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Gross Domestic Product Growth for Singapore Essay

Parkin (1998) defines Gross Domestic Product or more commonly known as GDP as ‘the market value of the final goods and services produced within a country in a given time period’.

So what happened prior September to make the economists downgrade their forecast for Singapore’s GDP growth?

‘Singapore’s inflation accelerated to the fastest pace since January as transportation and housing costs increased, maintaining pressure on the central bank to allow the currency to strengthen even as growth falters.’ (Adam et al, 2011)

Due to the sharp increase in housing costs and high COE (Certificate of Entitlement) premiums, the CPI (Consumer Price Index) inflation rate rose to 5.4% in July (Recent Economic Developments in Singapore, 2011). Inflation leads to a rise in the general price level hence money loses its value (Haikal, 2005). Consumers cannot buy as much as they could previously, thus consumer spending will fall, and companies will lower production as demands for goods and services decrease.

In addition, there is growing uncertainties in the global economy, which undesirably affects the GDP growth in Singapore.

With a highly developed and successful free-market economy, Singapore depends heavily on exports, mostly in consumer electronics, IT products, pharmaceuticals and service activities. Our main trading partners are Malaysia,

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European Union, United States and China (Trading Economics, 2011).

In April to June 2011, due to the exports/imports disruptions from the Japan earthquake in March 2011 and a weaker demand from the advanced economies, Singapore’s economy saw a sequential fall as trade-related activities slackened. The economic growth in Eurozone and US slowed dramatically. Manufacturing activity fell by 23.7% following a 97.2% surge in the preceding quarter. This decline includes both the contractions of electronics and non-electronic products (Trading Economics, 2011).

Singapore’s GDP and Sectoral Growth Rates in 2010

Figure 1.1: (Source: Economic Survey of Singapore, 2011, p.2)

Figure: 1.2: Source: Recent Economic Developments in Singapore, 2011

Why is there a decrease? Let’s talk about the main influences to the sluggish global economic growth – European and the US crisis.

Years of unrestrained spending, strong welfare systems and cheap lending left Greece with a debt of €300 billion (CNN, 2010). Greece struggles to pay its bills, as its low credit rating raises the interest rates on existing debts, thus reflecting badly on the credibility of the euro.

US credit rating was also downgraded early in August due to its nation’s fiscal path and its broken political system. The analysis of US debt to GDP was evaluated as unsustainable. Lawmakers find themselves in a tough position deciding on resolutions, as the politics involved are so caustic (Riley, 2011). This has never happened to the US, hence views of US effectiveness, credibility and stability are greatly affected globally as the communities are in doubt.

The decline of the economy of foreign large countries results in a reduction of imports in Singapore, leading to a lower demand for goods and services, thus reducing production. Companies will have to layoff employees because lesser workers are needed to produce a smaller amount of goods. When the unemployment rate increases, consumer spending will reduce as they lose their income. This in turn leads to lesser demands for consumer goods and import revenue acquired from global shipping trade decreases.

These are some of the factors that contribute to a revised forecast of Singapore GDP growth. With no natural resources, Singapore has little to shelter from the global downturn since we are largely reliant on developed countries for its trade-related activities. The growth outlook remains vulnerable to downside risks of the soft global economic conditions.

Question 2 “Governments should play active roles in managing the high inflation rate faced by an economy.” Do you agree with the above statement? Please explain your view.

Inflation is a rise in the general price level over a period of time. There are 2 classifications of inflation – Demand-pull and Cost-push (Haikal, 2005).

Demand-pull inflation occurs when the general price level rises due to an increase in aggregate demand and cost-push inflation occurs when the general price level rises due to the rise in the cost of production in the economy, independent of demand (Quek, 2011).

Figure 2.1: Demand-pull inflation Source: Economics: Theory and Practice (2009)

Figure 2.2: Cost-push inflation Source: Economics: Theory and Practice (2009)

Patrick et al suggests that as inflation makes imports cheaper, it increases uncertainty and discourages savings, damages the balance of payment. It redistributes incomes causing current wages to buy lesser due to, while employers are better off with their rising profits. If incomes increase at a slower rate as compared to rate of inflation, overall standard of living declines as there is a reduction of purchasing power, where there is a need to pay more for the same amount of goods and services. High inflation brings about adverse consequences to the economy regardless of the cause.

Low inflation leads to an increase in net exports as domestic goods and services may become cheaper to that of the foreign, and eventually may correct a persistent balance of payments deficit. There will be an increase in investment expenditure since low inflation is more stable hence costs/revenues of investments can be easily estimated. When inflation is low, it preserves the real value of savings given that nominal interest rates will compensate for the rise in general price level, allowing our savings to buy the same amount of goods and services. Low inflation is not only more desirable than high inflation, but also better than no inflation as it injects some downward flexibility into real wages resulting in lower unemployment (Quek, 2011). A vivid example would be Japan, where deflation is seen since 1990s and its economy remains sluggish till today.

There are several measures that the Singapore government can take to reduce inflation: fiscal policy, exchange rate policy, supply-side policy, short-term supply-side measures and trade policy. However, due to the high exports and imports, exchange rate policy is considered as the most effective policy for achieving low inflation in Singapore.

This policy controls the exchange rate to influence aggregate demand/supply. (Quek, 2011) When the external economic environment is strong, Singapore will face high inflation in the absence of central bank intervention. Singapore’s trading partners will expand rapidly instigating a rise in its national income and general price level. Prices of Singapore’s imported goods and services will increase, leading to high imported inflation – cost-push inflation. Further, the surge of external demand for local goods and services will initiate a high demand-pull inflation. Therefore, when the MAS predicts a strong external economic environment, it can raise the policy band steadily and modestly to allow a gradual and moderate appreciation of the Singapore dollar to reduce inflation.

The exchange rate policy stance of the MAS has helped Singapore achieve price stability over the last decades. Consequently, this instilled foreign investors’ confidence in the Singapore’s currency, attracting many MNCs to invest locally. The resultant escalation in investment expenditure in Singapore has led to a more progressive increase in the production capacity and hence lower inflation. (Yip, 2008)

The failure of some governments to curb rising inflation has caused them to lose popularity and/or power. Take Zimbabwe for an example. There were calls for the leader to step down when the estimated inflation rate in 2008 was at 6.5 quindecillion novemdecillion percent (Quek, 2011). In the final analysis, as inflation of approximate 3% is healthy for the country and to high inflation brings undesirable impacts to the economy, government should monitor consistently and to play active roles, in order to maintain a pleasing sustainable growth rate in Singapore.

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