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Introduction to Key Economic Indicators

Reveal facets of the economy’s health

May be used to compare across time eg. Singapore in years 2000 and 2008

May be used to compare across space eg. Singapore and China in year 2008

Overview of Macroeconomics

Macroeconomic Aims

What are the aims of internal and external economy?

The importance and relevance of individual aims to the success of an economy

Priority of aims

Implications on government’s actions

Macroeconomic Problems

What are the problems associated with failure to achieve the macroeconomic aims?

What are their causes?

What are their consequences?

Identification and analysis of problems brought about by internal (eg withdrawal of large MNCs) and external phenomena (eg. terrorist attack on America, rise in oil price) using AD-AS framework

Macroeconomic Policies

Explain the nature of policies in solving/alleviating macro problems, how they are supposed to work in theory (Use AD-AS framework)

Justification of the choice of policies in solving problems of a certain source

Analyse the effectiveness and limitations of policies given the nature of an economy (eg. Singapore)

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Key Economic Indicators

Syllabus requirements:

Explain the significance of each of the key economic indicators

Interpret statistical data

Use the key indicators to assess the economic performance of an economy, including international comparisons

Analyse the limitations of using the indicators to measure economic performance as well as standard of living of an economy including international comparison

[A broad understanding of the role of foreign direct investment, as a component of

BOP, in the Singapore economy is relevant.]

[The construction and computation of BOP account is not necessary but candidates

should have a broad understanding of the main accounts such as current and capital

accounts, and reserves]

Macroeconomics aims Syllabus requirements:

Explain government macroeconomic objectives in relation to inflation, employment, economic growth and the balance of payments

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Macroeconomics Aims: 1. Economic Growth Short term economic growth: economy recovery from recession

- Increase real NY => higher SOL - Job creation => reduce unemployment

Long term economic growth: sustainability

- Long term sustainable growth at low inflation 2. Price stability - low inflation rate

A primary objective because of impact on other macroeconomic goals (sustained economic growth, full employment, improve balance of payments):

- Relative low inflation rate (compared to other countries) encourages greater

demand for exports => export earnings increase => export-related industries expand => job creation;

- Relative low inflation rate (compared to other countries) encourages local consumers to buy domestic goods, instead of foreign imports => domestic industries (I) expand, import expenditure fall;

- (X-M) improve, C and I increase => AD rises, assuming YO<Yf , real increase in NY occurs => increase employment (assuming no structural unemployment) => higher SOL;

- Greater certainty on returns to saving, encourages S, greater supply of funds for I => SR effect of I rising, AD rises further increase AD;

- Greater certainty on LR returns to investments, hence more investments (capital accumulation, R&D, human K investments) => increase in productive capacity, technological advancement, increases in labour productivity => increase AS => LT growth.

3. Full employment

In the SR, full (closed to) unemployment is usually in line with strong ST economic growth, with higher real NY; - Efficiency allocation of resources, fully utilisation of limited resources; - Higher employment improve government’s budget position => higher income

tax revenue and lower unemployment benefits => enable government to spend on social infrastructure for micro aims (e.g. public healthcare, education etc) as well as basic infrastructure for LT growth (e.g. road, industrial park etc);

- If achieve LT growth with low unemployment (no structural unemployment) => improve equity;

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4. Improve balance of trade and capital account

Any surpluses in any account => building up reserves => room to control exchange rate for macro aims - Improving capital account in the form FDI will impact the economy positively,

in terms of AD (I), and AS (long term capacity); - Improving in BOT will impact AD in the SR in terms of (X-M);

Take note: BOP will always be balanced.

5. Strong and stable currency

- Investors’ confidence will increase => attract FDI and portfolio investment => also more ST capital inflow => increase MS => lower interest rates => further increase investment;

- Manage imported inflation, especially for countries who rely on imports; Some countries may opt for weakening currency to enhance export competitiveness. However, the conflicts could be higher inflation and lost of investors’ confidence in the long run;

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Standard of living (SOL)

Standard of living (SOL) refers to the average quality of life of a population, which includes the material and non-material aspects of life:

Materials Key Indicators:

Real GDP per capita (take into consideration of inflation and average distribution of NY)

Limitations: o Composition of GDP

For example, economy may be driven by government’s military expenditure on , or export driven, which do not contribute to SOL of households

o Distribution of income not taken into consideration Certain groups of people benefited from the economic growth,

rural urban disparity etc

Non Materials Key Indicators:

Human development index (HDI)

Measurement of economics well being (MEW)

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The Human Development Index (HDI)

The first Human Development Report introduced a new way of measuring development by combining indicators of life expectancy, educational attainment and income into a composite human development index, the HDI. The breakthrough for the HDI was the creation of a single statistic which was to serve as a frame of reference for both social and economic development. The HDI sets a minimum and a maximum for each dimension, called goalposts, and then shows where each country stands in relation to these goalposts, expressed as a value between 0 and 1.

HDI Ranking 2010 (out of 162 countries):

1. Norway 10. Germany 21. HK 89 China

2. Australia 11. Japan 27. Singapore 119 India

3. NZ 12. South Korea

4. USA

5. Ireland

Conflicts between macroeconomics objectives

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1. Short term economy growth Vs Demand pull inflation

Economy focussing on increasing AD to achieve short term economy growth towards full employment will face with demand pull inflation over the range shown below:

Fro example, with rapid increased in investment and export, emerging economies like China and Vietnam in the early 2000, experienced high economic growth (average 8-10% growth in GDP). The inflation rates were high at average closed to 10% per annum. If the economies did not manage the high demand pull inflation, it may result in overheating.

Demand pull inflation is unavoidable if an economy wants to achieve short term growth, especially short term recovery from recession. As long as the demand pull inflation is anticipated, manageable, and predictable, it should be alright. In the longer run, economy needs to increase her productive capacity by shifting the AS to the right.

2. Long term growth Vs Structural unemployment

Sustainable long term economic growth can be achieved via restructuring of the economy to higher value added industries, adoption of new

AS 1

GPL

Real Income

AD1

YN

AD2

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technologies and attracting foreign talents. These strategies may create structural unemployment as local workers lack the skills or being replaced by technologies of foreign talents in their jobs. Though AS will shift to the right, with higher real NY, structural unemployment may occur and in the longer run, resulted in equity problem as well. For example, in Singapore, in order to achieve, sustainable growth in the long run, the economy needs to restructure and rely on foreign talents, thus structural unemployment is unavoidable. Even in countries like India and China, technology has also replaced workers in many industries, resulting in loss of jobs. Restructuring of the economy is crucial for the survival of any economies, especially with globalisation and keen competition in the global markets. Governments need to anticipate the problem/reduce the impacts of structural unemployment by preparing the workforce for the challenges ahead.

3. Economic growth Vs Worsening BOT

Higher economic growth increases real national income and SOL. With higher income, demand for import will increase (especially consumer durables). At the same time, economic growth may result in higher domestic inflation, thus reduce the export competitiveness. With greater economic activities, demand for imported FOPs may increase as well. BOT will worse off, cp. However, the conflict may be a short term problem, as export will increase after value add to the imported FOPs. Higher purchase of imported consumer goods merely reflects higher SOL, which should be overly concerned.

4. Export competitiveness Vs Inflation

Some countries will allow their currency to depreciate in order to increase the price competitiveness of the countries’ export. By allowing the country’s exchange rate to depreciate, the economy may suffer higher imported inflation. For example, if MAS allows Singapore dollar to depreciate against major currencies, imported goods will become more expensive in S$, resulting in higher imported inflation. On top of importing consumer goods, Singapore also imports raw materials, such as metals, crude oil etc. The weakening S$ will result in a higher cost of production, which may worsen our export competitiveness after all.

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Thus, countries like Singapore should focus on increasing the non price competitiveness of the export, or reduce other cost of production, such as labour cost and rental.

5. Economic growth Vs Negative externalities

Higher economic growth via industrialisation often resulted in industrial pollution. The government usually ignore these pollutions as it will increase cost of production and reduce the export competitiveness. With higher SOL, numbers of cars have increased, contributing to pollution as well as congestion problems. For example, level of pollution in countries like China and India have reached an alarming level, with air and river pollution ranks the highest in the world. Traffic congestion has also become a serious problems in big cities. Economic growth and externalities need long term solutions to balance. It is also a world wide problem where countries (developed and developing) need to work hand in hand to resolve.

6. Economic growth Vs Equity

Economic growth usually concentrates amongst certain industries or cities in an economy. Thus, the distribution of gain may widen the income gaps between the urban and rural, the skilled and unskilled workers etc. GINI indexes have widen for many countries, such as China and even Singapore, over the years as a result of rapid economic growth. Widening income gap is unavoidable. However, the governments need to level up the poor to a minimum sustainable level of income.