Chapter 6-1: Economic Growth

Question 1

Types of Economic Growth (4)

Answer 1

Actual and Potential Growth
Actual Growth: Increase in an economy’s level of real GDP over time
Potential Growth: Increase in productive capacity of the economy which refers to maximum output the economy is capable of producing given available resources and state of technology

Sustainable Growth
Growth is compatible with better environmental control and resources are not overused or depleted, so as to enable the economy to continue to generate growth for the benefit of future generations.

Inclusive Growth
Benefits of growth are distributed equitably

Question 2

Benefits and Costs of AG

Answer 2

Benefits
Increase consumption, higher SOL for households
Increase revenue and profit for firms
Job creation leading to reduced unemployment
Ability to achieve potential and inclusive growth

Costs
Trade-off between growth and price stability, unemployment, sustainability, inclusiveness and future consumption

Question 3

3 types of desirable EG

Answer 3

AG and PG increase in tandem
Healthy growth is characterised by AG growing in tandem with PG
Ideal state is economy is producing at its potential output, thus coinciding with full employment level of output and there are no excessive inflationary pressures
Hence, this rate of growth allows economy to achieve full employment without inflation

Sustainable growth
Growth that is compatible with eco-friendly production and consumption and sustainable use or non-depletion of natural resources

Inclusive growth
Growth characterised by fair and equitable distribution of output or GDP

Question 4

AG (Def + How to measure)

Answer 4

AG: Expansion or increase in an economy’s level of output or real GDP over time

Achieved with rise in AD or AS, or a combination of them

Measurement of AG
Measured by rate of growth of real GDP over time
Measured by percentage change in nation’s RNI over time

Question 5

Slowdown vs Negative EG

Answer 5

Slowdown in EG
Actual output or real GDP continues to expand, but at a slow pace

Negative EG
Term used to describe reduction or contraction in actual output over time
Often associated with economic recession and usually accompanied by rising unemployment in economy
Great Depression, Global Financial Crisis

Question 6

Cyclic fluctuations / business or trade cycle

Answer 6

Cyclic fluctuations / Business cycle : Periodic changes in value of economic activity (measured by GDP) in a pattern of ups and downs

Peaks: Periods of high EG (Boom) where consumer and investor confidence are high. Prices and costs rise faster as economy tends to operate at or near full capacity.

Downswings: Decline in GDP (known as recession) as consumer confidence falls. Firms cut back on production resulting in increased spare capacity and unemployment.

Prolonged period of reduced economic activity marks the through of the cycle which is accompanied by falling prices. Upswing or recovery stage happens when economic activity starts to pick up again.

Cycles not uniform as some take only several months to complete while others span across several years

Question 7

Technical Recession

Answer 7

Economy contracts over 2 consecutive quarters – technical but not real full-blown recession

Contraction persist longer (usually a year), economy said to be experiencing full-fledged recession

Question 8

Hard-landing vs Soft-landing

Answer 8

Hard-landing: Sudden sharp or severe contraction in output, especially when an economy has been performing relatively well prior to the contraction

Soft-landing: Gradual slow down or contraction of the economy such that there is no major rise in unemployment

Question 9

PG Def

Answer 9

Potential Growth: Increase in productive capacity of the economy. Productive capacity refers to maximum output the economy is capable of producing given available resources and state of technology

Question 10

Importance of achieving AG and PG

Answer 10

For economy to grow at an ‘uninterrupted’ rate, AG must be in tandem with PG

AG faster than PG - Prices rise as economy overheats or experiences strong inflationary pressures

AG below Potential rate – Growth too slow or sluggish. AG slower than PG, demand-deficient unemployment becomes a problem

Ideal - Economy grow at non-inflationary rate with full employment

Question 11

Benefits of AG - Consumers

Answer 11

Consumers’ Perspective
Increase levels of consumption or higher material living standards

• Increase in real output or GDP would lead to higher incomes and thus higher purchasing power for households in the economy.
• With higher purchasing power, households can now afford to satisfy more wants via a higher level of consumption. Thus, economic growth is the key to improving the standard of living or material well-being of the average resident of the population of the country.
• The material well-being is dependent on the level of consumption per person. In practlce, the real GDP per capita is used as a proxy measure.

Question 12

Benefits of AG - Producers

Answer 12

Increase levels of revenue and profits

Producers also stand to gain or benefit from economic growth. Growth stimulates more business and investment.

As more output is produced and national income increases, firms gain higher revenue and profits from sales.

This in turn provides the incentive for firms to invest in more production capacity e.g. build more factories and retail outlets; purchase more equipment and tools etc.

Question 13

Benefits of AG - Gov

Answer 13

Creates jobs, reduces unemployment

When the economy grows, more output is produced and to increase reduction, more factors of production are employed, reducing cyclical unemployment. Cyclical unemployment occurs during the downswing of the business cycle, where a fall in output results in workers being retrenched.

On the other hand, if the economy grows due to a rise in PG which is largely brought about by increases in productivity through training and reskilling, it may help to reduce structural unemployment which occurs due to a mismatch of skills when job seekers are unable to find suitable jobs because their skills do not match those required by employers.

Achieves PG, sustainable growth and inclusive growth

Economic growth makes it possible for the government to collect more tax revenue to finance various public expenditure eg education, health-care and infrastructure which further enhances potential growth.

At the same time, more tax revenue can be used to increase spending on environmental friendly infrastructure like using solar energy to power the streets, HDB flats and government buildings for a more sustainable growth and social spending so as to narrow the income gap between the rich and poor, achieving a more equitable distribution of income or inclusive growth.

Question 14

Cost of AG (TO, Growth, Stability)

Answer 14

Demand-pull inflation

If PG does not increase in tandem with actual growth (PG slower than AG), it results in inflationary pressure as the capacity of the economy cannot cope with rising demand. This is evident in emerging economies such as China or India. These countries are experiencing high economic growth and faster increase in price level.

This form of inflation is called demand-pull inflation.

Question 15

Cost of AG (TO, Growth, Unemployment)

Answer 15

Structural Unemployment

Rapid growth is often accompanied by structural changes associated with a dynamic economy - often accompanied by rapid innovation and technological changes as the economy moves up the value chain

Structural as the workers do not have the necessary skills demanded by employers in the new economy

For example, as the Singapore economy grew over the years, the economy transformed itself from dependence on exporting Low-end manufacturing to high-end knowledge-based goods and services. Low-skilled workers may find themselves at the mercy of rapid economy growth as their skills and knowledge become obsolete. As a result, the workers may be made redundant as they can be replaced by machines quite easily.

Question 16

Cost of AG (TO, Growth, Sustainability) - 2

Answer 16

Structural Unemployment

Rapid growth is often accompanied by structural changes associated with a dynamic economy - often accompanied by rapid innovation and technological changes as the economy moves up the value chain

Structural as the workers do not have the necessary skills demanded by employers in the new economy

For example, as the Singapore economy grew over the years, the economy transformed itself from dependence on exporting Low-end manufacturing to high-end knowledge-based goods and services. Low-skilled workers may find themselves at the mercy of rapid economy growth as their skills and knowledge become obsolete. As a result, the workers may be made redundant as they can be replaced by machines quite easily.

Note: However, environmental consciousness tends to increase with increase in affluence. The regulation on pollution tends to be stricter in developed countries than in the developing countries. Developed countries have more resources to deal with environmental problems.

Question 17

Cost of AG (TO, Growth, Inclusiveness)

Answer 17

Worsen Income inequality

Rapid economic growth may result in widening income disparities between the rich and poor.

The rich are usually the more mobile, entrepreneurial and highly-skilled segment of the population. Economic growth presents more opportunities for this group of people to earn higher incomes as well as exploit business opportunities to make profits.

On the other hand, the poor are usually those who are unskilled with low education. They generally fit into low-paying jobs. Thus, their earning power tends to lag behind that of the rich.

The growing income divide, if unresolved, poses a potential threat to social and political stability. The poor may become disenchanted with society and the political system. Widening income disparities can become socially divisive as those left behind (i.e. so-called have-nots) feel marginalised. Such social discontent can erupt into civil strife and political upheaval, thus derailing economic growth.

Question 18

Cost of AG (TO, Present and future)

Answer 18

An important source of economic growth is investment in both physical and human capital. For there to be investment, there must first be savings. In the attempt to save more, people will consume less. Therefore, there is a trade-off between current consumption and future consumption – which is achieved through investment in more capital goods.

Question 19

Sustainable Growth

Answer 19

Sustainable growth indicates a rate of growth that can be maintained without creating other significant economic problems (such as depleted resources and environmental problems), particularly for future generations. It implies a positive and stable

rate over an extended period of time.

The term sustainable growth is a reference to the concept of Green GDP.

There is a trade-off between rapid economic growth today, and growth in the future. Rapid growth today may exhaust resources and create environmental problems for future generations, including the depletion of oil and fish stocks, and global warming.

Thus the concept of sustainable growth is linked to growth rates that are compatible with eco-friendly practices and the sustainable use of natural resources e.g. fossil fuels and regulation of fisheries and exploitation of forest and underground mineral resources.

The focus on environmental protection is to reduce negative externalities. Growth which neglects or ignores environmental degradation cannot be sustainable in the long run. To feed our growing appetite for consumables due to economic growth, large scale agriculture and cattle ranching are responsible for deforestation while palm oil development and pulp and paper plantations are responsible for forest degradation.

Question 20

EG vs Depletion of Resources

Answer 20

For an economy to continue to grow in the future, the rate of growth has to be sustainable. However, economic growth tends to bring about the depletion of resources, which are generally non-renewable in nature.

Many of the world’s most valuable finite resources are being extracted at increasingly rapid rates, hence the question of the long-term sustainability of growth. Examples include the destruction of rain forests, the over-exploitation of fish stocks and loss of natural habitats created through the construction of new roads, hotels, retail malls and industrial estates. Unless viable alternatives can be found for various minerals and fossil fuels, present growth rates may lead to insufficient amount for future generations which impedes potential growth.

Hence, there will be a trade-off between the goods currently produced and those produced in the future, i.e. higher growth in current output comes with an opportunity cost in terms of slower growth in future output since more resources are allocated to producing goods to be consumed now, leaving fewer resources for future production hence future growth cannot be sustainable.

Question 21

EG vs Environmental Pollution

Answer 21

Economic growth is often accompanied by rapid industrialisation which, unless carefully managed causes deterioration of the environment in terms of negative externalities such as air and water pollution, industrial noise and stench, congested cities and traffic jams.

The more rapid the growth, the more serious the deterioration of the environment with increased level of economic activities. Such pollutants generated give rise to global warming which has a long term effect on the environment.

In fact, global warming and climate change have become an iconic threat to sustainable growth. It is a global concern and thus internationally co-ordinated attempts have been made to address the problem via the United Nations Framework Convention on Climate Change (UNFCCC) such as the Kyoto Protocol (Japan, 1997), the Copenhagen Summit (Denmark, 2009) and the Paris Agreement on Climate Change (France, 2015).

The key focus of these conferences is to reduce CO2 emissions globally in order to avoid the catastrophic consequences associated with climate change e.g. melting ice caps, rising sea levels and extreme weather conditions.

China for example, is amongst the countries which experienced the fastest economic growth but is also the top emitter of greenhouse gases each year. If unchecked, the unfettered emissions of CO2 or carbon emissions into the environment pose a grave danger to future growth via the devastating effects of climate change

Question 22

Green GDP

Answer 22

The green gross domestic product (green GDP) is an index of economic growth with the

environmental consequences of that growth factored into a country’s conventional GDP.

Green GDP monetizes the loss of biodiversity and accounts for costs caused by climate change.

Calculating green GDP requires the net natural capital consumption, including resource depletion, environmental degradation, and protective and restorative environmental initiatives, to be subtracted from traditional GDP.

Green GDP = Traditional GDP - Net Natural Capital Consumption

Some environmental experts prefer physical indicators such as “waste per capita” or “carbon dioxide emissions per year”, which may be aggregated to indices such as the “Sustainable Development Index”.

Question 23

Why traditional measure of GDP is inadequate to measure Sustainability

Answer 23

Natural resources in particular are poorly represented in GDP as resources are not adequately considered as economic assets.

Relative to their costs, companies and policy makers do not give sufficient weight to the future benefits generated by restorative or protective environmental projects. Moreover, important positive externalities that arise from forests, wetlands and agriculture are unaccounted for or otherwise hidden because of practical difficulties around measuring and pricing these assets.

Similarly, the impact that the depletion of natural resources or increases in negative externalities such as pollution can have the future productive capacity of a nation are unaccounted for in traditional GDP estimates.

Question 24

Inclusive Growth

Answer 24

Inclusive growth is economic growth that is distributed fairly across society and

creates opportunities for all. (OECD)

Reduce income gap

Growth across all sectors

Rapid economic growth may result in widening income disparities between the rich and poor.

In the case of Singapore, the government strives to achieve inclusive growth that takes income distribution into consideration to prevent worsening income inequality.

The focus is on productive employment for all groups rather than on income redistribution as the means of increasing incomes for the excluded.

In contrast to pro-poor growths, inclusive growth entails a focus not only on one group but more generally on those parts of the population or the labour force that are excluded from the growth process or do not get the opportunity to participate in economic processes according to their potential. Therefore, this explains why there is a trend towards governments caring not just about the level of growth but also about the distribution of its benefits.

Pro-poor growth refers to growth targeted at increasing the incomes of the poor relative to the rest of the population

Question 25

Policies to achieve Inclusive Growth (SG)

Answer 25

Inclusive Growth Programme

The Inclusive Growth Programme (IGP) was launched by the Labour Movement in 2010 to catalyse industry redevelopment, promote inclusive growth and to ensure sharing of productivity gains with workers through higher wages.

Companies are provided with funding to enhance business operations to drive higher productivity and to upgrade their workers’ skills and to equip them with new skills, making them multi-skilled and share the gains of growth with them.

Strengthening Social Safety Net

Measures are targeted towards alleviating the cost burden of the lower and middle income groups and in facilitating social mobility. Tax rebates and more GST vouchers have been given. More subsidies are also provided in areas of healthcare and education.