Discuss whether other economic objectives may conflict with the pursuit of long term economic growth in a country.

Introduction

  • Actual Growth: Refers to the annual % increase in national output as a result of using previously unemployed resources. It is caused by an increase in AD in the economy in the short run, in less than a fully employed economy. Typically brought short run demand management policies.
  • Potential Growth: Refers to the increase in the economy’s capacity to produce national output. It is caused by a rise in quantity and/or quality of resources available to the economy. Typically brought about by long run supply side policies.
  • Explain the advantages of economic growth
    • Increase in GDP leads to improvement in SOL, ceteris paribus.
    • Increase in employment
    • Reduction in poverty level as government has more funds to redistribute incomes to the poor to improve their well being
  • Possible conflicts: However, economic growth at all costs, especially of the short run variety, may result in trade off with other government economic objectives
    • May cause inflation
    • May result in income inequality
    • May result in BOP deficit
    • May result in inefficient resource allocation (presence of negative externalities) etc.
  • Other economic objectives: Government should also be concerned with other economic objectives.  Briefly explain why other economic objectives (low inflation, low unemployment, BOP equilibrium, social efficiency and income equity) are also important.
  • To minimize the adverse effects, especially of inflation, government must also promote potential growth to expand the productive capacity of the economy. This will improve productivity and reduce the inflationary pressure on the economy.

Body

  • Achieving economic growth is an important macroeconomic aim for Singapore as the benefits from economic growth are significant and crucial for a small and open economy like Singapore.
  • Economic growth is desirable as it brings about higher national income which in turn boosted internal demand, improved standard of living and achieve greater employment.
  • However, the pursuit of economic growth at all cost may mean a conflict in pursuing other macroeconomic objectives. Economic growth could be accompanied by costs such as price instability, environmental degradation and widening income gap.
  • The costs of inflation could be detrimental to the economy as it has negative internal effects on saving, investment, output and employment. There are also possible negative external effects on the balance of trade and exchange rate. In managing cost pressures, the Singapore government has effectively maintained a gradual and modest appreciation of S$ to ward off imported inflation. Further, the long term supply-side policies are in place in Singapore to increase productive capacity to lower domestic inflationary pressures.
  • Economic growth brings about greater tax revenue.
  • Enhances the government’s ability in managing the cost of economic growth.
  • Polices are in place to channel funds to correct environmental problems, to redistribute wealth to help the lower income group and for infrastructure development.
  • The pursuit of economic growth also may mean a conflict in pursuing healthy BOP. While a short-term deficit may not be harmful, a persistent deficit can cause a country to run down its reserves or borrow heavily, resulting in an accumulation of external debt which increases the burden of future generations.
  • Depreciation of currency may occur as a result as well. This is again detrimental for Singapore as a weaker Singapore dollar (S$) causes imported inflation and erodes the export price competitiveness.
  • Due to the strong economic fundamentals and conducive micro and macroeconomic environment, Singapore has been able to achieve a strong and healthy BOP surplus for many years.

CONCLUSION

  • Pursuing economic growth is an important macroeconomic aim for Singapore as it created more job opportunities and improved the standard of living. These benefits are vital for a small and open economy like Singapore.
  • The costs and objective conflicts that come with attaining economic growth are not much of an issue in Singapore as it has been effectively managed by the Singapore government.
  • Governments should not just pursue rapid economic growth at all costs as it involves only short term gains and there is trade-off with other government objectives. Government should use a combination of demand management and supply side policies to pursue long term sustainable growth with minimum inflation.
  • Thus the pursuit of long term economic growth is ideal as it is able to overcome most policy conflicts.

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