therefore, the demand for capital widening increases instead of the demand for capital deepening.
Capital Widening: Keeping per worker availability of capital constant
Capital Deepening: Making available more capital per worker
Therefore, the output per man hour may not rise which inhibits growth.
Watch more on how this affected China in the video below:
As the most populous country in the world with one fifth of the wolr’d population, China reached its peak of the population growth in 1960s. Thereby, until recent, the food production, agriculture and economic growth rates were not much higher than population growth in China. So, the effect of population growth was strongly felt.
With China’s mortality rate been 7.15 per thousand in 2012 and its fertility rate been 12.1 per thousand in the same year accompanied by 18% of its population been migrants are statistical information that clearly states that Chinese population growth rate is risking its economy.
However, the above situation was not led in a day or two, rather due to years of impact and activity. For instance, in mid 1960s China faced a surge in population growth leading to large numbers of young people of marriageable age making it difficult to cut down the fertility rate in the second half of the 1980s. This clearly teaches the policy makers that they must take a long term view of the relationship between population size and resources. This is especially important for two reasons:
- Population growth rate depends on mortality, fertility, migration and age structure.
- Higher the dependency ratio, higher the demographic investment, limiting the pace of economic growth,
Watch more about this below:
- The use of the word
Often candidates in Economics exams, they often say that things will happen and we have an example here; the lowering of taxes will lead to a rise in GDP and unemployment will therefore fall. We can’t assume these things.
For example, lowering taxes could lead to a rise in GDP. All the things in the economy might happen to lead to a fall in GDP, so we can’t be 100% certain that things will actually always happen. So, we should really change the sentence to lowering taxes should lead to a rise in GDP, and unemployment could possibly fall or is likely to fall. This shows a lack of understanding of the economy; not everything, a certain. 99.999% at the time all factors are not held the same. So, nothing can be presumed.
- The use of examples
So, the second mistake often people make is by drawing a diagram and then they give little or no explanation on the diagonal; just throw it in there, you will usually get little credit for this.
So, we’ve gone through about always being precise and also don’t always assume that some fingers demand or supplied normally as is here. Often things are supplied very inelastically. So, for example the supply of wheat is inelastic if demand for the week goes or not. A whole lot of weeks can be supplied because it takes a long time for that. Week to actually grow so you need to consider the elasticities when drawing your supply and demand curves.
Try to avoid rambling through large blocks of text. Often a lot of candidates see a question and then they go off on a large tangent about things that generally interest them but they aren’t actually answering the question. So, for example, a quick question here explains the reasons for the growth in GDP. So, start by answering the question, why one reason for a growth of GDP is because this and specifically honed in on the question and therefore you’re sort of answering the question and then the examiner can’t help.
We’ll give you marks. Also, remember if it doesn’t answer the question, you won’t gain any credit. So, you might be going against some really complex in-depth analysis of something. But, it’s not linked to the question. The examiner can’t reward you lastly.
One mistake that some candidates make is by being too controversial or biased. Avoid presenting radicals, socially transforming ideologies such as Marxism. In your essays, even if you think that they’re correct in under 40 minutes, you’ll probably not going to be able to find the time to justify your argument fully, and also there are some other reasons for avoiding going down. The route of becoming too radical. You probably won’t be answering the question directly. So, you’ll be rumbling on for a topic that doesn’t directly link the question as previously discussed and you could also lead the risk of the examiner disagreeing with you in agitating him and he could mark you harshly and you need to remember that they’re only human.
There’s something that annoys them subconsciously, they could more. You doubt one to two marks for something that they don’t agree with you how hardline. So, always try to give both sides of the argument. You probably haven’t considered your argument fully.
Remember you’re only an old student, you’re not a Ph.D researcher. So, don’t try and get too ahead of yourself.
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Hi everyone. This video is based on the discussion of CIE 2013 November paper.
- Pythagoras Theorem
- Quadratic Equations
Welcome to this financial analysis lesson which will focus on the techniques for investment appraisal. After you have finished this lesson, you will be able to first understand the context of investment appraisal for creating value in business. Second, you can learn the investment appraisal techniques used in decision-making and thirdly understand sensitivity and scenario analysis to test whether you are making the correct decision, to begin with.
The aim of investment appraisal is to use available resources to create value in excess of the cost of the investment. In other words, considering the risk involved, the value of the expected future cash flows need to be greater than the investment to be made. And, for investors, investment appraisal is a useful way to gauge the kind of returns the organization is generating.
Investment appraisal also involves asking whether the returns are good enough and the best possible given the estimated risk levels. Investments with less predictable future cash flows will warrant a higher risk profile and vice-versa. The key here is for managers to strike a balance between the level of risk and the level of expected returns.
Investment Appraisal Process
The various steps in the investment appraisal decision process are; the first two steps focus on information gathering and require you to forecast the revenue costs and associated cash flows of your investment, also identify any potential limiting factors such as budget constraints, timings or a need to generate a specific rate of return on the investment.
The next two steps focus on selecting the appropriate investment appraisal technique and setting specific variables such as the discount rate and the time horizon. The final two steps in the process focus on improving the quality of the decision making by constructing sensitivity analysis and what-if type scenarios to help decide whether to consider or reject the investment.
Investment Appraisal Techniques
There are two simple techniques that are frequently used but which measure different outcomes.
The payback method measures the time it takes for you to get your money back and the return on capital employed method measures the amount of value created from the investment.
The two more complex techniques focus on discounting future cash flows and consider both the timing and risk aspect of the investment. The main methods here are the net present value and the internal rate of return. No investment appraisal technique can give the right answer or is the right technique for all situations and an organization may have its own preferred method.
The payback method simply measures how long it will take for the future returns to pay back the initial investment. This method is often suitable for organizations that have a set period. When investments need to be paid back by or there may be a set period, when funding is available for, if the investment payback is within the criterion payback period, then the investment can be considered. The payback method is simple to use and easy to understand and can be used to make a quick first assessment of an investment’s viability. If available capital is in limited supply and there is strong demand payback within a certain period, maybe a critical factor and it considers risk in a simple way which is the length of time, it will take before you recover your investment.
However, the main drawback of the payback method is that it ignores total returns over the life of the project it will favor a short-term project which returns investment quickly but might then tail off and not give long term returns over a longer life. It also looks at paying back the capital only not at how profitable. The return is in practice the payback method is normally used to complement other methods not the main technique.
Return on capital employed or ROCE which is calculated by taking project returns over the capital employed, gives the return generated by the investment by comparing the accounting profit to the required capital outlay of the investment. It is most commonly used by comparing the return to the minimum hurdle rate which must be achieved. This will often be an organization’s cost of capital which is how much it costs an organization to fund the investment such as the interest rate charged for a bank loan.
ROCE can also be used to compare different projects to establish which has the highest return on investment. The ROCE method is simple to use and easy to understand whereas the payback method focuses on the timing of the cash inflow, ROCE focuses on the profitability of the investment. As such, it can give a quick first assessment of the viability of an investment which is usually whether the return is higher than the organization’s minimum hurdle rate.
In addition, you can easily compare the ROCE of different investment options and it allows investors to use the same benchmark to evaluate management’s performance. However, ROCE ignores the time value of money meaning it could take many years to generate the required returns, the quantifiable size of the investment and the value creation is ignored. In addition, the level of risk involved needs to be assessed separately and using Accounting profit rather than cash flows can be open to interpretation.
Now, let’s consider the more complex and time-consuming investment appraisal techniques; net present value and the internal rate of return with NPV; future cash flows are adjusted to the present value to reflect the time value of money by using the discounting process. A key principle of NPV is that the present value of the expected future cash inflows must be at least equal to the present value of any cash outflows for the investment to be worth considering. The discount factor used in the calculation adjusts for risk and timing and the terminal value estimates cash flows after the forecast period into perpetuity.
IRR is when the rate of discount produces a zero NPV. You can think of IRR as the rate of growth a project is expected to generate. A project with a substantially higher IRR value than other available options would likely stand a better chance of being considered. With these discounted cash flow techniques, the time value of money is factored into the investment appraisal of an investment and the inclusion of a discount factor allows managers to include a risk component in the investment. The higher the discount rate, the higher the perceived risk.
The IRR makes it simple to compare investments and benchmark rates with hurdle rates or costs of capital and both methods allow for sensitivity analysis such as variations in the discount rate. However, the increased complexity of these methods does not necessarily result in accuracy. More variables can lead to more areas of uncertainty and some variables may be more sensitive to small changes than others. They can also be time-consuming to produce and if a limiting factor is obvious such as the availability of funding, then a simpler method such as payback may be more appropriate.
Now, that you have understood how to select the appropriate investment appraisal technique, the final steps in the process focus on improving the quality of the decision-making. Here, you can construct sensitivity analysis and what-if type scenarios to help decide whether to consider or reject the investment. Sensitivity analysis looks at the impact of changing one specific variable such as the discount factor or the initial upfront investment or certain costs being higher or lower than forecast.
By contrast, scenario analysis considers many uncertainties in different scenarios such as the emergence of a new competitor or a price war breaking out by creating a given set of scenarios. You can determine how changes in variables will impact the investment outcome and therefore the decision process. In summary, investment appraisal ensures available resources are used to create value in excess of the cost of the investment. There are several investor appraisal techniques available including payback, ROCE, NPV and IRR. When calculating your appraisals ensure you forecast future cash flows, identify any limiting factors and select the most appropriate appraisal technique for your needs. Then, set any variables and finally conduct sensitivity and scenario analysis to consider or reject the investment.
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