Key Economic Indicators

Question 1

Define economic growth.

Answer 1

Defined as an increase in the real gross domestic product.

Question 2

How is sustained economic growth achieved? Why is it useful?

Answer 2

In order to achieve sustained economic growth, actual and potential growth is required. Sustained economic growth can raise consumption levels to improve the standards of living of society.

Question 3

Define actual growth and state how it is measured.

Answer 3

Actual growth is the increase in national output actually produced for a given period of time, commonly measured by the percentage increase in real GDP.

Question 4

Define potential growth.

Answer 4

Potential growth is the increase in the productive capacity of the economy for a given period of time. An increase in quantity or quality of resources will contribute to potential economic growth.

Question 5

How is economic growth measured?

Answer 5

Measuring economic growth requires that value of the total production of all goods and services in an economy, known as the National Product.

Question 6

State the fundamental identity of national income accounting.

Answer 6

The fundamental identity of national income accounting states that National Product = National Income = National Expenditure

Question 7

What is National Product?

Answer 7

National Product is the value of all the goods and services produced in an economy/all outputs

Question 8

What is National Income?

Answer 8

National Income refers to the total income generated by the economic activity. The income returns to factors of production such as rent (land), wages (labour), interest/dividend (capital) and profit (entrepreneurship).

Question 9

What is National Expenditure?

Answer 9

National Expenditure refers to the total expenditure by consumers in an economy and it includes Net Export (X-M), Consumption (C), Government expenditure (G) and INvestment (I) by firms on capital goods.

Question 10

Define Gross Domestic Product.

Answer 10

Gross Domestic Product (GDP) is the value of all final goods and services produced within the geographical boundary of the country of a country over a period of time.

Question 11

State the uses of GDP.

Answer 11

Measuring economic growth
Indicating living standards
Comparing between countries
Reflecting the economic environment of a country

Question 12

State the formula used to calculate economic growth rates (%).

Answer 12

Besides looking at the level of GDP in a given year, economists tend to compare the changes in GDP across time and look at economic growth rates which are defined as the rate of change of GDP where:
Economic Growth rate (current year) = (real GDP current year - real GDP previous year)/real GDP previous year * 100%
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Question 13

Distinguish between nominal GDP and real GDP.

Answer 13

Nominal GDP is the value of goods and services produced in a given year expressed in terms of the prices in that same year. To calculate Nominal GDP, we use current year prices and multiply them by current year quantities for all the goods and services produced in an ecnonomy.

Real GDP is the value of final goods and services produced in a given year expressed in terms of prices in a base year. To calculate real GDP, we use a fixed year price and multiply them by current year quantities for all the goods and services produced in an economy.

Question 14

Explain why real GDP values are used for economic growth rate calculations.

Answer 14

Real GDP values are used for economic growth rate calculations instead of nominal GDP as nominal GDP is affected by inflation that overstates the increase in production. Real GDP ensures that the values of GDP calculated are at constant prices, removing the effects of inflation and price changes. This allows quantities of production to be compared across time.

Question 15

State the 4 indicators of economic performance.

Answer 15

Economic growth
Price stability
Full employment
BOP

Question 16

State how economic growth is measured.

Answer 16

Gross Domestic Product

Gross National Income

Question 17

Define Gross National Income.

Answer 17

Gross national income measures the value of all final goods and services produced by nationally owned factors of production during a given period of time.

Question 18

Explain why GNI can indicate the consumption levels of a country.

Answer 18

Since the incomes earned by local factors are more likely to be spent in the domestic economy, an increase in GNI likely leads to an increase in domestic consumption.

Question 19

Explain how GDP may help investors decide whether to invest in a country.

Answer 19

GDP of a country reflects its economic vibrancy which is indicative of the quality and quantity of resources available in the country, as well as the state of technology achieved.

Question 20

Define NFIA.

Answer 20

Net Factor Income from Abroad (NFIA) represents the difference between income that locally owned residents/firms have received from abroad and income claimed by non-residents based locally.

Question 21

Explain the use of NFIA.

Answer 21

It is useful in determining the extent of income derived from abroad.

GNI = GDP + NFIA

When NFIA is less than 0, GNI is less than GDP, this means that much of the income from the country’s production flows to foreign persons/firms. When NFIA is more than 0, GNI is more than GDP, this means that much of the income flows in from domestic labour or capital based overseas.

Question 22

Limitations of GDP and GNI

Answer 22

(a) Presence of non-market activities - Refers to goods and services not bought and sold but involve the use of society’s resources for its production. Since there are no transactions that record the price of the good and reflect the value of its production, the calculation of GDP and GNI does not include these activities. Thus, understating the level of national output.
(b) Presence of underground economy - Refers to the unreported transactions from both legal and illegal activities such as private tuition and sex work that are not captured in GDP. Due to better communication technologies, it is also increasingly difficult to…

Question 23

Sustainable growth

Answer 23

Rate of economic growth that can be maintained without creating other significant economic problems for future generations. It implies a positive, stable growth rate over an extended period of time.

It can be assessed using Green GDP. It 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.

Question 24

Inclusive growth.

Answer 24

Rate of growth sustained over a period of time is broad-based across economic sectors and creates productive employment opportunities for the majority of the population. To achieve this, income distribution, measured using the GINI coefficient. must be taken into account. Labour productivity, which refers to the amount of goods and services produced for each hour of a worker’s time. is also used although amount of output per labour is more commonly used.

Question 25

Define price stability.

Answer 25

Price stability results from a low and stable rate of inflation. This means that prices increase gradually and do not fluctuate in wild and unpredictable manners.

Question 26

Define inflation.

Answer 26

Inflation is a situation where there is a sustained increase in the general price level.

Question 27

Define disinflation.

Answer 27

Disinflation refers to a substantial reduction in the rate of inflation. Governments aim for disinflation when inflation rates are too high. Therefore, when there is disinflation, prices are still rising, but at a slower rate.

Question 28

Define deflation.

Answer 28

Deflation is a situation where the price of most goods and services are falling over time so that the rate of inflation is negative.

Question 29

State how price stability is measured.

Answer 29

It is measured using the Consumer Price Index (CPI) and inflation rates.

measure the changes in the price level from year to year and is calculated as: Inflation rate, current year = (CPI, current year – CPI, previous year)/CPI, previous year ×100%.

Question 30

Explain what the Consumer Price Index is.

Answer 30

The CPI measures the price of a fixed basket of goods and services commonly purchased by a typical household. Since it is a weighted price index, each item in the basket is given a weight according to its importance as measured as a share in total consumption expenditure by a household. The types and specifications of goods and services and their weights are fixed at the base year and kept unchanged so any changes in CPI solely reflect price changes over time.

The price of the basket in the base period is assigned a CPI value of 100. The prices in other periods are shown as percentages of the price in the base period. For example, if the base year is the year 2000 and the price of the basket had increased by 5% in 2001, then the CPI in 2001 would be 105.

Question 31

Explain what the inflation rate is.

Answer 31

The inflation rate measures the changes in the price level from year to year and is calculated as Inflation rate, current year = (CPI, current year – CPI, previous year)/CPI, previous year ×100%.

Question 32

Explain the limitations of the inflation rate.

Answer 32

Though CPI rises and the price of the basket has risen, the cost of living may not have necessarily risen to the same extent

(a) Substitution bias - When the price of a good increases, consumers typically switch to consuming less expensive alternatives to keep their cost of living low. However, the weight given the goods does not change to reflect the changes in consumption patterns, causing CPI to overstate the increase in the cost of living from year to year.
(b) Quality adjustment bias - The price of a good rise when its real value increases, such that a better quality version of a good is more expensive. Prices of surgical procedures increase because of the improved surgical methodology and increased success rate. However, when surgical procedures are included in the reference basket of goods and services, the increase in price is captured nomia=nally such that CPI rises, seeming to imply that the cost of living has inflated. Thus, it is difficult to make a distinction between changes in the underlying price of goods and services and changes in quality.

Question 33

Explain why the limitations of the calculation of inflation rate are less applicable in Singapore’s context.

Answer 33

To overcome the limitations, the composition and weighting pattern for the CPI basket is revised every five years to reflect the changing consumption patterns in Singapore.

Question 34

Define unemployment.

Answer 34

The unemployment of labour refers to the situation where people who are willing and able to work and are actively seeking work but cannot find jobs.

Question 35

State how to calculate the unemployment rate.

Answer 35

Unemployment rate = No. of unemployed persons/ Labour force × 100%.

Question 36

State the three types of unemployment.

Answer 36

1) Frictional Unemployment - This is present in an economy at any point in time as it refers to people who are searching for jobs or in between jobs.
2) Structural Unemployment - Refers to people who are willing and able to work but do not possess the necessary skills/knowledge required by employers. When many workers’ skills set are mismatched. structural unemployment will be high and the economy will experience a high unemployment rate even when it has reached full employment.
3) Cyclical Unemployment

Question 37

Define Full Employment.

Answer 37

Full employment/Natural rate of unemployment level indicates a non-zero, low rate of unemployment that is compatible with price stability when all those who are able and willing to work have gained employment. At full employment, structural and frictional unemployment can still occur.

Question 38

Explain why the unemployment rate can never be zero.

Answer 38

Frictional Unemployment - This is present in an economy at any point in time as it refers to people who are searching for jobs or in between jobs.

Question 39

Define unemployed persons.

Answer 39

Unemployed persons refer to persons aged 15 years and over who were without work during the survey reference period but were available for work and were actively looking for a job. They include persons who were not working but were either taking steps to start their own business or are about to take up a new job offer after the reference period.

Question 40

Define labour force.

Answer 40

The labour force or economically active population refers to persons aged 15 and above who were either employed or unemployed during the reference period.

Question 41

State the limitations of the unemployment rate.

Answer 41

Unemployment rates may not measure the utilization of our labour resources well because changes in this rate could result from the:

(a) Changing size of the labour force - For instance, unemployment rates decline when unemployed persons stop looking for jobs and leave the labour force, either to go for further education and training or to retire. They may also possibly be too discouraged to continue to search for jobs (discouraged worker syndrome). When this happens, both the numerator and the denominator of the unemployment rate falls, but the numerator falls by a greater proportion, resulting in a fall in the unemployment rate. However, this does not imply better utilization of resources.
(b) Increase in the size of the labour force - When new entrants or re-entrants enter the labour market who are not immediately employed but will need to seek jobs first. When this happens both the numerator and the denominator of the unemployment rate rises, but the numerator rises by a greater proportion, resulting in a rise in unemployment rate. However, this should not be intepreted as poorer use of resources in an economy as they can still find jobs in a short period of time.

Question 42

BOP

Answer 42

Record of a country’s international transactions which involve flows of money between the residents of a country and the rest of the world. It can be in a deficit when the outflow of money is more than the inflow of money whereas a surplus occurs when the inflow of money is more than the outflow.

Question 43

State the effects of monetary inflows and outflows on the BOP position.

Answer 43

Monetary inflows improve the BOP position while monetary outflows worsen the BOP position.

Question 44

State the three main accounts in the Balance of Payments.

Answer 44

Current account - comprises of trade balance which refers to the value of the difference between export revenue and important expenditure and income balance which records wages, interests, profits flowing into and out the country as well as government contributions to and receipts from international organisations and international transfers of money by private individuals.

Capital and Financial account - records changes in ownership of assets and comprises of direct investment and portfolio investment.

Reserve assets account - records international transactions made by the monetary authorities for the purpose of financing the overall BOP position

Question 45

Define material standard of living.

Answer 45

The material standard of living is a quantitative measure of well-being using the quantity of goods and services an average person gets to consume.

Question 46

Explain how the overall BOP position is calculated.

Answer 46

The overall BOP position comprises of the sum of the current account, capital and financial account and net errors and omissions account. Thus, a country with a favourable position of BOP is usually in a modest surplus where the inflow of money is greater than the outflow of money. It would have better economic performance compared to a country whose BOP is in a deficit.

Question 47

Define standard of living.

Answer 47

A population’s standard of living includes both material standard of living and non-material standard of living.

Question 48

Define non-material standard of living.

Answer 48

Non-material standard of living is a qualitative measure of well-being and can be indicated by welfare indicators.

Question 49

Explain how material standard of living is measured.

Answer 49

Real GDP per capita