JC Economics Recession & Sustainable Growth Essay Model Answers
A sample question on the main macro goal of economic growth, specifically recession & sustainable Growth and its application to macro economic performance. Economics growth can be split into actual growth, potential growth, inclusive growth as well as sustained growth. So read carefully as you tackle the macro essay questions.
(a) Explain why governments around the world are concerned about a fall in real GDP.
(b) To achieve high and sustained growth, low inflation is an essential. condition. Discuss the view that attainment of low inflation should be the main aim of a government’s economic policy.
JC Economics – Economic Recession
Explain why governments should be concerned about a fall in real GDP.
Theoretical framework: AD/AS, Economic growth
Analysis: Cause and Effects:
falling real GDP => negative economic growth (recession), higher unemployment, lower SOL, lower economic development in the long run.
Applications: recent global crisis, can refer to Singapore as example.
Define real GDP: GDP refers to the value of final goods and services produced in the country over a period of time. It is in real terms because the value has been adjusted for inflation. Explain the meaning of fall in real GDP:
Fall in real GDP means the country produces less goods and services. It implies a fall in the level of economic activity. In the AD/AS framework reflected by a falling AD (diagram)
Governments should be concerned with a fall in real GDP, esp. if it occurs for a prolonged period of time (more than 2 quarters) for a few reasons:
• Fall in real GDP, for example for Singapore in 2009, reflects a lower level of output (for e.g. investment fall), thus lower real output value and real NY. Falling output and profit will increase unemployment and further reduce personal/households’ income, thus reduce induced consumption, further fall in AD and real NY.
Fall in real GDP will lower the standard of living of the people. Standard of living refers to the material and non-material welfare of the people. Real GDP per capita is a very reliable single indicator that reflects material standard of living. Fall in real GDP means that national income decreases, ceteris paribus, this means that people’s purchasing power has decreased. Hence, they are not able to buy as much as before, leading to a fall in their standard of living.
Fall in real GDP fall in real incomes (personal incomes and profits) . thus government tax revenues less funds for expenditure on infrastructure e.g. roads, hospitals, schools hinder long term economic development. If a country experienced a fall in real GDP for a prolonged period of time, this can erode consumer and investor confidence. The fall in confidence level due to fall in expectations of future profits will lead to a fall in investment and capital flight out of the financial sector. For Singapore these problems are much more serious, as we rely heavily on FDI and foreign capital.
Thus, falling real GDP is a concern for an economy like Singapore in both the short and long run.
JC Economics Essay – Economic Priority between Sustainable Growth & Inflation
Theoretical framework: AD/AS, Macro aims and conflicts of objectives
Analysis: Cause and Effects:
Low inflation lead to higher growth, higher employment and higher SOL
Applications: apply to Singapore, USA
conflicts of lower inflation to other macro objectives, thus low inflation may not be the main objective for country like USA during economic recession
Low inflation is defined as a period of relative price stability. Inflation is mild. Low inflation does not distort the pattern of resource allocation. It is a generally good sign of the health of an economy.
There are many factors that are essential for sustained economic growth,
These include the quantity and quality of the factors of production, the level of technology, infrastructure, business environment, social and political stability. Low inflation is one of those conditions that are needed. to ensure a conducive environment for investments and hence economic growth. To have sustained economic growth, the country must achieve potential growth. Potential growth refers to the increase in the full-employment level of national output. Potential growth increases when there is an increase in the productive capacity of the economy. It can be illustrated by an outward shift of the AS curve.
Low inflation can contribute to economic growth. Low inflation provides an environment that is conducive for savings and investment. Real value of savings is protected because of greater certainty over real interest rat, leads to more savings, more funds for capital formation more investments can be undertaken. Higher (I) , leads to rise in AD & NY (higher induced consumption further increases NY, aka multiplier). AS curve will also shift to the right with higher investments.
Low inflation contributes to export price competitiveness If the country’s inflation rate is lower than in other countries its exports will be relatively cheaper: greater qty demanded for country’s exports rise; export earnings , so higher AD & NY.
Thus, we can see how low inflation can instill confidence in the economy as well as boost export price competitiveness, thereby contributing to economic growth. Apply to Singapore case whereby we rely on export and FDI as engine of growth, thus, the above is especially crucial.
JC H2 Econs Essay – Evaluation of Macro Aims
Whether the attainment of low inflation should be the main aim of govt economic policy depends on the following, among other things:
Severity of the problem: When a country is plagued by hyperinflation, the situation is so chaotic that it can lead to a collapse of the monetary system as people lose confidence in money as a medium of exchange and store of value. There is greater uncertainty.
Source of inflation:, etc.
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