Economic Growth Flashcards
(142 cards)
1
Q
What is Economic Growth?
A
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
2
Q
What is Actual Economic Growth?
A
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
3
Q
What is formula for rate of actual economic growth?
A
[(Year 2 Real GDP - Year 1 Real GDP) /Year 1 Real GDP] x 100%
4
Q
What is the formula for Real GDP?
A
Real GDP = Nominal GDP x (Base Year Price Index/Current Year Price Index)
5
Q
How is Actual Economic Growth Represented by the PPC?
A
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
6
Q
What is Potential Economic Growth?
A
Potential Economic Growth is the rate of growth of potential output, which is the output that could be produced with full employment of resources.
7
Q
How can Potential Economic Growth be caused?
A
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
8
Q
What is Sustained Economic Growth?
A
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
9
Q
What is Sustainable Growth?
A
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
10
Q
What is Inclusive Growth?
A
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.
11
Q
What are the undesirable rates of economic growth?
A
i) Negative economic growth
ii) low economic growth
iii) economic growth rates that are either unsustainable and/or
iv) not inclusive
12
Q
What is a recession?
A
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.
13
Q
What are the two main causes of negative economic growth?
A
i) Decrease in Aggregate Demand (AD)
ii) Decrease in Aggregate Supply (AS)
14
Q
What is the Adjustment Process of decrease in AD?
A
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
15
Q
What is Slow Economic Growth?
A
Slow economic growth occurs when the economy is experiencing POSITIVE but LOW rates of growth of between 0 to 2.5%.
16
Q
What are the benefits of economic growth?
A
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
17
Q
What leads to higher income per capita?
A
When economic growth exceeds population growth
18
Q
How does Economic Growth improve SOL?
A
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
19
Q
How does economic growth impact productive capacity?
A
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
20
Q
How does Economic growth result in easier re-distribution of income?
A
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
21
Q
What are the costs of Economic Growth?
A
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
22
Q
How does economic growth result in deletion of non-renewable resources?
A
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
23
Q
What is Fiscal Policy?
A
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.
24
Q
What are the various ways a government can increase its revenue?
A
-Taxes
-Non-tax revenue
-Borrowings
-Foreign aid or grants
25
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
26
What are Indirect Taxes?
Indirect taxes are taxes paid by the taxpayer indirectly to the government. GST is an example of indirect taxes.
27
What are the purposes of taxation?
a) To raise revenue for the govt to finance its expenditures
b) To achieve macroeconomic objectives
28
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
29
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.
30
What is Proportional Tax?
A proportional tax is one, which removes an equal portion of one's income as income rises.
31
What is Regressive Taxation?
A regressive tax is one, which removes a smaller proportion of income as incomes rise.
32
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
33
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
34
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
35
What are the different forms of government expenditure?
-Exhaustive expenditure
-Current or ordinary expenditure and development expenditure
-Transfer payments
36
What is Exhaustive expenditure?
Exhaustive expenditure are payments in return for goods and services (included as part of AD in the form of G)
37
What is current or ordinary expenditure?
Expenditure in the day to day workings of the government
38
What is development expenditure?
spending on public investments
39
What are Transfer Payments?
payments made where no current factor service is rendered
40
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.
41
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)
42
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.
42
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]
43
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.
44
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
45
What are the different time lags?
-Recognition lag
-Implementation lag
-Impact lag
46
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.
47
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.
48
What are the main tools of monetary policy used by Central Banks?
-Interest rates
-Exchange rates
-Money supply/Monetary base
49
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.
50
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
51
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.
52
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
53
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.
54
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.
55
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.
56
What are the external effects of Monetary policy?
Fall in interest rates -> outflow of hot money in search of higher interests in other countries -> increase in supply of currency in forex market -> depreciation of exchange rate -> export become cheaper in foreign currency terms. Imports will be more expensive in local currency terms -> lead to fall in Qd of imports -> increase in X and decrease in M -> (X-M) will then increase
57
What are the internal effects of Monetary Policy?
-Lower interest rates -> reduces cost of borrowing -> encourage consumption
-Lower interest rates -> lower returns to savings -> lower opportunity cost of spending -> consumers will be more willing to spend
-Lower interest rates -> lowers cost of borrowing -> investments likely to be more profitable -> encourage increase in investments
58
What is the adjustment process for both Fiscal and Monetary policy?
Assuming the economy is not at full capacity,
firms will employ more factors of production to
increase production of output, which increases
RNY from Y1 to Y2. This causes an increase
in national income, which will increase income
induced consumption and result in a further
increase in AD.
This triggers successive rounds of increases
in national income and income induced
consumption. At each round, the increase in
both gets smaller. The multiplier process will
end when the increase in national income is
too small to generate further increase in
induced consumption.
Thus, the autonomous increase in AD from
AD1 to AD2 results in a multiplied increase in
RNY from Y1 to Y5
59
What happens when Consumer and Investor confidence is low?
-Consumption and investment are likely to be interest insensitive (or inelastic) during severe economic downturn as firms and households are unlikely to borrow when the economic outlook is very poor
-Cutting interest rates may not lead to economic growth.
Low confidence -> people may not want to invest or spend despite low interest rates -> Expansionary monetary policy may fail
60
How does liquidity trap affect monetary policy?
Since interest rates do not fall further, conventional monetary policy does not stimulate C and I and thus, AD. Thus, monetary policy loses its expansionary effect.
61
What is an Asset Bubble?
An asset bubble occurs when the market price of an asset exceeds its rightful price.
Lower interest rates -> reduces cost of borrowing -> boosts investment spending -> investors invest in various types of assets -> spiking asset prices
Accelerated increase in asset prices attracts many to borrow and invest. However, when the asset prices eventually falls when the bubble bursts, huge losses and high debts incur, leading to serious recessionary pressures and economic hardship
62
What are the impacts of rising asset prices on firms and consumers?
Rising property prices impacts the affordability of housing and operating costs of firms which also has social and economic implications
63
What is the exchange rate policy?
The exchange rate policy is a form of monetary policy where the government intervenes by manipulating the exchange rate of its currency to achieve macroeconomic objectives.
It is often done to promote price stability as a sound basis for sustainable economic growth.
64
What is Exchange rate?
Exchange rate refers to the value of one currency in terms of another currency
65
What is Nominal Exchange Rate?
Nominal Exchange Rate of a currency is the exchange rate based on the nominal value of the currency, before making adjustment to price changes.
66
Note: The demand of a country's currency is generated from international transactions that requires buying of a country's currency.
67
What are the sources of demand for a currency?
1. Demand for a country’s exports – rise in international tourism in a country
2. Long term investments inflow – inflow of foreign direct investment (FDI)
and portfolio investments into the country
3. Short term investments inflow – inflow of short-term investments due to
anticipation of profits, possibly from high interest rates or anticipated
exchange rate changes (this is also known as “hot money inflow”)
4. Official buying of the currency by the domestic central bank
68
Note: Assuming no government intervention, a rise in the demand for the currency will cause an appreciation in the currency; and a decrease in the demand for the currency will cause a depreciation in the currency, ceteris paribus.
69
Note: The supply of a country's currency is generated from international transactions that requires sales of a country's currency
70
What are the sources of supply for a currency?
Sources of supply for a currency
1. Demand for imports – buying products from US Amazon
2. Long term investments outflow – outflow of direct investment and portfolio
investments into other countries
3. Short term investments outflow – outflow of short-term investments due
to anticipation of profits overseas, possibly from high interest rates or
anticipated exchange rate changes (this is also known as “hot money
outflow”)
4. Official selling of the currency by domestic central bank
71
Note: Assuming no government intervention, an increase in the supply of currency will result in a depreciation in the currency’s value, ceteris paribus; and a decrease in the supply of currency will result in an appreciation in the currency’s value, ceteris paribus.
72
What are the possible factors that may affect Singapore's exchange rate?
a) Changes in Current account
-Rise in income of trading partners
-Large current account deficit
-Relative inflation rates
b) Capital movement
i) Short term capital movement
-The level of interest rates
-Expectations of movements in exchange rates
ii) Long-term capital movement
c) Confidence factor
73
What are the three types of Exchange rate regimes?
-Free floating exchange rate regimes
-Fixed exchange rate regime
-Managed float exchange rate regime
74
How can speculator's expectations be influenced?
-Inflation expectations
-Expected changes in government policy
75
Note: if more capital moves into Singapore than out of it, the exchange
rate of the SGD would strengthen. If capital outflow exceeds inflow, the
exchange rate of the SGD would weaken.
76
What is a Free-Floating exchange rate regime?
A free-floating exchange rate regime is one whereby the exchange rate is determined solely by the interaction of demand and supply of the currency in the Foreign exchange market.
77
What is the Fixed exchange rate regime?
A fixed exchange regime is one whereby the exchange rate is fixed by the central bank.
78
What is a managed float exchange rate regime?
A managed float is one where the exchange rate is free to float within a prescribed band, but the central bank would intervene when the exchange rate exceeds the range
79
What is Devaluation/Revaluation?
Devaluation occurs if a nation operating a fixed exchange rate reduces the external price of its currency
On the other hand, Revaluation would mean that the external price
of its currency is increased by the central bank.
80
What is Depreciation/Appreciation?
Depreciation occurs when a nation operating on a freely floating or managed floating exchange rate system allows the external value of its currency to fall due to MARKET FORCES
The opposite occurs for appreciation
81
Note: Devaluation and revaluation applies to GOVERNMENT INTERVENTION while appreciation and depreciation applies to FREE MARKET INTERACTIONS
82
Note: Exchange rate policy can only be used by countries that adopt the FIXED EXCHANGE RATE or the MANAGED FLOAT SYSTEM and NOT the free float system
83
Note: exchange rate policy, like Fiscal and Interest rate centred Monetary Policy, are usually DEMAND MANAGEMENT policies. Hence, it is most effective at helping to sustain actual economic growth
84
How does achieving economic growth via depreciation result in cost-push inflation?
For countries that are dependent on imports as FOP, depreciation results in a higher price of these raw materials in domestic currency. Hence, with a higher COP, to maintain profits -> each level of output would be sold at a higher GPL -> higher costs passed onto consumers as higher prices -> fall in SRAS -> driving GPL upwards.
Hence depreciation to achieve actual growth could result in cost push inflation and conflict with the macroeconomic aim of price stability
85
86
Note: exchange rate policy is largely only able to achieve sustained growth. It needs to be complemented with other policies to make this growth sustainable and inclusive
In terms of achieving sustained economic growth, exchange rate policies are usually more appropriate for small and open economies like Singapore and Hong Kong because they are more exposed to external uncertainties. Therefore, for most large and less open countries, the default monetary policy tend to be interest rate policy.
87
Why would Singapore's monetary policy be exchange rate policy rather than other tools?
It is mainly influenced by Singapore's SMALL SIZE, HIGH DEGREE OF OPENNESS TO TRADE and CAPITAL FLOWS. The primary objective of monetary policy in Singapore is to PROMOTE PRICE STABILITY AS A SOUND BASIS FOR SUSTAINED ECONOMIC GROWTH
88
What are the reasons for Singapore's choice of exchange rate policy over interest rate policy?
a) Small size and openness to trade
b) Openness to capital flow as a small open economy
c) Open economy Trilemma
89
Note: given Singapore's small size, it DOES NOT influence world prices, and is a PRICE TAKER. As a result, the exchange rate directly affects the prices we pay
90
Why is it important for Singapore to control exchange rates?
It is important to control exchange rates to manage the import prices in domestic currency, a significant factor DETERMINING PRICE STABILITY in Singapore.
This is because Singapore is heavily dependent on imported FOP for production and imported goods and services for consumption. Hence, smaller domestic demand influence (as compared to external demand)
91
What is the Open-Economy Trilemma?
An economy cannot simultaneously:
i) Manipulate exchange rate;
ii) have free capital mobility; and
iii) control interest rate
91
Note: increased money supply will result in lower interest rates
92
Note:
-MAS tends to maintain a MODEST AND GRADUAL APPRECIATION as a general stance when the economy experiences economic growth
-However, during economic uncertainties, where economic growth is negative, he MAS flattens out or eases the exchange rate band to ACHIEVE A NEUTRAL POLICY STANCE, which is also known as a ZERO APPRECIATION STANCE
93
Note:
-Due to free capital mobility -> effect of hot money flows on money supply will be substantial.
-Small changes in difference between domestic and foreign interest rates -> large and quick movements of capital in and out of the economy
94
Why is mirroring domestic interest rate to foreign interest rates good for Singapore?
It will avoid large fluctuations in hot money, keeping the exchange rates stable
95
How does Singapore's exchange rate system mitigate volatility of international foreign exchange markets?
SGs exchange rate is managed against a trade weighted basket of currencies of SGs major trading partners and competitors
96
What are Supply Side Policies?
Supply side policies focus on influencing the AS to lower unit COP and increase SRAS and/or increase productive capacity and increase LRAS. While the reduction in costs and increase in SRAS helps to achieve ACTUAL ECONOMIC GROWTH, this increases the long-term productive capacity of an economy and helps achieve potential economic growth.
97
Note: Supply side policies can be used to help reduce inflation by increasing flexibility and competition in the labour market and increasing productivity of firms and workers
98
What can supply side policies be categorised into?
i) Market-oriented; and
ii) Interventionist supply side policies
99
What are Market-oriented supply side policies?
Market-oriented supply side policies are aimed at freeing up the market in the belief that market forces always result in efficient allocation of resources.
100
What is Privatisation?
Privatisation involves the transfer of government owned enterprises to the private sector
101
Why should nationalised firms be privatised?
Privatisation can lead to:
-increased efficiency
-provide more incentives to management and employments
-introduce flexibility necessary in a rapid changing world
102
PRIVATISATION
note:
IN THE SHORT RUN:
when faced with greater market competition -> firms engage in extensive cost controls -> increase in SRAS -> support actual economic growth and price stability in SG
IN THE LONG RUN:
-freed up resources channeled into more productive uses -> rise in private investments -> plays a role in capital stock accumulation or further improving quality of resources -> increase in LRAS-> create potential economic growth.
-It will also increase AD through an increase in investments
103
What is Deregulation?
Deregulation eliminates artificial, legal barriers into an industry, and red tape in all sectors of the economy
104
How does deregulating industries encourage more competition?
Deregulating industries encourages more competition by removing artificial, legal barriers into an industry, and eliminating red tape in all sectors of the economy.
105
DEREGULATION
note:
IN THE SHORT RUN:
markets are made more competitive -> firms obliged to be more dynamic efficient -> reduction costs -> increase SRAS -> support actual economic growth and price stability in SG
IN THE LONG RUN:
-more new firms will be entering deregulated markets -> rise in private investments, playing a role in capital stock accumulation or further improving quality of resources -> increase in LRAS -> creating potential growth
-It will also increase AD through an increase in investments
106
What are labour market reforms?
Labour market reforms seek to make labour markets more flexible as well as to increase the quality and quantity of labour supply
107
What happens when trade union power is reduced?
Reduction of union power keeps wage costs low as some militant unions can demand for excessive wage increases which results in high COP for firms
108
What is Tripartism?
It is when the unions, employers and the Government collaborate
109
What are the two methods of Labour market reforms? (Market oriented SS policies)
-Reducing trade union power
-reduce restrictions in labour flows
110
How do you reduce restrictions in labour flows?
This involves reducing barriers to migration and encouraging inflow of human capital
111
Why would the government Privatise a company?
Because a large government sector may be more bureaucratic and less efficient than the private sector. This is because governments do not aim to achieve profit
maximisation, and therefore may not be concerned about lowering costs
through efficient use of resources.
112
How does Deregulation affect existing firms?
The removal of barriers to entering a market creates contestable markets. New firms can easily enter and compete with existing firms, which can increase industry output levels, and at the same time forcing existing firms to improve their efficiency, quality and prices
113
What is encouragement of enterprise culture?
This involves encouraging people and organisations to perceive opportunities and take risks in pursuing them. Having an enterprise culture makes innovation possible.
114
Why is encouragement of enterprise culture important?
Having an enterprise culture makes innovation possible -> spurring more startups -> contributing to a rise in domestic investments -> play a role in capital stock accumulation or further improving quality of resources -> increase in LRAS, creating potential growth
115
Why is reducing restrictions in labour flow important?
reducing barriers to migration and encouraging inflow of human capital -> increase supply of labour in SG -> increase quantity of resources -> expansion of LRAS and potential growth
116
What are Tax Reforms?
Tax reforms involves reducing taxes or provision of tax incentives, which creates incentives to work and invest
117
What is Capital formation?
With lowered corporate taxes, firms can allocate freed up available resources into production of capital goods
118
Why are tax reforms beneficial ?
Lowered corporate taxes -> firms can allocate freed up available resources into production of capital goods -> rise in investments -> increase AD in addition to any possible supply side effects
Reduction in corporate taxes -> increase investment flows into an economy -> play a role in capital stock accumulation or further improving quality of resources -> increase in LRAS, creating potential growth
119
What are Interventionist Supply Side policies?
Interventionist supply side policies aim to increase the AS by government interference to counteract the deficiencies of the market
120
Why is investment in education important?
Government investment into education -> increase future labour productivity -> future labour output rise given fixed amount of resources and time -> firms will face lower wage and production costs -> SRAS rise
Rise in quality of future labour force -> boosts LRAS
Other than its role in sustaining growth into the future, education has the ability to reduce income gap and intergenerational inequality, making the growth more inclusive
121
What is Investments in continuous education and training
Continuous education and training target the existing labour force and the unemployed
122
What are the various Interventionist Supply Side Policies?
-Labour Market Reforms
-Provision of Industry support
-Investment in new technology
-Direct provision of infrastructure
-Nationalisation
123
What are the other types of supply side policies? (pg 58)
Market Oriented:
-Removal of unemployment benefits
Interventionist:
-Wage Subsidies
-Increase working participation age
-Rationalisation
-Advice and persuasion
-Provision of Information
-National economic planning
124
Why is investment in continuous education and training important?
Through quality training -> allows labour to move to other places and jobs -> boosts labour supply in markets with labour shortages -> wages fall -> reduce wage costs in firms -> reduce production costs -> boost SRAS -> positively impact output and prices
Quality training also helps the existing labour force to become more
geographically and occupationally mobile. Increasing labour mobility allows
labour to quickly transit into new industries as economic circumstances
change, supporting economic growth during economic uncertainties. Also, if
lower skilled labour to transit into middle or higher skill labour markets, which
generally pay out higher wages. This can potentially reduce income
inequality, making growth more inclusive.
125
Why should there be restrictions in labour flow?
Restrictions on inflow of foreign low skilled labour may encourage firms to invest more in training domestic labour and adopt technology to eliminate and ease the labour shortage
126
What is Provision of Industry Support?
Government support industries by encouraging more startups as well as growth and change in enterprises
127
What is Investment in new technology?
R&D is the fundamental activity behind the development of new technologies
128
What is Direct Provision of Infrastructure?
Infrastructure is considered as physical capital, which constitutes as part of the economy's pool of resources. Direct provision of infrastructure boosts the economy's quantity of resources
129
How is restrictions in labour flow beneficial?
SG tightening foreign worker quotas and increasing foreign worker levies -> (Assuming improvements in domestic labour productivity outweighs cost of retraining and technology) SRAS can increase -> contributing positively to economic output and price stability
rising domestic labour productivity = higher quality labour force -> increase LRAS
130
Why is provision of industry support important?
These strategies may boost the level of domestic investments in the economy -> contributing to capital formation eventually.
Such a move helps to reduce reliance on foreign investments -> reduce volatility in economic growth
Also, economic growth can now be more inclusive as SMEs have more opportunities to grow and compete with existing large corporations
Hence, to ensure inclusive economic growth, government's support should not be biased towards certain sectors, such as high-tech based industries
131
Why is investment in new technology important?
This can create improved capital goods -> increase in potential economic growth
(Example)
Government should invest in clean energy sector. This is to ensure the country's growth strategy is environmentally sustainable and promoting greener growth can also make economic expansion more inclusive since environmental impacts tend to affect the poor more adversely
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Why is Direct Provision of Infrastructure important?
Direct provision of Infrastructure -> boosts economy's quantity of resources-> LRAS increases -> economy experiences potential growth
The increase in G also increases AD, leading to actual growth
(Example)
The increase in biomedical startup -> rise in investment spending -> plays a role in capital stock accumulation or further improving quality of resources -> possible rise in SRAS and LRAS
Other examples of direct provision could be the building of communication and transportation infrastructure.
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What is Nationalisation?
It is the process by which the countries purchase or own the industries/firms
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Why is Nationalisation important?
It may result in higher investment -> greater efficiency -> increase in SRAS and LRAS
The higher investments also increase AD
Note:
This is the most extreme form of intervention, and is not typically done for most industries except for key transport and power industries, such as the railways and electricity generation
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Nuances of Market Oriented Policies
-Market-oriented policies do not require increased government spending
-Sometimes, it may involve a cut in government spending instead
-Market-oriented policies tend to rely on free markets to attract private investments in, helping the economy increase AD, and most importantly, achieve its targeted rise in SRAS and the LRAS
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Nuances of Interventionist Policies
-These tend to involve increased government spending, also causes the AD to rise
-These policies directly boost the productive capacity of the country through improving quality or quantity of resources or technology
-These policies also creates more stable business environments, further drawing in investments, which increases AD, and most importantly achieves its targeted rise in SRAS and LRAS
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Note:
During a major recession, AD could be declining or is very low, focusing on increasing productive capacity (LRAS) of the economy is unhelpful unless there is a corresponding increase in AD
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Note:
Supply side policies that are driven through debt cannot be sustainable, and Supply side policies that promote free market interest is also most likely to widen the income gap
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Note:
Market-oriented SS Policies:
may create dynamic efficiency and promote a sustainable culture of innovation, but the growth may not be inclusive
Interventionist policies:
A complete reliance on Interventionist SS Policies may create more inclusivity, but at the same time, it can be unsustainable for the government and increases the risk of government failure
Hence, it is common for many countries to adopt a balance of both types of SS Policies
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