Discuss whether the use of protectionist policies can ever be justified during a period of worldwide recession or whether governments should follow Chinese Premier Wen Jiabao’s advice to adopt a policy of greater free trade. [N2013 25]

Protectionism refers to the imposition of economic policies aimed at restricting trade between countries, designed to protect domestic businesses and workers from foreign competition, while free trade refers to the exchange of goods and services across international boundaries. Recently, governments have been adopting protectionist measures in the belief that this would offset the impacts on their economies from the worldwide recession. Fundamentally, the question is: during a period of worldwide recession, can protectionism be justified, or should governments adopt a policy of free trade, to address the macroeconomic problems of rising unemployment and lack of economic growth? This economics paper argues that, while some would argue that protectionist policies can be justified during a worldwide recession, governments should still follow Premier Wen’s economic advice to pursue a policy of greater international free trade.  

There are many methods used by various countries to protect their economies, but fundamentally these methods either discourage imports or encourage a country’s own exports.  For example, a tariff is a tax levied on imports, where a specific tariff is levied as a fixed charge per unit while an ad valorem tariff is levied as a fraction of the value of a unit. A tariff raises import prices, hence causing consumers to switch from imports to locally produced goods. An import quota is a direct restriction on the quantity of imports. The quota is typically enforced by issuing licenses to a group of individuals or firms. The quota directly reduces the availability of imports, hence pushing up prices of imported goods. Per unit output subsidies can be given to help local producers lower their production costs, which enable them to better compete with more efficient foreign producers. These methods, among others, arguably can protect the domestic economy during a period of recession. 

On the one hand, it can be strongly argued that protectionism can be justified on grounds of employment protection. Protectionism arguably helps the economy against both demand-deficient and structural unemployment. First, during a period of recession, protection may be used to reduce demand-deficient unemployment, where there is insufficient AD to fully utilise the unemployed resources in the economy, because imports are discouraged while exports are encouraged, which theoretically boosts AD, shifting it to the right. Furthermore, trade restrictions are sometimes imposed during an economic downturn to reduce cyclical unemployment. For example, under trade union pressure, governments may decide to curb imports that are in direct competition with domestically-produced goods in order to preserve the jobs in these industries. 

Second, protectionism can also be given to declining sunset industries to slow down their contraction, thus allowing more time for labour to be retrained and re-channelled to other growing sunrise industries. This reduces the degree of structural unemployment, which can be defined as the unemployment arising from the mismatch of skills in the industry as the structure of the economy changes. Many developing countries, especially China, and developed economies, such as Singapore, face structural unemployment as the production structure of the economy as well as demand conditions change and mature. Hence, protectionism can be justified through employment protection. 

However, there are many limitations of protectionism in addressing a situation of worldwide recession. First, protectionism creates a “beggar-thy-neighbour” effect whereby the exports, output, and employment of its trading partners are reduced, which in turn curbs the exports, output, and employment of the country initiating the protectionist measures. Secondly, with protectionism, trading partners are likely to “retaliate” and impose their own import restrictions, again further causing the initiating country’s exports, output, and employment to subsequently suffer even more. For instance, China may face countermeasures if it were to implement protectionist measures on the USA, which would not benefit both countries. 

Furthermore, although the initial intention may only be to offer temporary protection to help smoothen the adjustment and reallocation of resources, protection is politically difficult to remove, once it has been put in place. Vested interests are created and the industries concerned will inevitably resist any removal of trade barriers. In the long run, the country might end up having resources being locked in inefficient ‘sunset’ industries, hence depriving its expanding ‘sunrise’ industries of precious economic resources. For instance, this occurred in Latin America after WWII under the system of Import Substitution Industrialisation, as contrasted with the success of the East Asian countries which pursued Export Oriented Industrialisation. All these limitations reduce the usefulness of protectionism in addressing a situation of worldwide recession. 

On the other hand, other than the limitations of protectionism, international trade might in fact help a country tide a recession. First, developing economies sometimes lack sufficient domestic demand to enable full utilisation of resources. Trade allows such countries to overcome domestic demand constraints by giving them access to larger world markets. With additional demand coming from exports, greater utilisation of otherwise unemployed resources raises output, income, and employment. For instance, Singapore, a small and open economy, depends upon trade as an engine of growth for her national income and employment. Furthermore, rising export demand further stimulates investments, causing the AS to shift outwards faster. These investments, for example in infrastructure facilities like ports and storage warehouses and export industries, in fact allowed Singapore to expand its export sector. Seen from these perspectives, trade arguably acts as an engine of growth as it enables both AD and AS to increase faster than under autarky, and therefore possibly contributes to a country’s long run sustained economic growth.

Second, accompanying the development of merchandise trade would be the development of services like shipping and airfreight, air travel, banking and finance, and tourism. With time, a developing economy experiences structural change and becomes less dependent on merchandise trade and manufacturing, instead diversifying into services, thus becoming more like a developed economy. For instance, countries like Singapore have developed from a third world to a first world country by experiencing structural change from international trade. Therefore, governments like China should also pursue a policy of free trade to benefit from economic diversification, maturation, and structural change, which could arguably ameliorate the impacts of recession. 

In conclusion, while protectionism can be politically expedient and may even ameliorate unemployment – both demand-deficient and structural unemployment – in the short run, it should not be used as an active policy to address recessions. This is because of the limitations of protectionism as well as the foregone benefits of international trade as an engine of growth that can also provide fundamental structural change to the economy, which would put it in good stead when the world economy recovers. Alternatively, large economies like China could also encourage local, domestic demand through the use of expansionary monetary and fiscal policies, and that could drive their economic growth during periods of recession, because they have the option to depend on domestic demand, whereas smaller and more open economies like Singapore would have to depend on international trade and globalisation to drive their economies. Thus, in the final analysis, the policy options taken to address the problems really depend on the countries involved, but to a large extent international trade is a much better policy than protectionism.

JC Economics Essays: This economics essay is a sample answer to an adapted economics question from the H2 Economics A Level paper, November 2013. The response was co-written by two economics lecturers for a tutorial class, in order to teach about protectionism and international trade for the A levels examination. However, this particular economics essay is only one possible response to the question - what could be done differently? Furthermore, how would you improve upon this answer, what real world examples could you use to buttress your arguments, and what can you do to improve this essay? Remember to think through the answers and how you can make economics arguments better. Thanks for reading and cheers. 

Discuss with relevant examples the best way to sustaining long run economic growth for a small country, such as Singapore, with an aging population. [25]

Economic growth is defined as an increase in the real output of an economy over a period of time. Positive growth means that real output has increased while negative growth means that real output has fallen. Sustaining economic growth means long-run growth, defined as the rate of growth in real output of a country over a extended period of time. For long-run growth to occur, productive growth capacity needs to rise which means that there should be potential growth. Therefore, a sustaining economic growth needs not only actual growth but also potential growth. This essay attempts to explain the impacts on the economic growth due to small country with aging population, various methods to counter these problems and discuss about the best method to achieve a sustaining economic growth.

An aging population in a small country results in two major problems: shrinking labour force and decreasing national income. When there is a shrinking labour force, the burden on the productive workforce in supporting non-productive residents would rise. This means the number of new entrants into the workforce is smaller than the number of people retiring from it. Shrinking size of the workforce results decrease in labour supply. As a factor production, shrinking labour force leads to AS curve to shift left. Therefore, the potential growth slows down. Meanwhile, more retirees have lower income than the time when they work. They feel poorer to consume. Hence, consumption decreases. Shrinking workforce means that firms have more difficulty finding workers, so they might downsize, close down or relocate. They will not want to invest anymore. A decrease in consumption and investment results a decrease in AD as AD = C + I + G + (X – M). Hence, actual growth is reduced. Both AD and AS are likely to decrease due to an aging population; the economy would contract and economic growth would be negative. Hence, there is a need to raise AD and AS. 

[Insert diagram on increase in AD and AS]

From the diagram above, when the AS curve shifts to the right, at full employment level, an increase in AD will not cause demand-pull inflation, hence, a sustaining economic growth is achieved. 

To increase AD, there are several methods, namely, expansionary fiscal policy, expansionary monetary policy and exchange rate policy. 

Expansionary fiscal policy involves raising government spending on infrastructure like transportation, public utilities and telecommunication and on merit goods like education and healthcare. Cutting direct taxes can also have beneficial effects on long run growth. Cutting personal income taxes raises the monetary returns to work thereby increasing the incentive to work harder. Furthermore, more disposable income generates greater savings thereby increasing the funds available for investment. Lastly, cutting corporate taxes raises firm’s post tax profitability and hence their incentive to invest. As AD = C + I + G + (X – M), a increase in C and I and G will then raise AD.

The first limitation of expansionary fiscal policy is that it results in government debt as the government has to borrow to finance its budget to finance a budget deficit. Hence, future welfare is actually being sacrificed for the sake of raising current welfare. Secondly, in a small country with small multiplier (k), expansionary fiscal policy is very costly and not very effective. For instance, Singapore has a high MPS as we have compulsory savings like CPF and also a high MPM due to our dependence on imports. Since k = 1/(MPW) and MPW = MPS + MPT + MPM, Singapore has a high withdrawal and therefore a small multiplier. Thirdly, there is crowding out effect. Expansionary fiscal policy involves running a higher budget deficit that is probably financed from increasing borrowing. The demand for loanable funds rises and hence raising interest rates. This deters consumption (C) and investments (I) and also causes the currency to appreciate, thereby curbing net exports (X – M). As AD = C + I + G + (X – M), AD decreases due to decrease in C, I and (X – M). The expansionary effects of the budget deficits are therefore negated by a reduction in consumption, investments and net exports. Fiscal policy also has limitations like time lags and tax insensitivity. 

Expansionary monetary policy refers to increase money supply by Loanable Funds Theory, hence boost borrowing for consumption and investment. Lowering interest rates also causes hot money outflow, which causes the currency to depreciate because the demand for currency decreases hence boosting net exports. As AD = C + I + G + (X – M), AD is increased due to increase in C and I or (X – M). 

One of the limitations of expansionary monetary policy is the liquidity trap which refers to the situation where interest rates are already so low such that the further cuts in interest rates are unlikely to have any impact in stimulating borrowing. At the extreme, when interest rates hit zero, this means that there is no more room for further interest rates cuts and expansionary monetary policy stops being a viable policy tool. Meanwhile, small country such as Singapore is usually trade dependent. With free capital mobility, and fixed or managed exchange rate, small countries find it hard to implement monetary policy because of the economic trilemma. 

Exchange rate policy can be used to increase AD by depreciation of the currency. When the exchange rate is lowered, consumers find imports more expensive compared with domestic products, hence consume fewer imports. With lower exchange rate, country’s exports are more competitive and the quantity demanded for its exports increases. Hence an increase in net exports results in an increasing AD as AD = C + I + G + (X – M).

However, depreciation of currency will cause imported inflation which is very harmful to import-dependent small countries. These small countries prefer to have fixed or managed exchange rate, hence exchange rate policy may not be used. 

Governments can also use supply-side policies to ensure long-run economic growth. To counter the decreasing AS due to shrinking workforce, governments can choose to increase the quantity of labour or improve the quality of labour. 

The first option is to increase the size of the population with higher birth rates. i.e. pro-natal policies. Tax rebates and subsidies can be given to encourage more births. The labour market can also be regulated to allow for more flexible work arrangements so that parents can better balance work and family commitments. The size of the working population (labour force) can be increased by raising labour force participation. This can be done with policies to encourage non-working women and retirees to re-join the labour force. One way to do so is to increase the retirement age. Policies should also create more flexible and less intensive work arrangements which make jobs less demanding for older workers, hence encouraging them to remain in or to re-join the workforce. 

Besides trying to raise birth rates, a faster and easier way of increasing the size of the labour force is to allow more inflow of foreign labour. i.e. increase immigration. Allowing more inflow of higher skilled foreign labour like doctors, managers and engineers usually does not face that much social and political resistance. Being more educated and generally small in numbers, it is arguably easier for such foreigners to integrate into the local society. To improve the quality of labour force, governments have to increase labour productivity and occupational mobility. This involves two main elements. i.e. education and training. 

However, these supply-side policies have limitations as well. It is very hard to increase birth rate due to the fact that the opportunity cost of having children in terms of the sacrifice in consumption, leisure and career advancement is often too high. Re-joining the workforce is not easy as this cannot prevent people from getting old and retiring early. Immigration creates social tensions and depresses the wages of domestic low skilled labour, thus worsens the country’s income distribution. Education programs typically take many years to implement and their effects are felt only much later. Most of the labours and companies are reluctant to take and set up workshops for training. 

In conclusion, to achieve sustaining economic growth in a small country with aging population, the best way is to use supply-side policies to increase AS which is the root cause of slowing economic growth. Expansionary fiscal policy can be considered as one of the better choices if the small country has a relatively large multiplier hence it will not be so costly to use fiscal policy. Monetary policy is usually not a good choice due to the fact that small country is usually trade dependent and is limited by the economic trilemma. Small country which is usually import dependent will not choose to depreciate its currency. Therefore, supply-side policy is considered as the best way to sustaining economic growth for a small country with an aging population. 

JC Economics Essays - H2 'A' Level standard essay on the Singapore macroeconomy: Economics Tutor's comments. Macroeconomics essays covering the various macroeconomic aims and goals of governments, as well as the demand management policies and supply side policies are important. Often, macroeconomics essay topics will focus on either the goals as a standalone topic, or in conjunction with economic policies. Economics policies often come accompanied with some economics issues or economics news in a preamble, but economic policies can be assessed also on their own theoretical merits. (In a way, that's the beauty of macroeconomics - it can be quite theoretical and while often macro is in the news, and often catches attention with the headlines, in economics examinations macroeconomic policies can be considered theoretically too. The thrill of theory is often too beautiful for economists to ignore.) In any case, the usual economics tutor's questions apply: what are the strengths and what are the weaknesses of this economics paper? Does the student develop her arguments cogently, clearly, and build on theory and real world economic examples? Think about how you could help this student write an even better essay, or how you could help the student to get the highest marks possible. Having said that, this economics essay is very well written for a variety of reasons. The materials presented are wide ranging and very well applied to Singapore's context. There is a lot of economic theory, but also examples as well. The conclusion is nuanced, evaluative, and generally very well written. Note: this essay was written under examination and timed conditions by an actual A level student in a class Economics H2 test (not an economics assignment). Special thanks for AG, SS, and other students for their kind feedback and invaluable contributions and suggestions. 

Explain possible causes of stagflation in the USA.

Explain possible causes of stagflation in the USA.

Introduction - Possible Causes of Stagflation in the USA

Stagflation, as the name suggests, refers to the macroeconomic situation of low economic growth and high inflation – stagnation and inflation occurring at the same time. The background to this essay is that from 2008-2010 due to the housing bubble crisis in 2007/2008 in the USA, there have been massive rates of unemployment, raising the jobless rate.

This Economics essay argues that the possible causes of stagflation in the USA can be traced to mainly cost-push inflation.

Cost Push Inflation?

First, general cost push inflation could have resulted in stagflation in the United States. Inflation can be defined as a sustained increase in the general price level (GPL), and it could be a problem when the increase in the GPL is sustained, persistent, and inordinate.

Inflation can be both demand pull and cost push, the first affecting the aggregate demand (AD) which equals consumption, investment, government spending, and net exports or C + I + G + (X-M), by shifting it to the right, and the second affecting the aggregate supply (AS) curve, which is affected by the factors of production which are land, labour, capital, and enterprise.

For cost push, increases in unit input costs in the factors of production will lead to the AS shifting upwards, lowering employment, and simultaneously raising the rates of inflation. This can be explained using the AD/AS diagram demonstrating cost push inflation.

For example, first, higher costs of inputs such as oil could have contributed to this situation, because oil is fast running out, and the demand for oil is relatively inelastic, which could lead to high volatility and high prices. Second, wage costs could possibly have spiralled in the USA. Third, capital costs could have increased, but this is highly unlikely given that this is the USA with its technological advantages and its huge supply of capital.

Imported Inflation?

Imported inflation, which generally also leads to cost push inflation, but can also lead to demand pull inflation in some instances, might not have been a major influence of stagflation in the United States. This is because while the USA might accuse China of artificially having low exchange rates, thus increasing their imports of Chinese goods and probably causing some unemployment in sunset industries in the USA, the decreasing AD that results from this situation would actually ease inflation, and not cause stagflation. 

Furthermore, the United States of America is a large country and does not depend on imported inputs that much for the production of her own products or exports. Possibly, the rise in global food and oil prices (commodity prices have been rising internationally) could lead to some imported inflation in the USA, which would have possibly also contributed to shifting the AS curve upwards, increasing GPL.

Quantitative Easing (QE)?

Second, excessive printing of money from the QE exercises (quantitative easing), from around 2008 to 2012, by the USA Federal Reserve (USA’s central bank) could have also led to stagflation in the USA because there could be the case of too much money chasing too few real goods. Also, it can be argued that according to the Fisher Equation, where MV = PT, increases in the money supply cause inflation to occur, corroborating Milton Friedman’s famous statement that “inflation is always and everywhere a monetary phenomenon”.

This might have contributed to the high inflation in the USA because low interest rates encourage borrowing for consumption and investment, which would have caused demand pull inflation to also occur; also, according to the classical direct transmissions mechanism, more money in the hands of consumers and firms would lead to higher C and I, thus boosting AD, which might have contributed to inflation. This could have led to AS shifting upwards due to asset bubbles, which raise the costs of production.

Conclusion

Hence, in conclusion, cost push inflation is likely to be the main cause of stagflation in the USA. 

JC Economics Essays: Tutor's Comments - This Macroeconomics essay is about the causes of low economic growth and high unemployment in the USA, and is clearly in reference to recent events, in recent years (around 2007 - 2012). There are many good points about this Economics essay, such as its references to Milton Friedman and the many excellent, relevant, real world examples. However, put yourself into the shoes of an Economics tutor - what would you say were the weaknesses of this Economics paper, and how would you remedy them? Other than the fact that an Economics diagram could have been used (the AD/AS diagram which is already highlighted and put in bold fonts in the essay), what else could have been done better? While this Economics paper is good, how can it be made even better? Thanks for reading and cheers!

(b) Discuss if a low and stable rate of unemployment is what governments should only aim for. [15]

(b) Discuss if a low and stable rate of unemployment is what governments should only aim for. [15]

Should governments only aim for a low and stable rate of unemployment? First, what is unemployment? First, this paper defines unemployment. A low and stable rate of unemployment refers to a situation where workers who are willing and able to work are largely able to find employment, in contradistinction to a situation of unemployment. This is indeed one of the macroeconomic objectives of governments. However, governments also have other objectives, such as sustained economic growth, price stability, and a healthy Balance of Payments (BOP). This essay argues whether a low and stable rate of unemployment is the only macroeconomic objective that governments should aim for would depend on the economic conditions and status of the economy.

Increases in AD in a Developing Economy

This paper argues that a low and stable rate of unemployment could be the primary aim if the economy is a developing economy, as it would achieve other macroeconomic objectives relevant to developing economies. By assumption, a developing economy can be characterised by having spare capacity and massive unemployment. A developing economy is characterised this way as there is more spare capacity in such economies because they have huge populations. A low and stable rate of unemployment means more employed workers being able to spend more on consumption (C). Firms can take this steady increase in C as an indication for more investment (I). The rise in C, I and (X – M) would lead to a rise of the AD of the economy, and the economy would reach full employment eventually.

Other macroeconomic objectives can be achieved because of a focus on low unemployment. The General Price Level (GPL) can be considered virtually unchanged due to the spare capacity of the developing economy. Inflation is defined as a persistent and sustained increase in the general price level, and while inflation can be dangerous, mild inflation can be seen as useful as it stimulates economic growth and production. Production would increase, leading to more workers being employed. This would trigger an increase in the AD due to the probable increase in the components of C, I, G and (X – M). As a result, the economy is able to achieve sustained economic growth. This leads to governments being able to collect a steady stream of taxes from the economy. The tax revenue collected can potentially be used for basic needs of housing, healthcare, and education, among other things. This helps to increase the standard of living for the economy. Hence, all these effects collectively would lead to full employment, with stable inflation, and economic growth, which are all good objectives for the developing economy, but if pursued to its logical end, inflation could result once the developing economy enters developed status or if it hits the full employment level.

Increases in AD in a Developed Economy

However, a low and stable rate of unemployment should not be what governments should only aim for if the economy is a developed economy. A developed economy can be described as having its AD near or at the full employment level (Yf); developed economies are characterised as such as there is less spare capacity there, because, due to their low and stable rate of unemployment, developed economies are usually operating near to full employment (Yf) or even at full employment. The effects of a low and stable rate of unemployment would translate into an increase in the AD. Assuming an unchanged AS, an increase in the AD is undesirable. This is because the increase of AD results in an increase in the GPL. In such economies, such inflation would cause overheating in the economy as the GPL increases while real national output remains the same. An increase of the AD beyond a certain point would result in hyperinflation affecting the objective of price stability. Hyperinflation would cause increases in the prices of products, leading to the loss of the value of money.

Hyperinflation would also affect the aim of having a satisfactory balance of payments (BOP), for instance, a BOP surplus where there are more exports than imports. With higher prices, the export price competitiveness of the economy would fall as domestic goods are now more expensive relative to other economies. There would also be an increase in the amount of imports (M) as foreign goods are now cheaper. This would lead to more imports than exports. Though one can argue that the fall in the net exports (X – M) could be a corrective mechanism to bring AD down, it would not be applicable as developed economies tend to import more than export, generally due to their high incomes and wealth. Hence, if a low and stable rate of unemployment is the only aim of such economies, it would compromise other macroeconomic aims of price stability and having a healthy BOP. Therefore, a low and stable rate of unemployment should not be the only macroeconomic objective that governments of such economies should aim for.

Conclusions

In conclusion, whether a low and stable rate of unemployment should be what governments should only aim for would depend on the conditions of the economy in question, with developing countries possibly focusing more on employment. There are also other macroeconomic objectives that governments should also aim for, such as low inflation, economic growth, and a healthy BOP, and there seem to be trade-offs when focusing solely on one macroeconomic goal. A delicate balancing act should and must be maintained. In the final analysis, governments should aim for a set of macroeconomic aims rather than only having one aim. 

Junior College (JC) Economics Essays: Tutor's Comments - This Economics paper is part (b) of a two part question on unemployment in Singapore. It was written and contributed by TJL, an Economics teacher I knew from PGDE (JC) and National Institute of Education (NIE) times, and who is an excellent, motivated, and hardworking Economics tutor. However, having said that, as part of Socratic questioning and learning for the benefit of students - TEACHER'S QUESTION: putting yourself into the shoes of an Economics tutor, how would you improve on this essay? Reflect on the essay's structure, and reflect on how you would make this essay better, stronger, tighter, and more evaluative in the conclusion. Think about it. Think about it some more. Do remember to read Economics essays with a critical, probing, and intellectual mind, because you want to think of ways of how you can learn, study, and revise Economics, as well as improve on your essay writing skills and approaches to Economics examinations. Thanks for reading and cheers!

(a) Explain the likely types of unemployment in Singapore that could challenge sustainable growth. [10]

(a) Explain the likely types of unemployment in Singapore that could challenge sustainable growth. [10]

Introduction

What is unemployment? Unemployment is the situation when people willing and able to work are unable to find employment, with the most common types being structural unemployment, demand-deficient unemployment, frictional unemployment, and seasonal unemployment. This essay explains the likely types of unemployment in Singapore that could challenge sustainable economic growth. Unemployment in Singapore that could affect sustainable growth is likely to be brought about by the following major factors: changes in the underlying structure of the economy and cyclical factors.

Body of Essay

The first likely form of unemployment in Singapore that could challenge sustainable growth would be structural unemployment. Structural unemployment occurs when there is a mismatch of skills and knowledge. For instance, structural unemployment occurs when workers in sunset industries, with declining demand for their products, are unable to be reemployed in new, growth industries, with increasing demand for those new and probably high-tech products, due to a mismatch of skills, talents, and training for the new changed production structures. Also, for example, in Singapore in the 1980s, there was a shift from low-end production to higher-end production and this shift required workers to have the required higher level skills. As a result of the mismatch of skills required of workers to work in the new high-end production industries, structural unemployment occurred. Singapore often faces structural changes due to the dynamic changing needs of her economy, and the extent of structural unemployment depends on the adaptability of workers to adapt to these new needs.

The second form of unemployment that could challenge Singapore’s sustainable growth would be cyclical unemployment, also known as demand-deficient unemployment. This unemployment is linked to the business cycle, where downturns occur now and then, aggregate demand (AD) falls, causing unemployment, and a fall in actual economic growth. Actual economic growth can be thought of as an increase in real national income in a given period of time. In particular, due to the small size and relative openness of the Singapore economy, dependence on trade makes Singapore vulnerable to cyclical unemployment, economic recessions, and falling AD. This leads to unemployment because there would be a fall in the general price level, profit expectations would also fall, and producers would cut down on employment, resulting in more unemployed workers with fewer job vacancies available.

Falling AD of the Singapore Economy

The sustainable growth of the Singapore economy can be defined as a sustained increase in the real national output or real national income (real Y) over a period of time. Structural and demand-deficient unemployment affect the sustainable growth of the Singapore economy as they affect the sustained increase in Singapore’s national income. During periods of low economic activity and high unemployment, there will be a fall in the consumption (C), investment (I), and net exports (X-M) of an economy, shifting AD to the left. The fall in C is a result of the fall in the disposable income of the workers as a result of being unemployed. The fall in C, I and (X –M) would lead to a fall in the AD. Assuming that the Aggregate Supply (AS) curve is unchanged, the fall in AD would translate into a fall in real Y over the period. This fall in real Y over a period of time would challenge Singapore’s sustained growth.

Conclusions

In conclusion, structural and demand-deficient unemployment are the two main forms of unemployment which potentially challenge the sustainable growth of the Singapore economy, lowering the national income of the economy. There are also other forms of unemployment such as frictional unemployment or seasonal unemployment that would also occur in Singapore. However, such forms of unemployment would not affect the sustainable growth of the Singapore economy; as such both structural and demand-deficient unemployment are by far the biggest enemies to growth.

JC Economics Essays: Tutor's Comments - Special thanks to TJL for his kind contribution. TJL is a friend (fellow teacher) of mine I knew from National Institute of Education (NIE) days, and who later went on to become an excellent, outstanding Economics tutor at IJ after completing his PGDE. This Economics essay was written under examination conditions. In the earlier, past few posts, here on JC Economics Essays, I have given detailed comments about what was right, good, and great about the essays and gave my view, comments, and ideas. It's time for me to revert back to the older Socratic questioning style of earlier posts here on my site! TEACHER'S QUESTION: putting yourself into the shoes of an Economics tutor, and ignoring the provenance of this sample/ model /version of the answer given by a tutor - what grade would you give this Economics paper, and why? what are the good things that you can learn from this Economics paper, and what are bad things that you should not learn from this paper? also, how would you improve on this Economics paper? how else could you approach it? Do remember to ask questions, and read with a critical, yet open, constructive mind. Thanks for reading and cheers!

Discuss whether fiscal policy is the most effective way for Singapore to sustain a successful economy, with low unemployment, low inflation, and economic growth. [25]

Discuss whether fiscal policy is the most effective way for Singapore to sustain a successful economy, with low unemployment, low inflation, and economic growth. [25]

Introduction

This paper discusses if fiscal policy is the most effective way for Singapore to sustain a successful economy, where the idea of a “successful economy” is based on attaining the macroeconomic goals of generally low unemployment, low inflation, and economic growth. The means of attaining each of these desirable macroeconomic objectives may sometimes be at odds with other macroeconomic goals because of trade-offs. The most effective way for Singapore to sustain a successful economy is not to depend on one single macroeconomic policy; in particular, due to Singapore’s small and open economy, fiscal policy would go only a little way to help Singapore attain her macroeconomic goals, and a combination of exchange rate policy and supply-side policies would work more effectively instead.

Fiscal Policy Can Be Effective

First and foremost, it can be argued that fiscal policy could theoretically achieve the macroeconomic goals of low unemployment, low inflation, and economic growth. First, low unemployment can be achieved through the use of expansionary fiscal policy. What does expansionary fiscal policy mean? It  means increasing government spending (G) or lowering taxes (T), in times of high unemployment or recession. The discretionary expenditure by the government, for instance on the military or on education, would raise aggregate demand (AD) and drive up employment, due to the multiplier effect, thus resulting in a higher level of employment. AD shifts to the right and causes unemployment to fall. What is unemployment? Unemployment is defined as the situation in which people who are willing and able to work are unable to find employment. Secondly, likewise, stable actual economic growth can attained the same way, because expansionary fiscal policy can ensure that growth is maintained during recessions. Actual growth can be thought of as an increase in real national output. These implications are reflected in the diagram below.

Likewise, fiscal policy can be used to reduce inflation by contracting AD in times of high inflation in order to reduce inflationary pressures and control prices. This is the reverse of expansionary fiscal policy; contractionary fiscal policy can reduce AD in times of inflation. Inflation is defined as a persistent and inordinate increase in the general price level, and if it is demand-pull, contractionary fiscal policy reduces AD accordingly.

Limitations of Fiscal Policy

On the other hand, the way fiscal policy works in reality is different from theory because policymakers may not know exactly where the full employment level is in reality, and time lags, recognition lags, and implementation lags are all real. All the theoretical effects of fiscal policy also assume that the economy has a sufficiently large multiplier for the injections by the government to make large impacts on national income and employment. It also presupposes that the government’s budget does not suffer from massive deficits, and that fiscal policy would not result in the “crowding out effect”, when the government drives up interest rates, negatively affecting the private sector, when it attempts to finance policies through borrowing.

However, more importantly, while the Singapore government’s finances is such that it can potentially deliver a fiscal stimulus without financial or political problems, the fact that Singapore’s national multiplier is small implies that this would not have a great impact on growth or employment. The high level of imports and high proportion of savings in Singapore means that the multiplier effect would be small. Furthermore, fiscal policy seems most effective in reducing cyclical unemployment, associated with falling AD during a recession, and does not go a long way in relieving structural or frictional unemployment; as for inflation fiscal policy helps reduce demand-pull inflation and does not go a long way in alleviating cost-push inflation. Even if fiscal policy could generate employment, it is only in the short run, and unemployment will eventually return if it was actually due to structural unemployment, the mismatch of skills and knowledge in an economy due to structural changes in the methods of production, and hence such reductions in unemployment and the concomitant growth would not be sustainable.

Exchange Rate Policy

In order to sustain a successful economy, arguably a combination of fiscal, monetary and supply-side policies is required instead. In particular, monetary policy – in Singapore’s context, an exchange rate policy – would be able to affect AD during short-term economic fluctuations. It should be noted that interest rates-based monetary policy cannot be applied in Singapore as a result of Singapore’s vulnerability to short-term capital flows and thus an exchange rate policy has to be adopted in Singapore. As Singapore is dependent on imports, low inflation can be sustained instead through a gradual appreciation of the currency, because the imports would look relatively cheap vis-à-vis other countries. However, it should be noted also that this would affect exports negatively, on the flip-side.

On the other hand, depreciation can be used to increase AD, by raising demand for Singapore’s exports, since short-term depreciations of the Singapore dollar could help to raise competitiveness of Singapore’s exports and thus drive growth and generate employment. However, it should again be noted that this would affect inflation, on the flip-side. Hence, trade-offs are inevitable, although exchange rate policy is clearly a viable alternative.

Supply-Side Policies

As for long-term economic growth and stability, supply-side policies are necessary to sustain potential growth. Education and retraining of workers has to be implemented in order to maintain flexibility of labour and allow Singapore to cope with structural changes.

Furthermore, in terms of reducing unemployment, job fairs and placement or matching agencies could also help reduce frictional unemployment. Low domestic inflation can be maintained in the long run through continuous improvements in productivity and the enhancement of cost-competitiveness. The productive capacity of the economy must grow continuously in order for increases in AD to translate into sustained, non-inflationary, real economic growth in Singapore's national output; this increase in LRAS can be encouraged through fiscal spending that has supply-side effects such as investments in infrastructure and education, which would both affect AD and LRAS, leading to economic growth both actual and potential.

Conclusions

In conclusion, the application of fiscal policy is not an effective way for Singapore to sustain a successful economy that achieves its macroeconomic aims, thanks primarily to the small and open nature of the Singapore economy that gives rise to a small multiplier resulting from the high level of leakages due to high savings from CPF and high import contents in inputs. This reduces the impact that fiscal policy can have on the economy because the famous Keynesian multiplier effect is mitigated. The current managed float exchange rate policy that Singapore adopts is more significant in achieving short-term demand-management objectives. In the long-run, the government would sustain a successful economy through a combination of both demand-management and supply-side policies that enhance the long-term productivity and productive capacity of the economy, thus providing potential growth, whilst driving AD through actual growth, which reduces unemployment and spearheads economic development. Hence, fiscal policy is clearly not the most effective way – an economic policy package is better. 

JC Economics Essays: Tutor's Comments - This Economics paper is very well written, full of Economics perspectives, theories, concepts, and arguments. It also has good content on the Singapore economy. It covers the relevant Economics materials required and has an excellent thesis- anti-thesis - synthesis approach, that uses relevant examples that are contextual, real life, and related to the question. The conclusion presented and argued is clear, relevant, and evaluative in nature - do remember the important keyword here is "evaluative". The usual Economics tutor's caveat applies, of course, that naturally to get the highest grades, students must always remember to add Economics diagrams that are well-labelled, properly and carefully explained, and relevant to the context and question. This Economics essay under examination conditions can definitely get the highest marks in an examination. As a friendly, useful tip, do think through this particular Economics paper and reflect on these educational comments presented. Thanks for reading and cheers!

China's Economy: Discuss the implications of a revaluation of the Chinese yuan on Singapore’s economy. [25]

In recent years, economists worldwide argued that China should revalue her yuan, or shift away from her dollar peg, because her yuan (RMB) has been viewed as undervalued. (Year 2010-2012).

Discuss the implications of a revaluation of the Chinese yuan (RMB) on Singapore’s economy. [25]

Introduction

The Chinese yuan (reminbi, RMB) has long faced revaluation pressures with China’s mounting trade surpluses and developed countries’ claims of China dumping cheap goods on their markets, flooding their economies with low-priced goods “Made in China”. 

This paper argues that, as an increasingly dominant trading partner for Singapore, if China were to revalue the yuan, it would have a huge impact on Singapore’s economy. Revaluation, an increase in the value of the Chinese yuan, will impact the Singapore economy through imports from China, exports to China, and the concomitant effects on the balance of payments, and may thus impact Singapore’s economic growth and national income.

Imports: Imported Inflation

First and foremost, Singapore imports a large variety of goods from China, as Singapore relies on many Chinese intermediate goods as inputs for production of exports for her export sectors. As these are inputs or necessities needed in Singapore, the demand for these goods is relatively price inelastic, and thus the revaluation of the yuan, which makes Singapore’s imports from China more expensive, would likely raise Singapore’s import expenditure. 

Most importantly, because Singapore relies on Chinese inputs for production of both exports and also domestically consumed goods, a revaluation of the yuan would result in imported inflation in Singapore, as the prices of domestic goods will rise to account for the rising costs of production due to the increased costs of raw materials in terms of Singapore Dollars. 

Inflation is defined as a persistent and sustained increase in the general price level, and can be divided into demand-pull and cost-push inflation. In this case, cost-push inflation in terms of imported inflation would result from a revaluation of the yuan.

Exports: Earning?

However, on the other hand, Singapore’s exports to China would increase due to a revaluation of the yuan, ceteris paribus. A revaluation of the yuan, without any corresponding rise in the value of the Singapore dollar to offset the relative effect, would result in Singapore’s exports to China appearing cheaper in yuan. With the growing middle class in China and their rising disposable income, consumption of imports is rising in China, and Singapore can benefit from this boom. 

Yet, it has to be argued that the problem is that Singapore depends heavily on imported inputs, being a small and open economy, and as such it is likely that the increased exports to China would be less than the increased costs of imports, which are often needed to produce output in Singapore. This results in a catch-22, because the inflation from the imported inputs, which makes Singapore’s exports more expensive, would counter the relative price effects of the revalued yuan.    

Balance of Payments: Trade Deficit?

Therefore, the revaluation of the yuan would worsen Singapore’s balance of payments, possibly causing a growing trade deficit with China, thus hampering the Singapore government’s goal of a healthy balance of payments surplus. 

The balance of payments refers to the accounting record of all monetary transactions between a country and the rest of the world, and can be classified into the different components of the current account, capital account, financial account, and (statistical) balancing item. There could be a trade deficit for Singapore if (X-M) falls.

Damage to Singapore’s National Income and Growth

Furthermore, as China is one of Singapore’s emerging exporting market and increasingly important trade partner, given Singapore’s economy as one being driven by trade, the revaluation of the yuan can affect Singapore’s national income adversely. Economic growth can be thought of as increases in the Gross Domestic Product (GDP) of a country, and can be classified into potential and actual growth. 

First, potential growth could be hampered due to the rising input costs from goods we buy from China from Singapore’s perspective. Although potentially Singapore’s actual growth might improve if AD goes up due to rising X, this could be offset by long term damage to our potential growth. 

Furthermore, if Singapore’s exports are affected because unit costs have risen due to imported inflation because Singapore uses foreign inputs to produce exports, as argued earlier, then X might fall in the long run, and also cause actual growth to slow down. Hence, potentially a rise in the yuan could potentially and possibly lead to both lack of potential and actual growth for Singapore’s economy. Thus, while export revenue might increase in the short term, as Singapore is small and open, the higher costs of imported inputs from China would have detrimental effects and as such, the revaluation of the yuan has largely negative implications on Singapore’s BOP.

Policies and Conclusions

Since the export sector of (X-M) takes up a huge proportion of Singapore’s national income because Singapore is a open and small economy, falling net export revenue from China can potentially reduce Singapore’s rate of growth by shifting her AD to the left, unless this is cushioned by rising export revenues with other trading partners, like the USA and the European Union. 

However, that seems unlikely in the intermediate term given the global financial crisis and recent Eurozone crises and the concomitant recessions worldwide. Fortunately, as long as the Monetary Authority of Singapore allows an appreciation of SGD, ahead of the revalued yuan, the adverse impact of the revaluation on Singapore’s economy would likely be minimal. Singapore pursues an exchange rate policy using a managed float exchange rate system in place of a “standard monetary policy”. A strong Singapore Dollar keeps imported inflation low by maintaining the low cost of her imports. 

In conclusion, the implications of a revaluation of the yuan on the Singapore economy are most likely negative overall, but Singapore has the appropriate policy tools in exchange rates and monetary policy to manage and mitigate these impacts and will use them if need be. Hence, to a large extent, the discretionary powers of the MAS would be useful in mitigating the effects of a revaluation in the yuan. 

Junior College Economics Essay: Tutor's Comments - This Economics paper was written and contributed by a Chinese student from China. This Economics essay has to be praised: first of all, it was composed and written under H2 JC Economics examination conditions; second of all, the language is good, refined, and proper; third, the content knowledge is there, and there is wide understanding of both the Singapore and the Chinese economies. There is good application of economics knowledge and concepts, and there are also empirical evidence and current affairs discussions. As an Economics tutor, this is one of the best Economics exam pieces that I have seen by a Chinese student, and it goes to show that when students work hard, study hard, and try their best, they can achieve, grow, learn, and develop rapidly. If they want to, they can put their heart into learning and studying Economics. As usual, do think of how you can improve upon this work and how you would approach this essay. Maybe, try to write out the answer without referring to this sterling Economics essay? It has also to be admitted that this Economics paper is (of course) not perfect: What other economics concepts, theories, and knowledge could you bring in to make the discussion richer? Thanks for reading and cheers. 

Discuss the extent to which globalisation has helped Singapore achieve its macroeconomic objectives. [25]

Discuss the extent to which globalisation has helped Singapore achieve its macroeconomic objectives. [25]

This paper discusses the extent to which globalisation has helped Singapore achieve its macroeconomic objectives. Globalisation refers to the integration of economies through greater flows of trade, capital, labour, and technology across international borders. Singapore’s four main macroeconomic objectives are high and stable economic growth, a low inflation rate, low unemployment, and a favourable balance of payments (BOP). To a large extent, globalisation has helped Singapore achieve its macroeconomic objectives; however, globalisation brings with it downsides which have to be properly mitigated.

Economic Growth

First, globalisation has helped Singapore attain actual economic growth through increased international trade. Actual growth means an actual increase in real Gross Domestic Product (GDP), a shift in Aggregate Demand (AD) to the right. An increase in net exports (X-M) to the rest of the world raises AD, which in turn leads to a more than proportionate increase in GDP via the multiplier effect. Singapore has relied heavily on exports for economic growth. In fact, net exports make up the largest component of Singapore’s GDP. Increasing actual growth also helps Singapore achieve full employment, or alternatively low unemployment.

Second, large amounts of foreign direct investment (FDI) have helped Singapore achieve potential economic growth. Potential growth is the increase in the economy’s potential capability to produce output. Transfers of physical capital, human capital, and technology from Multi-National Corporations (MNCs) have helped increase the Singapore economy’s productive capacity, and thus shifts Singapore’s long-run Aggregate Supply (LRAS) curve to the right, increasing her potential economic growth.

Third, Singapore has also benefited from increased labour flows across international borders. Importing foreign labour leads to an increase in Singapore’s labour which raises the economy’s productive capacity. This is a relatively efficient and cost-effective way of increasing potential growth.

Low Inflation

Fourth, globalisation has helped Singapore keep inflation low. Inflation is defined as a persistent and sustained increase in the general price level, and it is generally seen as a problem. By importing raw materials from other countries at low prices, Singapore has been able to lower her costs of production which translates to lower prices for final products. Importing necessities and other finished products helps keep the general price level down. Also, globalisation increases the Singapore economy’s productive capacity which lowers prices. This is reflected by a rightward shift of the Long Run Aggregate Supply (LRAS) curve, which increases Singapore’s productive capacity in the long run, and concomitantly lowers prices and prevents cost-push inflation.

Low Unemployment

Fifth, globalisation helps to keep Singapore’s unemployment low. Increased export levels shifts AD to the right which in turn leads to higher equilibrium national output. This means that actual growth occurs, which shifts AD towards the full employment level, which lowers unemployment.

BOP

Finally, Singapore is able to have a positive net-export position by importing cheaper raw materials from abroad and exporting high value-added products. For example, Singapore imports crude oil from abroad, refines the oil, and then exports it to different countries. Because the value of Singapore’s exports exceeds the value of her imports, she has a current account surplus, which could translate into a BOP surplus, assuming the deficit in the financial or current accounts are not huge.

Downsides of Globalisation

Yet, despite all its apparent benefits, globalisation has some downsides which could possibly derail Singapore’s macroeconomic aims.

First, Singapore’s dependence on exports makes her vulnerable to negative economic conditions in other countries. If one of Singapore’s trading partners were to experience a recession, demand for her exports would fall. This reduces AD which leads to lower equilibrium national output. Thus, the Singapore economy is susceptible to demand shocks. For example, Singapore’s GDP decreased during the financial crisis of 2007/2008. Thus, while globalisation might confer growth, it also means that same growth could potentially be more volatile.

Second, while globalisation gives Singapore a bigger market for her exports, it also means that she could face more competition. Developing countries, like China, are catching up quickly. Singapore has already lost her comparative advantage in low- to medium-end manufacturing to rapidly industrialising countries. If exports decrease due to competition from low-cost countries, it will result in a fall in AD, which would lead to a drop in output. Over the years, Singapore has had to move up to higher value-added goods and services like biomedical or financial services in order to remain competitive.

Third, increases in Singapore’s productive capacity brought about by globalisation might not be permanent because she is highly reliant on MNCs which are by nature internationally mobile. They could shift operations to a lower-cost location, taking capital with them. There is also no guarantee that Singapore’s “foreign talent” will stay in the country for the long term. Furthermore, importing foreigners to increase Singapore’s labour is also unsustainable in the long term given Singapore’s small land size because the influx of foreigners, perceived to be competing with Singaporeans for jobs and space, has become a major source of political and social discontentment and political acceptability is a major issue. Thus, potential growth might be illusory and fraught with many potential political perils.

Fourth, if the Singapore economy is already operating at or near full employment, then a rise in AD due to increased exports could possibly and realistically lead to demand-pull inflation. Singapore’s persistently low unemployment rate suggests that her economy is operating at close to full employment already. Thus, inflation could be a potential problem.

Fifth, importing raw materials from abroad also leaves Singapore vulnerable to cost-push inflation, more specially imported inflation. For example, Singapore was affected by the rise in oil prices due to political uprisings in the Middle East. Hence, Singapore is vulnerable to supply shocks.   

Sixth, should Singapore lose export competitiveness, (X-M) will become negative which would mean a current account deficit and a likely BOP deficit. Weak demand for exports would result in a depreciation of the Singapore dollar which would increase the price of imports. A depreciation of the Singapore dollar is likely to be inflationary given Singapore’s dependence on imported raw materials, and because it becomes more expensive to buy imported inputs which Singapore needs to produce goods. A deficit in the BOP also means a decline in the country’s foreign reserves which means that if Singapore has few foreign reserves, her currency will be vulnerable to speculative attacks.

Seventh, globalisation could also potentially be harmful for employment. Singapore’s heavy reliance on exports means that she will experience high cyclical unemployment should her major trading partners enter recessions. Perhaps, even more worrying is the increase in structural unemployment because lower-skilled workers could find their jobs being outsourced. Even if their work cannot be easily shifted abroad, they face competition from foreign workers willing to work longer hours and at lower wages. Concomitantly, there is a shortage of workers able to take on high-skilled jobs created by the global economy. As such, Singapore has had to import “foreign talent” to fill this gap. Therefore there are many negative implications for the labour market.

Conclusions

In the final analysis, despite many drawbacks, globalisation has been largely beneficial for Singapore. This is mainly due to the way in which the government has managed to tap into opportunities offered by a globalised world. For example, by providing necessary infrastructure, low tax rates, and a highly-skilled workforce, the government created conditions conducive for international trade and economic growth. At the same time, the government has been able to mitigate some of globalisation’s downsides through her economic policies. Singapore could and does use exchange rate policy. The Monetary Authority of Singapore (MAS) has the discretion to allow the Singapore dollar to appreciate in order to mitigate the inflationary effect of rising prices. Hence, to a large extent, globalisation has helped Singapore achieve its macroeconomic objectives; however, globalisation also brings with it several downsides which have to be properly managed.

JC Economics Essays: Tutor's Comments - This paper was modified and amended from one of the Economics essays written by my friend and classmate from NIE (National Institute of Education). After NIE, he became an Economics tutor at Raffles Institution (the JC section). [Special thanks and acknowledgements to my classmate's contribution.] This Economics essay is about globalisation and the impacts on Singapore's macroeconomic goals and aims; it also discussed policy options and methods to tackle impacts. There are many other globalisation and Singapore economy Economics questions and answers on my site here; do take your time here to explore and read, review, and study the other questions and answers. Compare and contrast them; think through them as well. Alright, here it is time to do the usual tutor's exercise once again: imagining that you are an Economics tutor, examining and marking this paper, what would you look out for? What would you consider a valid, reasonable, nuanced, and balanced argument or point? As an Economics tutor, how would you grade this paper, and why? Thinking through these processes will help you in writing better and better Economics essays, and improve your understanding and knowledge of this interesting and exciting subject. Thanks for reading and cheers!

“Governments should focus primarily on a low and stable rate of inflation.” Discuss. [15]

(b) “Governments should focus primarily on a low and stable rate of inflation.” Discuss. [15]

This essay discusses the macroeconomic aims of governments. This essay argues that, while low inflation is an important macroeconomic aim, governments should also focus equally on other macroeconomic aims such as low unemployment, economic growth, and a stable balance of payments. There are a few types of policies that governments can use to achieve their aims. First, monetary policy is the manipulation of monetary variables such as money supply, interest rate and the exchange rate. Second, fiscal policy refers to the use of government spending and taxation to achieve macroeconomic objectives. However, other than such demand-side policies, governments can also use supply-side policies, which increase the quantity and quality of resources, and improving technology.

Targeting Inflation

First and foremost, clearly there are good reasons for governments to use demand-management or supply-side policies to tackle inflation. This is because a persistent and sustained increase in the general price level hurts fixed-income wage earners and retirees on pensions, as well as consumers of goods and services, who find that their incomes buy fewer goods and services. Inflation reduces the real value of their incomes. In addition, inflation makes it difficult for trading and exchanges within an economy, for instance due to menu costs – the costs of constantly updating prices. Furthermore, inflation makes it difficult for a country to engage in international trade. This is because cost-push inflation reduces the competitiveness of a country that depends on exports, for instance, Singapore, which might suffer from imported inflation. These culminate in a wider socio-political impact: for instance, the hyperinflation in Weimar Germany in 1923 led to socio-political unrest and the collapse of the Weimar government.

Targeting Unemployment

Yet, inflation is not the main goal or the only focus of government policies. Another important goal of government can be to increase employment, or lower unemployment. Unemployment refers to the situation where people able and willing to work are unable to find jobs, and can be structural, demand-deficient, frictional, or seasonal. Being unemployed causes financial hardships for citizens, therefore governments have to ensure that there is job creation for citizens. For example, during 2008-2010, in the depths of the financial crisis and economic recession, there was massive unemployment in many developed economies, especially in the West. Governments can also tackle structural, frictional, and seasonal unemployment by focusing on these problems rather than concentrating their efforts on inflation.

In fact, reducing inflation sometimes leads to increased unemployment. This is because if the inflation comes from demand pressures, policies that lower AD might inadvertently cause demand-deficient unemployment. In a similar vein, focusing on solving unemployment might lead to higher inflation. This is because of government failure – governments do not always know where the AD and AS curves of the economy are, and their actions suffer from time lags and delays, due to imperfect information. If governments use demand side policies such as Keynesian fiscal policy, and the economy is near the full employment level, then an overshooting AD might lead to inflation. Therefore, there is a trade-off between inflation and unemployment.

Targeting Economic Growth

Another goal of government can be to raise economic growth, which leads to a rise of the standards of living in a country, which will generally make citizens better off. Economic growth is measured by percentage increases in real Gross Domestic Product (GDP), which measures the production of an economy. Generally, a higher real GDP per capita means a higher standard of living for the people of that country. There are two aspects to growth: actual growth measures the rate of change in the volume of output produced within the country in a year, and increases mean increased employment, another of the government’s goals. Potential growth is the percentage annual increase in the economy’s capacity to produce. Economic growth can be increased via increasing aggregate demand and increasing aggregate supply. Thus, the government may introduce demand management policies, such as monetary and fiscal policy, as well as supply-side policies in order to aid actual and potential economic growth respectively. Supply-side policies generally lower inflation by shifting LRAS to the right, and therefore it would seem that there is no trade-off.

However, increasing actual economic growth sometimes results in more inflation, because the AD shifts rightwards, and there might be a trade-off to be made between economic growth and a low rate of inflation; higher rates of economic growth are generally accompanied by higher rates of inflation, ceteris paribus.

Targeting the BOP

Another possible macroeconomic aim of government is to maintain a balance of payments (BOP) surplus. Generally, some governments like Singapore run BOP surpluses for most years, where export values exceed import values. For example, Asian countries such as China have been running huge BOP surpluses, vis-à-vis their trading counterparts, mainly western countries; they have been selling more exports than imports they buy, and this provides a net inflow of capital into their countries rather than an outflow.

However, running a current account surplus might lead to demand-pull inflation because exports (X) exceed imports (M), if the economy is already near or at the full employment level. Therefore there is a trade-off decision to be made between a current account surplus and demand-pull inflation.

Conclusions

In conclusion, one disagrees with the statement posed. All the macroeconomic aims of government are important and the government has to maintain a balancing act, considering various trade-offs. Also, governments may have to tackle different problems at different time periods, and thus inflation should not be the primary focus. In the final analysis, governments should use a combination of demand-management and supply-side policies to manage society’s macroeconomic aims, and not merely focus primarily on inflation, because it is one problem among many.

JC Economics Essay - Tutor's Comments: This is the second part to a question on inflation. There are many relevant real life examples in this essay, and this "A" grade essay also tackles a wide range of macroeconomic aims and  policies, which makes it a balanced, sound, and well-written Economics paper. In addition, the conclusion is considered, evaluative, and generally quite interesting to read. Overall, it is very well done! However, the usual question applies: if you were an Economics tutor, what would you do to make this Economics paper better? How would you improve on it? To take a specific case: if you were going to edit or correct the conclusion, what better conclusion, or what alternative conclusion to this Economics essay could you come up with? Think, think, think; thanks for reading and cheers!