Macroeconomic Goals, Problems and Solutions

Internal Goal
Economic growth - Defined as the expansion or increase in an economys level of output or GDP over time - 2 components: actual growth and potential growth - Key economic indicators: Real GDP growth or Real GNP growth

Problem
Negative economic growth - A reduction in economic activity of an economy - Identified by a decrease in real GDP over a given time period - Indicates the economy is heading into RECESSION - Economy expanding but at a reduced pace: economic slowdown/slow/sluggish growth Examples of periods of negative economic growth: a. 1998: decrease in investments due to Asian Financial Crisis b. 2001: global recession due to slowdown in the technology sector (bursting of dot.com bubble) and terrorist attack in USA (9/11 incident) c. 2009: sub-prime market and the accompanying financial crisis that started from the USA

Solution
Measures to increase QUANTITY and QUALITY of factors of production: - Singapores economic growth is mainly driven by foreign direct investment (FDI) and international trade (exports and imports of goods and services btw Singapore and the rest of the world) - To promote sustained economic growth, SG adopts a policy of creating a conducive environment to attract foreign investment to foster economi c growth by (a) maintaining sound infrastructure to ensure economic activities can be undertaken with ease (port and aviation facilities, roads, telecommunications, electricity distributions) and (b) investing heavily on education to train workers - SGs growth strategy is driven by manufacturing and service sectors: (a) generate growth through manufacturing of higher value (e.g. oil rigs, semiconductors etc.) and (b) offering services, (c) building knowledge-based capabilities through heavy investment in R&D, (d) establishing free trade areas via signing free trade agreements (FTAs) - Singapores annual inflation rate has been about 2% over the past decade - Achieved by varying our foreign exchange rate as inflation rate in Singapore depends on the prices of imported goods; local inflation rate has been kept in check by national wages council + foreign labour migration policies - Other countries vary interest rate (r%) to control inflation: when r% increases, cost of borrowing increases, investment and consumption thus increases. - High inflation rate leads to: lower investment + poor business sentiments arising from uncertainty in the markets which affects exchange rate and BOP

Stable prices - Assessed in terms of inflation rate - Desired inflation rate is low and steady - Key indicator: Consumer Price Index (CPI)

Inflation - Defined as a sustained increase in the general price level in an economy 2 main causes: a. Demand-pull inflation: inflation arising from too much money chasing too few goods when the economy is close to full employment (illustrated with Y=AE model with Inflationary Gap) b. Cost-push inflation: Inflation arising from rising cost of factors of production or depreciating local currency or both (illustrated by AS curve shifting right)

Full employment - A condition of an economy where all or nearly all persons, of working age and willing and able to work at the prevailing wages and working conditions

External Balance of Payment

(BOP) equilibrium - A summarized statement of monetary value of all transactions between residents of one country and the rest of the world during a specified period of time, usually one year BOP surplus: total credit (inflow of money) > total debit (outflow of money) of all transactions for a country with the rest of the world over a specified period of time BOP deficit: vice versa

Unemployment - Refers to the number of people of working age who are without work, but they are willing and able to take up employment Mainly 3 types: a. Structural unemployment: arises when workers do not have necessary skills that employers require in growing industries b. Cyclical unemployment: arises from a lack of demand for final goods and services during an economic recession (aka demand-deficient unemployment; illustrated by Y=AE model with Deflationary Gap) c. Frictional unemployment: arises when workers who are retrenched or who have resigned or who are joining the labour market cannot find jobs immediately as they have to find jobs since information may not be readily available Balance of Trade deficit - Signals that country is importing more exporting goods and services and lead to increase in unemployment + depreciation of its currency - Refers to the difference between export revenue and import expenditure

Ensure that unemployment is kept low by creating jobs in the economy through increasing public investment or reducing taxes during recessions; providing necessary skills for its labour force to meet the requirements of the economy as it restructures itself; making information available to both employees and employers SG focuses on economic growth and price stability Unemployment rate MUST be kept low to reduce wastage of human resources + prevent unemployment benefits from draining national revenue + prevent social unrest which may lead to decreased foreign investment, hence hindering economic growth

Example: US current account deficit with China US wants to reduce Chinas trade surplus in fear of fewer exports of goods to China resulting in a growing unemployment level in the US and a loss of confidence in the US dollar US is trying to: - Introduce trade restrictions on Chinas exports to the U.S: export restraints, tariffs imposed on Chinas goods - Pressure China to appreciate the Yuan gradually, so that US exports to China will be cheaper and Chinas exports to US will be more expensive - Liberalise Chinas service sector to foreign companies