Economic Growth Flashcards
What is Economic Growth?
Economic Growth is defined as an increase in real output of an economy
Positive growth means that real output has increased while negative growth means that real output has fallen
What is Actual Economic Growth?
Actual Economic Growth is defined as the percentage annual increase in REAL output over time, or the increase in real GDP/GNP/NNP over time.
It refers to the increase in the quantity of goods and services available to the people in a country
What is formula for rate of actual economic growth?
[(Year 2 Real GDP - Year 1 Real GDP) /Year 1 Real GDP] x 100%
What is the formula for Real GDP?
Real GDP = Nominal GDP x (Base Year Price Index/Current Year Price Index)
How is Actual Economic Growth Represented by the PPC?
Actual Economic Growth is shown by a movement from a point inside the PPC to a point closer or to or on the PPC
This movement is the result of utilization of previously unemployed resources
What is Potential Economic Growth?
Potential Economic Growth is the rate of growth of potential output, which is the output that could be produced with full employment of resources.
How can Potential Economic Growth be caused?
This may be caused by an increase in the
- quantity of available resources;
- quality of available resources; and/or
- Improvements in the state of technology
What is Sustained Economic Growth?
Sustained Economic Growth indicates a rate of growth that can be maintained over a period of time without giving rise to high rates of inflation
This is often referred to as non-inflationary economic growth. Sustained economic growth is a result of an increase in both AD and AS
What is Sustainable Growth?
Sustainable Growth indicates a rate of growth that can be maintained without creating other significant economic problems (eg. depleted resources, environmental problems, large public debts to repay), particularly for future generations. Thus, sustainable growth implies a stable and positive growth rate over an extended period of time
What is Inclusive Growth?
Inclusive growth indicates a rate of growth that is sustained over a period of time, and is broad based across economic sectors for the majority of the country’s population.
What are the undesirable rates of economic growth?
i) Negative economic growth
ii) low economic growth
iii) economic growth rates that are either unsustainable and/or
iv) not inclusive
What is a recession?
A recession is defined as a period of two consecutive quarters of negative economic growth. This occurs when there is a decline in economic output.
What are the two main causes of negative economic growth?
i) Decrease in Aggregate Demand (AD)
ii) Decrease in Aggregate Supply (AS)
What is the Adjustment Process of decrease in AD?
A fall in AD will result in a fall in Real National
Income from Y1 to Y2.
This will then lead to a fall in income induced
consumption and thereafter, a further fall in
AD. This triggers many successive rounds of
decrease in national income and income
induced consumption. At each round, the
decrease in both gets smaller.
The multiplier process will end when the
decrease in national income is too small to
generate further decreases in induced
consumption.
The autonomous fall in AD from AD1 to AD2
results in a multiplied decrease in RNY from
Y1 to Y5
What is Slow Economic Growth?
Slow economic growth occurs when the economy is experiencing POSITIVE but LOW rates of growth of between 0 to 2.5%.
What are the benefits of economic growth?
i) Improvement in SOL
ii) Increased levels of savings
iii) Increased levels of investments
iv) Increased levels of employment
v) Easier to Re-distribute income
vi) Provide funds for reducing environmental costs of growth
vii) Help avoid other macroeconomic problems
viii) Improvement in the country’s budget balance
What leads to higher income per capita?
When economic growth exceeds population growth
How does Economic Growth improve SOL?
i) assuming economic growth exceeds population growth -> leads to higher income per capita -> consumers can consume more goods and services -> material SOL increases
ii) economic growth results in higher productivity -> people have more time for leisure -> non-material SOL increases
iii) economic growth provides government with higher tax revenues -> government can spend on public amenities such as quality of education, healthcare, street lighting quality, police force, etc -> non-material SOL increases
How does economic growth impact productive capacity?
Increase in income from economic growth, consumers will save part of that money -> increase in savings -> faster capital accumulation -> more funds to finance public and private investments -> increases productive capacity for economy
How does Economic growth result in easier re-distribution of income?
economic growth -> increase in income for individuals -> pays more personal income tax -> government revenue increases -> extra tax revenue can be spent on programmes supporting poorer groups -> will also result in inclusive economic growth
What are the costs of Economic Growth?
i) Externalities and effect on SOL
ii) Depletion of non-renewable resources
iii) Debt-driven economic growth
iv) Effects on the distribution of income
v) Rise in structural unemployment that may lower material and non-material SOL
vi) Opportunity cost of growth - Reduced current consumption
vii) Higher rates of demand pull inflation
How does economic growth result in deletion of non-renewable resources?
economic growth -> rise in production -> resources extracted faster than rate of replenishment -> less resources available for future generations -> fall in productive capacity and lower potential growth in the future -> trade-off between current economic growth and future growth
What is Fiscal Policy?
Fiscal policy refers to the use of government expenditure (G) and taxation (T) to influence the level of economic activity in an economy. It is mainly a demand management policy to attain the various macroeconomic aims.
What are the various ways a government can increase its revenue?
-Taxes
-Non-tax revenue
-Borrowings
-Foreign aid or grants
What are Direct Taxes?
Direct taxes are paid by the taxpayer directly to the government. Income, property and corporate taxes are examples of direct taxes
What are Indirect Taxes?
Indirect taxes are taxes paid by the taxpayer indirectly to the government. GST is an example of indirect taxes.
What are the purposes of taxation?
a) To raise revenue for the govt to finance its expenditures
b) To achieve macroeconomic objectives
What are the three possible relationships between the tax payments and a person’s income?
a) Progressive Taxes
b) Proportional Taxes; and
c) Regressive Taxes
Note: Focus on Progressive tax rates and how it could address income inequality
A progressive tax system promotes greater equity as it takes a greater proportion of income from the rich compared to the poor. This helps in lowering income inequality achieving a more inclusive growth.
What is Proportional Tax?
A proportional tax is one, which removes an equal portion of one’s income as income rises.
What is Regressive Taxation?
A regressive tax is one, which removes a smaller proportion of income as incomes rise.
Why does Regressive Taxation place a heavier burden on the poor?
“The Goods and Services Tax (7%) is an example. Regardless of income, the
consumer pays the same tax amount (7% of the selling price) as tax.”
As the poor spends a greater proportion of their income on goods and services, the tax they pay will constitute a larger percentage of their income
What are the Macroeconomic reasons for Government Expenditure?
-To regulate AD to achieve the various macroeconomic aims
-To foster potential growth by expanding the nation’s productive capacity (influencing AS)
-To redistribute income to reduce income inequality/promote inclusive growth
What are the Microeconomic reasons (To correct market failure and redistribute resources) for Government Expenditure?
-Expenditure on public goods
-Expenditure to provide or subsidise merit goods
-To redistribute income to achieve higher equity and efficiency
What are the different forms of government expenditure?
-Exhaustive expenditure
-Current or ordinary expenditure and development expenditure
-Transfer payments
What is Exhaustive expenditure?
Exhaustive expenditure are payments in return for goods and services (included as part of AD in the form of G)
What is current or ordinary expenditure?
Expenditure in the day to day workings of the government
What is development expenditure?
spending on public investments
What are Transfer Payments?
payments made where no current factor service is rendered
Note: Students tend to confuse ‘budget deficit’ with ‘poor fiscal health’.
When we refer to a ‘budget deficit’, we mean that the government is planning
to spend more than it would receive in revenue for the fiscal year. However,
this may not necessarily affect the long-term fiscal health of the government.
E.g. the Singapore government usually runs budget surpluses and managed
to accumulate ample national reserves. Therefore, in years where there is a
need to run budget deficits, e.g. in 2020 to support households and firms due
to economic crisis brought about by Covid-19, the government is able to draw
from its reserves without affecting its fiscal health.
Additionally, austerity measures refers to strict economic policies that a
government imposes to control growing public debt, defined by increased
frugality. Broadly speaking, there are three primary types of austerity
measures:
- revenue generation (higher taxes) to fund spending;
- raising taxes while cutting nonessential government functions; and
- lowering taxes and lower government spending.
With the reduction of public debt, the government aims to increase investor
confidence and thus boost the level of investments in a country.
Note: The use of indirect taxes, as opposed to direct taxes, will not affect AD as it affects COP and therefore SRAS (affects producers directly, paid for by taxpayers indirectly)
How does Fiscal transfers/Transfer payments result in inclusive growth?
In Singapore, the Workfare Income Supplement (WIS) supplements
the income of the bottom 20% of workers through case payments and CPF
contributions.
This serves to increase the real income of the bottom 20% and REDUCE THE INCOME GAP between the lower 20% with the rest of the employed workforce. This HELPS TO ENSURE THAT ECONOMIC GROWTH IS INCLUSIVE by ensuring a more even distribution of income across the economy.
How does the government promote inclusivity and sustainability?
-The government may make the tax system more progressive by reducing indirect taxes and increasing personal income taxes for higher income brackets.
-Governments may choose to target specific sectors or goods. [e.g. by placing taxes on property transactions (stamp duties). This will help to promote inclusivity by reducing the profits property owners (usually the higher income group) earned from reselling.]
-Governments could tax on negative externalities. [e.g. taxes on carbon emissions to ensure that economic growth is sustainable in the long run]
What is the Crowding-out effect?
-Crowding-out effect occurs when an increase in government spending due to an expansionary fiscal policy reduces other types of spending such as investment spending by firms and consumer spending so that overall AD does not increase at all (full crowding-out effect) or increase to a small extent (partial crowding-out effect). Discretionary fiscal policy therefore, becomes less effective at stimulating economic growth and at reducing unemployment.
-Assuming the government finances its spending by
borrowing from the private sector, it essentially
competes with firms/households for a fixed pool of
loanable funds. As such, the demand of loanable funds
increases, driving interest rates up. The higher cost of
borrowing reduces borrowing by firms/households
leading to reduced investment spending and consumer
spending respectively which will partially offset the
increase in AD due to the higher G.
Why is Fiscal policy less affective for a country with high levels of debt?
Fiscal policy is less effective for a country with high accumulated debt due to not being able to increase G or decrease T extensively
What are the different time lags?
-Recognition lag
-Implementation lag
-Impact lag
What are the prerequisites for sustainable growth?
1) To be able to achieve sustained growth. To achieve sustained growth, potential growth is required. Fiscal policy needs to have supply-side elements in order to be effective in achieving sustained economic growth
2) To ensure that no other significant economic problems are created for future generations, which may or may not be met by the government.
What is Monetary policy?
Monetary policy is defined as the process by which the central bank uses various tools such as interest rates, money supply, and exchange rate to control the economy.
What are the main tools of monetary policy used by Central Banks?
-Interest rates
-Exchange rates
-Money supply/Monetary base
What is Money Supply/Monetary Base?
This refers to the total stock of money available in an economy at a point in time. The money supply is made up of CURRENCY IN CIRCULATION and BANK DEPOSITS.
How can the Central Bank increase money supply?
-Buy bonds/securities
-Lower the minimum reserve ratio to increase credit creation
-Increase lending to commercial banks
What is the interest rate centred monetary policy?
The interest rate centred monetary policy is a form of monetary policy where the government intervenes by manipulating the money supply and interest rate in order to influence AD to achieve its economic objectives.
When is expansionary monetary policy typically used?
An expansionary monetary policy is pursued when the government seeks to increase the money supply in the economy, usually used to stimulate production and to increase the level of economic activity in times of recession through LOWER INTEREST RATES
When would contractionary monetary policy be pursued?
Governments may choose to use contractionary monetary policy in times of inflation. This can be done by raising interest rates and or appreciating/revaluing the country’s currency.
Note: Monetary policy in itself works to ACHIEVE SUSTAINED GROWTH ONLY and need to be complemented with other policies to make this growth both sustainable and inclusive.
How does lower interest rates encourage consumption?
Lower interest rates will encourage consumption as it directly reduces the cost of borrowing for purchases of consumer durables. Moreover, lower interest rates -> lower returns to savings and opportunity cost of spending -> consumers will be more willing to spend.
