Top 2 misconceptions of YED
Welcome back to our lost and found series where we cover the misconceptions that we as students faced and help them get back on the right track!
This week, we will be looking at some difficulties and misconceptions within YED.
1. How many types of YED figures are there?
This is something that confuses students because there seem to be a variety of YED figures. There’s however only 2 things that you should worry about.
Whether the YED value is positive or negative
(IF the YED value is positive), is it more than or less than 1.
If YED < 0, the only classification is that it is an inferior good.
If YED > 0, it is a normal good. However, there are two kinds of normal goods: Necessities and luxuries.
YED > 1, it is a luxury.
YED < 1, it is a necessity.
So why do we split normal goods up? The reason is that this will tell us how income elastic the good is!
So, if the good is a luxury, it is income elastic. This means that any change in income leads to a proportionately greater change in Quantity Demanded.
So yes, remember that there are only two main classifications. However, within the positive classification, there are another 2 sub-classifications!
2. What are the implications for the economy?
This part of the syllabus is mainly looking at the effects on the 3 main types of industries (Primary, Manufacturing and Service) as economic growth takes place and incomes rise.
Primary: Since YED is positive, the increasing income means that demand for goods made under the Primary industry (e.g. food) also increases. However, since the goods are under the sub-classification of necessity and YED < 1, the demand for such goods grows slowly, relative to the growth in income.
Manufacturing: YED is also positive. But since YED > 1, the demand the goods under this industry grows faster than the growth of income.
Service: YED is also positive. But YED >>1 (somewhat much more than 1), so percentage increase in demand is the greatest.
Implications: The share of agricultural output in total output decreases while the share of manufacturing output increases. The service sector expands teh most.
It is important to note that all the industries’output are actually growing in absolute terms!
The only difference is that since the sectors grow at different rates, the service sector starts to take up a bigger share of the output, followed by the manufacturing.
Think of it like an endless race with infinite distance. If there are 3 competitors in the race and they run at different but constant speeds, the gap between the competitors will keep increasing. However, this does not mean that the slowest competitor does not get closer to the end line as time passes.
One good example of a country that has seen such a change is Singapore.
We hope this has helped you understand some of the common pitfalls students like yourself might have. If you know someone who doesn’t listen in Economics class, it might be worthwhile to send this resource to him/her. You might save him/her from a catastrophe. Then he might owe you a meal.
Win-win?
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