Practise evaluating government macroeconomic intervention for inflation, unemployment, growth, external balance, sustainability and distribution through policy conflicts and evidence.
Developments in the electric vehicle (EV) industry
The advantage of the car is that it provides freedom for the consumer. However, the disadvantages of car use are that it creates congestion, carbon dioxide (CO2) and air pollution. These disadvantages led many countries to agree to replace internal combustion engine (ICE) cars with electric vehicles (EV) from 2030.
The successful introduction of EV is dependent on the development of battery technology and production of batteries to enable EV to drive a similar distance to ICE cars before they need re-charging. Better electrode design, battery assembly and chemistry are all technical aspects of battery production that could reduce costs, resulting in economies of scale from more efficient use of capital and labour. In addition to technical economies, there may well be purchasing economies of scale in battery production when buying raw materials and capital equipment in bulk.
Table 1.1 shows the estimated average costs of battery production for EV using two different technologies.
| Annual production | US$ per kwh | |
|---|---|---|
| kwh (millions) | Technology A | Technology B |
| 0.5 | 115 | 120 |
| 2.0 | 105 | 90 |
| 4.0 | 98 | 80 |
| 10.0 | 97 | 80 |
Table 1.1 Average costs of battery production
The shift to EV will cause redundancies for highly skilled mechanical engineers who have developed and refined the ICE. Often these workers are concentrated in specific areas, such as southern Germany.
The change from ICE cars to EV may also cause difficulties for governments in two ways. First, many countries rely on oil exports for a large part of their income. For example, Saudi Arabia receives 45 % of its gross national income (GNI) from oil exports. Secondly, other governments place an indirect tax on petrol (gasoline) and diesel as part of their general revenue. For example, Singapore charges S $ 0.41 per litre, approximately 17 % of the price.
Sources: Applied Energy 286 (2021) Economies of scale in battery cell manufacturing, 25 April 2022, and The Singapore Independent, 28 March 2022
Evaluate the likely macroeconomic effects of the switch to EV for both Saudi Arabia and Singapore.
S Arabia: exports reduced, X-M of AD reduced, expect level of output to fall, governments may increase G to offset fall in exports, supply may be restricted to maintain price of oil and X-M remains indeterminate.
Singapore: taxation receipts reduced, the pattern of consumption may change, but government spending may decrease to offset fall in tax revenue. Taxation may increase for other goods or on income. Budget deficit.
Evaluation examples:
S'Pore: Effect depends on whether electricity to fuel EV is produced by alternatives to oil.
Saudi Arabia, S'pore: Effect depends upon alternative source of taxation revenue.
The US government has been using a policy of quantitative easing to increase economic growth.
What is the most likely effect of this policy on the internal and external value of the US dollar?
internal value
external value
decrease
decrease
decrease
increase
increase
increase
increase
decrease
A
An economy has a sudden increase in inflation caused by a large rise in energy prices. It also enters a recession with rising unemployment.
A decrease in which policy variable is most likely to reduce the impact of the recession without increasing the price level further?
direct taxation
government spending
indirect taxation
interest rate
C
The inflation rate in a country increased.
Which effect would this most likely have on the country's balance of payments?
an improvement in the current account balance
an increase in price competitiveness
an increase in export revenue
an increase in import expenditure
D