2012 Mr Lee Page 1

Introduction to Key Economic Indicators

Reveal facets of the economys health
May be used to compare across time
eg. Singapore in years 2000 and 2008
May be used to compare across space
eg. Singapore and China in year 2008


Overview of Macroeconomics

Macroeconomic Aims
What are the aims of internal and external economy?
The importance and relevance of individual aims to the success of an
economy
Priority of aims
Implications on governments actions


Macroeconomic Problems
What are the problems associated with failure to achieve the
macroeconomic aims?
What are their causes?
What are their consequences?
Identification and analysis of problems brought about by internal (eg
withdrawal of large MNCs) and external phenomena (eg. terrorist attack
on America, rise in oil price) using AD-AS framework

Macroeconomic Policies
Explain the nature of policies in solving/alleviating macro problems,
how they are supposed to work in theory (Use AD-AS framework)
Justification of the choice of policies in solving problems of a certain
source
Analyse the effectiveness and limitations of policies given the nature of
an economy (eg. Singapore)

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Key Economic Indicators
Syllabus requirements:
Explain the significance of each of the key economic indicators
Interpret statistical data
Use the key indicators to assess the economic performance of an economy,
including international comparisons
Analyse the limitations of using the indicators to measure economic
performance as well as standard of living of an economy including
international comparison

[A broad understanding of the role of foreign direct investment, as a component of
BOP, in the Singapore economy is relevant.]
[The construction and computation of BOP account is not necessary but candidates
should have a broad understanding of the main accounts such as current and capital
accounts, and reserves]

Macroeconomics aims

Syllabus requirements:
Explain government macroeconomic objectives in relation to inflation,
employment, economic growth and the balance of payments
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Macroeconomics Aims:

1. Economic Growth

Short term economic growth: economy recovery from recession
- Increase real NY => higher SOL
- Job creation => reduce unemployment

Long term economic growth: sustainability
- Long term sustainable growth at low inflation


2. Price stability - low inflation rate

A primary objective because of impact on other macroeconomic goals
(sustained economic growth, full employment, improve balance of payments):

- Relative low inflation rate (compared to other countries) encourages greater
demand for exports => export earnings increase => export-related industries
expand => job creation;
- Relative low inflation rate (compared to other countries) encourages local
consumers to buy domestic goods, instead of foreign imports => domestic
industries (I) expand, import expenditure fall;
- (X-M) improve, C and I increase => AD rises, assuming YO<Yf , real increase
in NY occurs => increase employment (assuming no structural unemployment)
=> higher SOL;
- Greater certainty on returns to saving, encourages S, greater supply of funds
for I => SR effect of I rising, AD rises further increase AD;
- Greater certainty on LR returns to investments, hence more investments
(capital accumulation, R&D, human K investments) => increase in productive
capacity, technological advancement, increases in labour productivity =>
increase AS => LT growth.

3. Full employment

In the SR, full (closed to) unemployment is usually in line with strong ST
economic growth, with higher real NY;

- Efficiency allocation of resources, fully utilisation of limited resources;
- Higher employment improve governments budget position => higher income
tax revenue and lower unemployment benefits => enable government to
spend on social infrastructure for micro aims (e.g. public healthcare,
education etc) as well as basic infrastructure for LT growth (e.g. road,
industrial park etc);
- If achieve LT growth with low unemployment (no structural unemployment) =>
improve equity;



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4. Improve balance of trade and capital account

Any surpluses in any account => building up reserves => room to control
exchange rate for macro aims

- Improving capital account in the form FDI will impact the economy positively,
in terms of AD (I), and AS (long term capacity);
- Improving in BOT will impact AD in the SR in terms of (X-M);

Take note: BOP will always be balanced.

5. Strong and stable currency

- Investors confidence will increase => attract FDI and portfolio investment =>
also more ST capital inflow => increase MS => lower interest rates => further
increase investment;
- Manage imported inflation, especially for countries who rely on imports;

Some countries may opt for weakening currency to enhance export
competitiveness. However, the conflicts could be higher inflation and lost of
investors confidence in the long run;

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Standard of living (SOL)
Standard of living (SOL) refers to the average quality of life of a population, which
includes the material and non-material aspects of life:
Materials Key Indicators:
Real GDP per capita (take into consideration of inflation and average
distribution of NY)
Limitations:
o Composition of GDP
For example, economy may be driven by governments military
expenditure on , or export driven, which do not contribute to
SOL of households
o Distribution of income not taken into consideration
Certain groups of people benefited from the economic growth,
rural urban disparity etc
Non Materials Key Indicators:
Human development index (HDI)
Measurement of economics well being (MEW)

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The Human Development Index (HDI)
The first Human Development Report introduced a new way of measuring
development by combining indicators of life expectancy, educational attainment and
income into a composite human development index, the HDI. The breakthrough for
the HDI was the creation of a single statistic which was to serve as a frame of
reference for both social and economic development. The HDI sets a minimum and a
maximum for each dimension, called goalposts, and then shows where each country
stands in relation to these goalposts, expressed as a value between 0 and 1.




HDI Ranking 2010 (out of 162 countries):
1. Norway 10. Germany 21. HK 89 China
2. Australia 11. Japan 27. Singapore 119 India
3. NZ 12. South Korea
4. USA
5. Ireland

Conflicts between macroeconomics objectives

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1. Short term economy growth Vs Demand pull inflation

Economy focussing on increasing AD to achieve short term economy growth
towards full employment will face with demand pull inflation over the range
shown below:





Fro example, with rapid increased in investment and export, emerging
economies like China and Vietnam in the early 2000, experienced high
economic growth (average 8-10% growth in GDP). The inflation rates were
high at average closed to 10% per annum. If the economies did not
manage the high demand pull inflation, it may result in overheating.


Demand pull inflation is unavoidable if an economy wants to achieve short
term growth, especially short term recovery from recession. As long as the
demand pull inflation is anticipated, manageable, and predictable, it should
be alright. In the longer run, economy needs to increase her productive
capacity by shifting the AS to the right.





2. Long term growth Vs Structural unemployment

Sustainable long term economic growth can be achieved via restructuring
of the economy to higher value added industries, adoption of new
AS 1
GPL
Real Income
AD1
YN
AD2
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technologies and attracting foreign talents. These strategies may create
structural unemployment as local workers lack the skills or being replaced
by technologies of foreign talents in their jobs. Though AS will shift to the
right, with higher real NY, structural unemployment may occur and in the
longer run, resulted in equity problem as well.

For example, in Singapore, in order to achieve, sustainable growth in the
long run, the economy needs to restructure and rely on foreign talents,
thus structural unemployment is unavoidable. Even in countries like India
and China, technology has also replaced workers in many industries,
resulting in loss of jobs.

Restructuring of the economy is crucial for the survival of any economies,
especially with globalisation and keen competition in the global markets.
Governments need to anticipate the problem/reduce the impacts of
structural unemployment by preparing the workforce for the challenges
ahead.


3. Economic growth Vs Worsening BOT

Higher economic growth increases real national income and SOL. With
higher income, demand for import will increase (especially consumer
durables). At the same time, economic growth may result in higher
domestic inflation, thus reduce the export competitiveness. With greater
economic activities, demand for imported FOPs may increase as well.
BOT will worse off, cp.

However, the conflict may be a short term problem, as export will increase
after value add to the imported FOPs. Higher purchase of imported
consumer goods merely reflects higher SOL, which should be overly
concerned.


4. Export competitiveness Vs Inflation

Some countries will allow their currency to depreciate in order to increase
the price competitiveness of the countries export. By allowing the
countrys exchange rate to depreciate, the economy may suffer higher
imported inflation.

For example, if MAS allows Singapore dollar to depreciate against major
currencies, imported goods will become more expensive in S$, resulting in
higher imported inflation. On top of importing consumer goods, Singapore
also imports raw materials, such as metals, crude oil etc. The weakening
S$ will result in a higher cost of production, which may worsen our export
competitiveness after all.

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Thus, countries like Singapore should focus on increasing the non price
competitiveness of the export, or reduce other cost of production, such as
labour cost and rental.

5. Economic growth Vs Negative externalities

Higher economic growth via industrialisation often resulted in industrial
pollution. The government usually ignore these pollutions as it will
increase cost of production and reduce the export competitiveness. With
higher SOL, numbers of cars have increased, contributing to pollution as
well as congestion problems.

For example, level of pollution in countries like China and India have
reached an alarming level, with air and river pollution ranks the highest in
the world. Traffic congestion has also become a serious problems in big
cities.

Economic growth and externalities need long term solutions to balance. It
is also a world wide problem where countries (developed and developing)
need to work hand in hand to resolve.


6. Economic growth Vs Equity

Economic growth usually concentrates amongst certain industries or cities
in an economy. Thus, the distribution of gain may widen the income gaps
between the urban and rural, the skilled and unskilled workers etc.

GINI indexes have widen for many countries, such as China and even
Singapore, over the years as a result of rapid economic growth.

Widening income gap is unavoidable. However, the governments need to
level up the poor to a minimum sustainable level of income.