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Discuss the view that an economy should pursue grow at all cost policy.

Key terms:Growth (LT & ST)Causes and effects:growth and its impact on other macro & micro objectives

Framework:AS/AS, SOL

Economic growth can be actual growth (ST recovery) and potential growth (LTsustainability).

To achieve actual growth the economy must have excess capacity given anyincrease in aggregate demand.

To achieve potential growth, the economy will have to expand the quantity andquality of its resources, improve the level of technology so as to be able tosustain the actual growth without a rise in general price level.

All economies wish to achieve growth due to the benefits enjoyed like improvement instandard of living, ability to achieve other macro objectives (both internal and externalstability.

Internally, with economic growth, there will be greater demand for resources.Greater demand for labour will keep unemployment low while greater output willenable the economy to achieve price stability.

Externally, if growth is driven by the external sector, balance of trade willimprove.)

Government will also has a healthier budget to provides benefits for the lower

income group, and improvement in redistribution of income to ensure equity.

However growth may also incur costs.

To achieve growth, there will be a need to increase investment. To increase thelevel of investment, there is a need for more savings. Present consumption willbe forgone. (opportunity cost incurred)

Growth will also require structural economic changes in Singapore given newregional challenges from growing economies like India, China and Vietnam withlower costs but skilled labour affecting our low end manufacturing. Differentgroups of labour with different skill and education will benefit differently. (for

some low skilled and educated factors they might be structurally unemployed)We can then expect the different groups to have differing rates of return resultingin widening disparity in income.

Growth result in higher level of productive activities. This often results in higherlevel of negative externality especially when producers ignore external cost ofproduction in their private marginal cost. Such spill over effects on third partiescan result in lower consumer well being. (increase in non-material negative

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consequences). For example, emerging countries are facing increasing pollutionand congestion problems as a result of their rapid economic growth.

In the short run, with the rise in AD at a faster rate than the increase in AS, theeconomy is expected to suffer from demand pull inflation. (growth is too fast)

With growth, the level of income rises inducing a rise in import which is income

induced. Especially for country who relies heavily on imports like Singapore, thebalance of trade and services will worsen.

Judgments:

In the SR, demand pull inflation is unavoidable if the economy aims to recoverfrom recession. However, government needs to ensure that the inflation iscontrollable before the economy hits overheating. In the longer run, the economyshould expand its capacity to have a more sustainable growth with low inflation.

Higher import spending due to higher income is fine, as it simply reflects higher

SOL of the people. Structural unemployment is unavoidable if the economy needs to restructure to

maintain its competitiveness for long term growth. The government shouldensure that all workers are equip with the necessary skills for the new economy,through providing training and retraining for the workers.

Widening income disparity will be the key concerns for many governments.Policies must be put in place to redistribute income to the lower income groupwho has not benefits from the economic growth. Besides benefits and subsidies,equip the people with right skills to benefits from the rising industries.

Pollutions will also be the key concerns for the economy in the long run, asenvironment damage cannot be undone. Thus, the government will have to take

into considerations of negative externalities in achieving long term sustainablegrowth.

Most government has not pursued grow at all costs as it needs to ensure that overallbenefits of pursuing growth outweigh the overall costs. The government must thus studythe cost benefit analysis of its growth polices and pursue growth only if overall benefitsoutweigh the overall costs. In deciding to pursue growth, it will at the same time deploypolicies to tackle the various costs of growth.

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