JC Econs Essay Productivity-Driven Growth & Macroeconomic Objectives Model Answers
One of the biggest challenges and concerns for the Singapore government is the lack of appropriate macro econs policies to achieve her macroeconomics goals and objectives.
Due to the severe limitation of demand side management policies, she relies more on her supply-side policies to achieve the goals of low inflation, high and sustained growth, etc. In particular, the main thrust of productivity policy, to drive economic growth is imperative.
Question
(a) Explain the key macroeconomic objectives of a government.
(b) Discuss whether the emphasis on productivity-driven growth will help Singapore to achieve her macroeconomic objectives?
JC Economics – Macroeconomic Objectives of a Country
Introduction:
Identify the 4 main macroeconomic goals of a government-sustained economic growth, low unemployment, low inflation and BOP equilibrium
Bod
Explain the meaning of each macro goal and the key reasons for each goal, Le the benefits arising from achieving the macro goals
Suntained and stable economic growth
Sustain economic growth is a sustained increase in actual output as measured by higher Real GDP and increase in potential output/ productive capacity, it is brought about by both actual & potential growth; increases in AD and AS. It can be illustrated by a movement and an outward shift of the PPC respectively or rightward shifts of AD curve & AS curve.
Actual growth is desirable as it leads to higher (material) standard of living if population growth is slower as more goods and services are available for consumption. It also results in easier redistribution of income which can dampen the effects of income inequality in a country. Potential growth is desirable as it promotes price stability and leads to non-inflationary actual growth in the LR if AD increases. It also leads to sustained rise in SOL Sustained economic growth also lowers cyclical unemployment.
Low unemployment rate
Unemployment Rate = % of unemployed workers in the labour force. The unemployed are people of legal working age who are actively looking but unable to find work. The actual unemployment rate could be due to cyclical unemployment caused by insufficient demand for goods & services, structural unemployment caused by skills mismatch, and frictional unemployment due to imperfect info re job vacancies. When cyclical unemployment is zero and the economy is producing its potential output, it is said to be at full employment. Hence the goal of FE means to keep cyclical unemployment to zero, and minimize structural & frictional unemployment as the latter two are unavoidable types of unemployment due to the working of the economy.
Low unemployment or full employment is desirable at the economy is producing the maximum output potebble with all e resources, thereby maximizing the country’s standard of vino Low unemployment will also lead to less social costs a crime and hysteresis (loss of skills) due to long periods of unemployment, which may dampen a country’s economic growth. It will also result in less burden on the government budget due to lower welfare benefits and higher tax revenue. Apart from achieving full employment, a country also strives to lower its natural rate of unemployment so as to increase its potential output which will lead to rising SOL
Low and stable inflation rate Inflation rate annual % change in the GPL, measured by the CPI or GDP deflator
Low inflation or an acceptable rate of general price rise promotes efficiency and certainty Price signals transmit revenuelcost information accurately and resources are efficiently allocated by the price mechanism. Rates of return on potential projects can be accurately estimated, thereby encouraging investment. Low inflation and the consequent low COP enhances a country’s export competitiveness, boost exports & FDI, thereby strengthening its BOP. The increased L, X & FDI stimulate AD, resulting in both actual & potential growth, higher employment & rising SOL Hence low inflation helps a country to achieve its other macro goals of sustained growth, low unemployment and strong BOP.
Healthy Balance of Payments (BOP)
BOP is an annual account of a country’s transactions in trade & investment with the rest of the world. The 2 main accounts in the BOP are: i) current account which records exports & imports of goods & services, flows of investment income & remittances; i capital & financial account which records ST & LT capital flows. Transactions that lead to a demand for a country’s currency are exports & capital inflow, while transactions that inad to a supply of the domestic currency are imports & capital outflows. Over the LR, a country strives to achieve BOP equilibrium because foreigners’ demand for the country’s currency will be equal to the supply of its currency by domestic residents, resulting in a stable exchange rate which promotes domestic price stability & facilitates international trade and investment.
A persistent BOP deficit will lead to drain of foreign reserves and debt which dampens a country’s economic growth (in a managed float ER for S’pore) and/or a depreciation of the ER (in a floating ER regime) which may lead to loss of confidence in the economy and imported inflation. A persistent BOP surplus may result in the dutch disease caused by appreciation of the ER, a lower SOL then was possible, and possible retaliation from trading partners (as one country’s surplus is another country’s deficit)
Like all other countries, sustained econ growth, FE, price stability & LR BOP equilibrium also constitute Singapore’s key macro goals.
JC Economics Examiners Marking Report:
1. Some confusion over the main macro aims. Equitable distribution of income is a macroeconomic objective associated with sustained economic growth. However, it is not one of the four key macroeconomic objectives. Confusion about inflation and General Price Level [GPL]. Inflation is the % change in GPL High inflation implies that GPL has increased significantly. It means that GPL has increased, become higher. However, it does not mean that GPL is high. For example, China is experiencing high inflation, however its GPL is still lower compared to Singapore’s. Candidates should avoid statements like “High inflation means that cost of living is high”. Cost of living would have increased with inflation, but the absolute level of cost of living cannot be inferred from merely inflation data. This point is critical when interpreting inflation data in Case Study.
2. Many students do not understand the requirement of the question, i.e. to explain the meaning of each macro goals as well as explain why each goal is desirable. Some students only explain the goals. Some only explain the benefits of the goals. This limits them to L1 marks. It is also necessary to cover all 4 macro goals. Answers should be supported with relevant economic concepts and not just general descriptions.
3. Do not just make statements without explanations, e.g. price stability encourages investment, without explaining how price stability promotes certainty, facilitate estimation of profitability of investment projects, thereby promoting investment. Many answers lacked elaboration of key ideas. For example, many candidates simply asserted that an increase in Real Gross Domestic Product improved material standard of living. The idea that real GDP measured amount of goods and services produced, and an increase in real GDP made available greater amount of goods and services for households consumption, hence improving material standard of living was not explained.
4. It is incorrect to explain the causes of macroeconomic problems, e.g. causes of high inflation, high unemployment or BOP disequilibrium. Explain the benefits of low inflation, low unemployment instead of explaining the adverse effects of high inflation, high unemployment. Presentation helps you to earn bonus marks. So do not write about all 4 macro goals in one single paragraph. Also do not write next to diagrams.
JC Economics – Productivity-Driven Policy to Achieve Economic Growth
Economic growth is achieved through increases in AD and increases in AS brought about by increases in the quantity and quality of resources in the economy.
Productivity-driven growth is achieved by an improvement in the quality of resources, specifically improvements in productivity of resources. Productivity is measured by the output per worker per period of time or output per man-hour. Whether a productivity-driven growth strategy helps Singapore achieve its key macro goals depends partly on the time factor, i.e. SR versus LR. This distinction is necessary because increasing productivity is a long-term policy that requires time to take effect. The SR, in this context, refers to the time period before productivity is increased and potential output remains unchanged, whilst the LR is when productivity and hence potential output are increase.
Define productivity:
Policies/Measures to increase productivity
To increase annual productivity growth from 1% to 2 to 3%, the government may i) adopt market-based initiatives such as privatization or deregulation to increase productive efficiency and hence ensure that firms minimize ATC for a given output, ii) adopt interventionist measures such as the following:
1. Subsidize education and training to equip workers with new knowledge/skills so that a given task can be completed in a shorter time.
2. Tax incentives /subsidies for purchase of cost & time saving equipment.
3. Subsidize firms’ R&D initiatives to help firms develop innovative, time & cost saving production methods /new products.
4. Set up training facilities, hire training staff & conduct training courses for workers.
5. Attract foreign talent to meet firms’ needs for skilled labour as well as impart skills & expertise to local workers.
Thesis: A productivity-driven growth will help Singapore achieve its macro goals of LR non inflationary economic growth, as well as improves its BOP.
. Students are expected to explain how the measures to improve productivity will achieve macroeconomic objectives in Singapore.
▪ Impact on potential growth
➜ If the above measures adopted by the government are successful, the higher productivity will increase the economy’s productive capacity in the LR, as more output can be produced with the given resources. In addition, COPIATC also falls because every unit of output now requires less time and hence less labour cost to produce, i.e. higher productivity leads to lower AVC and hence lower ATC. This LR effect on COP & potential growth leads to both a downward and rightward shift of the AS as shown in the diagram below.
Impact on actual growth, employment, GPL & BOP
➜ Interventionist measures discussed above will lead to increased AD due to higher I and G. If the economy is operating below full employment level of national income, there will be actual growth in the short run as Real national income increases from Yo to Y₁ through the multiplier effect. Briefly explain the multiplier process. [The economy is still on the original AS curve as productivity has not risen]. As Real NY rises, firms’ demand for labour increases and cyclical unemployment falls. This will bring the economy closer to its potential output depending on the increase in I and G. This SR actual growth leads to higher GPL as productivity remains unchanged.
In the LR, when productivity is successfully raised, the lower COP leads to lower GPL However, if there is already inflation in the economy which is not reflected in an AD/AS diagram, the benefit of lower COP due to higher productivity helps dampen inflationary pressure and result in greater price stability. → With falling COP & GPL, the quantity of output demanded by the 4 sectors of the economy increases, including export demand & FDI by the foreign sector. This impact is, represented by a movement along the new AD curve, raising Real NY further from Y, to → The boost to exports & FDI improve both the current and financial accounts of Singapore’s BOP.
In summary, the shift towards a productivity-driven growth is beneficial in the LR as it enables Singapore to achieve a strong BOP and non-inflationary economic growth, though there may be a temporary [SR] rise in the GPL due to the government’s increased spending to boost productivity growth.
Anti-thesis: A productivity-driven growth cannot guarantee the achievement of FE in Singapore. addition, raising productivity growth is not without problems and uncertainties.
Impact on full-employment
Achieving full employment level of national income requires that AD is sufficiently high to buy the potential output. However, the level of AD depends on many factors, including business and consumer confidence. In Singapore, the instability of AD is aggravated by our heavy dependence on external demand. Hence our economy alternates between recession and economic boom in tandem with the state of the world economy. A policy focusing on raising productivity cannot effectively counter such fluctuations in AD because such a policy is a LT supply-side policy aimed primarily at shifting the AS. While it may have limited impact on AD due to the government’s interventionist measures, it is not a demand-management tool for regulating AD to achieve FE.
However, during recession, the Singapore government does step up its spending on productivity to “kill two birds with one stone”, i.e. stimulate some demand and alleviate cyclical unemployment while boosting future potential growth. But such a policy alone is insufficient due to its limited impact on AD. Hence the government needs to adopt additional stimulus to boost AD. Since export demand a major component of AD, the most effective way to stimulate AD is boost export demand. Thus the government tries to ower export prices and boost export demand by adopting an exchange rate policy of zero appreciation for S$. In addition, the government may further help firms to cut cost by lowering various government charges, as well as boost domestic demand using expansionary demand-side FP, largely tax rebates for households & transfer payments to low-income families. If growth of AD does not keep pace with potential growth, unemployment rate will rise.
Issues in increasing productivity
While Increasing productivity growth is a desirable and necessary growth direction for Singapore in view of intensified global competition, there are many problems in raising productivity. It not only takes time, it is also a costly investment and a heavy drain on SG gov finances. The outcome is uncertain depending not only on the workers receptiveness but also the quality of training.
Evaluation
Limitations, unable to solve every single macro goal.
Willingness and ability to train labour, etc
Conclusion
Make a judgement on SR & LR impact of policy on macro goals-LR impact largely favourable, but the policy cannot resolve Singapore’s underlying vulnerability to external shocks and FE in Singapore still depends on external conditions.
Make a judgement on the difference between the policy of focusing on productivity increase versus the past strategy of heavy reliance on foreign labour. Increasing productivity might be more costly for the government’s budget and the impact is more uncertain than relying on foreign labour which has the added benefit of rejuvenating our rapidly ageing pop. However, there is a limit to the influx of foreign labour given Singapore’s constraint of small physical size and the problems of social cohesion. There is thus a need to strike a balance and hence the government’s continued focus on attracting foreign talent.
Mark Scheme:
L1: General remarks on the to the macro goals impact of the policy, no evidence of theoretical framework. Good analysis on the thesis, but no evidence of any attempt to provide an anti-thesis
L2; Clearly discuss the impact of the policy on at least 2 of the 4 macro goals, using a clear theoretical framework, OO discuss the impact on all 4 macro goals but weak in theoretical framework A good answer with theoretical framework but no reference at all to measures adopted by Singapore government to raise productivity No suitable diagram to illustrate the impact of productivity increase largely one-sided answer, either weak thesis or weak anti-thesis
L3: Discuss impact on all 4 macro goals with a clear theoretical framework, showing a balanced analysis with scope & depth A distinction between SR & LR impact on macro goals is not required for students to achieve L3
E1; unexplained judgement, evaluative conclusion / comment
E2: Evaluative assessment supported by economic analysis → Substantiation of an evaluative comment and/or conclusion E.g. students can conclude that LR & SR impact may be different or the unsustainable effect on relying on foreign labour
JC Econs Tuition teacher’s Remarks:
1. Many A-Level Econs pupils did not define productivity growth. Productivity is a measurement of the efficiency of production. In the context of the question, the government is trying to boost labour productivity which measures the amount of goods and services produced per labour-hour. Many candidates also did not identify specific measures that the government could implement to increase productivity. This tended to affect the quality of subsequent analysis. Analysis of broad productivity increasing strategy, without specific measures, tended to lose out in terms of depth of analysis. On a related note, handful of candidates equated supply-side measures to productivity increasing measures. Productivity increasing measures are a subset of supply-side measures. For example, both skills upgrading programme and income policies are supply-side measures. However, skills upgrading programme increases productivity while income policy does not.
2. Note that governments typically do not carry out R&D activities. They provide grants and subsidies for firms and institutions of higher learning to conduct R&D. Avoid writing .. Governments can conduct R&D….”. Similarly, avoid writing “…. Governments retrain workers……
3. A small handful of candidates failed to appreciate that productivity increasing strategy primarily increases production capacity and lowers cost of production. That is, it works by increasing AS. These candidates focused their analysis on the increase in AD brought about by an increase in productivity. For example, firms invest more when productivity increases as COP falls and profits increases. While definitely correct and relevant, this should not be the primary or only analysis of productivity driven growth. Explain the increase in AS arising from an increase in productivity. Do not simply assert * An increase in productivity results in an increase in AS represented by an outward shift of AS curve.”. Explain that COP falls and productive capacity increases when productivity increases, resulting in an increase in AS, represented by an outward shift of AS curve.
4. A weak anti-thesis is common in many answers. Many do not even comment on the problems associated with increasing productivity. A common AT argument is the need for SG to adopt additional policies during a recession, but instead of discussing the limitation of productivity increasing measures in achieving the macroeconomic objective of FE, they provide an in-depth analysis of the workings of fiscal and exchange rate policies. Some even went on to discuss in detail the limitation of these policies. The pointed that alternative policies are required in the light of limitation of productivity increasing measures is relevant. However, it should come only after the discussion of the limitation of productivity-increasing measures. The workings of these alternative policies should not be covered in detail as well, simply because it is not a requirement of this question. Many students noted wrongly that increasing productivity has no impact on demand-pull and cost push inflation in Singapore. It is true that increasing productivity cannot shelter Singapore from such inflation, but it can alleviate the impact of such inflation. The GPL depends on COP or ATC which comprises cost of domestic & imported inputs. With higher productivity, domestic labour cost is lowered and this helps to offset the effect of higher imported cost. Also, increasing productivity enhances the economy’s ability to produce, thereby alleviating demand-pull inflation.
5. Many candidates could draw the link between increase in productivity and X. Some went further to examine the change in M, and consequently (X-M). However, two problems arise with respect to the analysis of this point. Some candidates incorrectly used the Marshall-Lerner Condition to analyse this point. Please remember that MLC should only be used when (X-M) changes with respect to changes in exchange rate. Many candidates incorrectly represented the increase in X as a rightward-shift of AD curve. When X increases as a result of increasing productivity, it is diagrammatically represented as a movement along the AD curve caused by a rightward and downward-shift of the AS curve (arising from increase in production capacity and fall in COP due to increasing productivity). Very few students commented on the relative merits of relying on foreign labour versus increasing productivity.
6. More on these exam techniques in our Econs revision lessons.)