Assess the extent to which an improvement in the living standards of an economy requires that managing inflation be the top economic priority.

Introduction

  • Living standards of an economy can be in terms of material and non-material. In the narrow, measurable sense, material standard of living refers to the amount of goods and services that an average citizen can consume over a period of time, usually a year. Non-material living standard can be defined as the quality of life and measurements usually include stress levels, amount of leisure and the state of environment.
  • As stated in the preamble, the MAS uses a gradual appreciation of the Singapore dollar through the use of exchange rate (monetary) policy to manage imported inflation while ensuring at the same time that Singapore’s exports remain competitive.
  • However to enjoy an improvement in living standards, governments generally aim to achieve the following macroeconomic goals; price stability, sustainable economic growth, low unemployment and healthy balance of payments but a government’s policy decision inevitably leads to conflicts, or trade-offs in macroeconomic objectives and it is impossible to achieve all the goals simultaneously.
  • Hence in light of the above, this essay will assess the extent to which managing inflation be the top economic priority to improve the living standards of an economy.

Body

Thesis: Managing inflation should be the top economic priority to achieve better living standards

[One can choose to either explain the problem of inflation OR explain how managing inflation will improve living standards]

  • Inflation is defined as a sustained increase in the general price level, and becomes a problem when it is inordinate. Both demand and cost pressures can lead to demand-pull and cost-push inflation respectively.
  • Cost-push inflation refers to inflation caused by persistent increases in production costs, independent of demand.
  • If firms face a rise in costs, they will probably respond by raising prices, partly by passing the costs on to consumers, and partly by cutting back on production. This can be modelled by continual upward shifts in the horizontal AS curve (explain with diagram). This would cause general price levels to rise and a fall in real national income.
  • Inflation would erode the internal value of money, leading to a fall in purchasing power. With the same amount of money, consumers can now purchase lesser units of goods and services and hence their material living standards fall.
  • Explain how singapore exchange rate policy works to increase net exports to increase AD and improve material living standards.
  • In addition, for cases where if inflation levels are high (> 5%) and unexpected or cost-push in nature, investment may be reduced.
  • This is because such inflation adds to much uncertainty. As a price increase may be due to inflation or increased demand levels, prices no longer serve as accurate signals for efficient resource allocation. Businessmen would find it difficult to make long-term plans and may be deterred from investing in Singapore.
  • This fall in investment would lead to a multiplied fall in aggregate demand and real national income through the reverse multiplier effect.
  • Since GDP growth is a key factor in influencing per capita income, governments aiming to achieve better living standards may have to leverage on managing inflation using a gradual appreciation of the Singapore dollar to manage costs of imports and export competitiveness to drive economic growth (explain/elaborate).
  • Anti-thesis: Managing inflation should not be the top economic priority to achieve better living standards

[One can choose to either explain that due to trade-offs, conflicts in macroeconomic objectives, managing inflation alone will not improve material living standards OR explain that other macroeconomic objectives are also as important to improve living standards OR explain how managing inflation alone will not improve non-material living standards]

  • However, for Singapore, managing inflation using the exchange rate policy may lead to conflicts with other macroeconomic objectives.
  • Singapore’s exchange rate policy — the gradual and modest appreciation of the Singapore dollar by the MAS, would cause foreign imported consumer and producer goods to become cheaper. The lower prices of imported inputs would decrease costs of production and hence mitigate imported inflation.
  • With lower inflation rates, households’ purchasing power would not fall as much, and their material living standards are raised. The caveat, is that an appreciation of the Singapore dollar causes export prices to rise in terms of foreign currency, hence Singapore may lose export competitiveness.
  • Due to the relatively close substitutes of Singapore’s exports from other countries, the demand for Singapore’s exports is likely price elastic (depending on industry, candidates may argue otherwise).
  • The rise in export prices can thus cause a more than proportionate fall in the quantity demand of her exports, resulting in a fall in export earnings.
  • Ceteris paribus, there will be a fall in net exports, leading to a multiplied fall in AD, hence lowering material living standards.
  • With Singapore being heavily reliant on trade, the fall in net exports could be substantial and have serious repercussions on the economy.
  • The Singapore government hence has to “balance imported inflation against export competitiveness”.
  • A severe fall in AD could also lead to fall in employment levels. With labour a derived demand, there will be a fall in the demand for labour and employment level will also decline. With a fall in disposable income, material living standards will again fall.
  • In this case, where export competitiveness is adversely affected, managing inflation may not be the top economic priority to improve living standards.
  • To improve living standards, price stability may not be the foremost economic priority as addressing high unemployment levels could be more pertinent.
  • As high unemployment levels has an adverse effect on living standards. With less disposable income, the unemployed would experience a fall in material living standards as they are only be able to consume fewer goods and services. This may also affect their non-material standard of living as there is undesirable stress associated with unemployment especially with large financial commitments such as mortgage payments and the inability to find jobs to provide for themselves and their families.
  • This was seen in the US during the 2008 subprime mortgage crisis that saw unprecedented increase in unemployment levels. During the global financial crisis, Americans reported high levels of depression and the experienced low living standards from the gloomy economy outlook.
  • One thus may argue that managing unemployment be the top economic priority in improving both material and non-material living standards.

Evaluative Conclusion

  • While managing inflation is no doubt important to improve living standards, especially in the face of high imported inflation which Singapore faces, it may not always be the top economic priority.
  • This is because the achievement of price stability may not improve non-material living standards and that there could be trade-offs which could lower living standards as a whole.
  • There is hence a need to balance negative impact on the quality of life from managing inflation. Policies could be implemented alongside the exchange rate policy to also address issues of environmental degradation for instance, to improve living standards of an economy.
  • Whether the attainment of a goal is the top economic priority, I believe depends on the state the economy.
  • For instance, when an economy like the US is facing high unemployment levels, the top economic priority then could be to stimulate economic growth and provide job opportunities to raise employment levels as taking steps to achieve this macroeconomic goal would likely improve material living standards the most.
  • Given the dynamic nature of economies, it is not necessary that the achievement of a particular goal will always be the top priority.