Macroeconomics
The study of economic aggregates
Main issues
1. Economic Growth Rate (National Income Growth)
2. Overall Employment in the country
3. Changes in the General Price Level (Inflation Rate)
4. International trade and Foreign Exchange Rates
5. Balance of Payments (BOP)
6. Role of Government in managing an economy
7. Fiscal, Monetary and supply side policies
Internal Macroeconomic Goals
- Sustainable Economic Growth
- Stable Prices
- Full employment = non-accelerating inflationary rate of unemployment (NAIRU)
External Macroeconomic Goals
- Stable Exchange Rate
- Balance of Payments equilibrium (Balance in foreign transactions)
Economic Growth
The annual % increase in an economy’s level of real output over time
- Actual economic growth: Annual % increase in national output
- Potential economic growth : Annual % increase in economy’s capacity to produce
- Key indicators: Gross Domestic Product (GDP), Gross National Product (GNP)
Primary macroeconomic goal of Singapore
- Economic growth enables more goods and services to be made available for consumption
- Seen as improvement in society’s welfare
- Driven by Foreign Direct Investment (FDI), International Trade, therefore affected by performance of other countries
- Strong infrastructure, human capital
- Centred on chemicals, biomedical sciences, engineering, services and electronics
- Higher value-add, offer services, R&D, free trade for future growth
Inflation
Sustained increase in the General Price Level (GPL)
- Demand-pull: arising from increase in AD that is persistently greater than increase in AS when near or at Full employment level
- Cost-push: resulting from decrease in AS
- Key indicator: Consumer Price Index (CPI)
Low inflation rate in Singapore achieved by manipulating Foreign Exchange Rate
- Depends primarily on prices of imported goods
- Local inflation kept in check by national wages council and foreign labour migration policies
Full Employment
Unemployment: The number of people of working age who are without work, but willing and able to take up employment
- Structural Unemployment: Arises when workers do not have skills that employers want
- Cyclical Unemployment: Arises from a lack of demand for goods and services –“Demand deficient” unemployment
- Seasonal Unemployment: Varies with season/weather
- Frictional Unemployment: Arises as it takes time for worker to be matched with suitable jobs
- Key indicator: Unemployment Rate
- At full employment, there is some form of unemployment due to frictional unemployment
- High unemployment usually associated with social unrest, which may discourage investment
- Increased unemployment may arise when: (a) firms relocated to other countries, (b) firms use more technologically efficient methods of production, (c) there is outsourcing of jobs to neighbouring countries
- Unemployment causes: (a) loss of output, (b) loss of tax revenue, (c) draining of government revenue in providing unemployment benefits, (d) social unrest
Achieved in Singapore when unemployment rate is ~2% (frictional)
- Fulfil 1st 2 goals to fulfil this 3rd one
Stable Exchange Rates
Exchange Rate: The rate at which one currency can be converted to another
- Appreciation: The currency as gained value in relation to another currency
- A currency has lost its value compared to another currency
- Fluctuating currency causes: (a) great uncertainty among traders who become unsure of profit levels, (b) deters long term contracts and investment
Maintained by Monetary Authority of Singapore (MAS) by buying and selling S$
- Ensuring S$ remains stable or appreciates gradually in tandem with economic growth or inflation
- Could affect: (a) export sector, (b) tourism, (c) Foreign Direct Investment
Balance of Payments
A summary statement of money value of all the transactions between residents of the country with rest of the world during a specified period of time, usually one year
- Surplus: more credit than debit
- Can cause: (a) high interest payments, (b) draining reserves
- Confidence crisis: (a) run on domestic currency, (b) fall in external value of country’s exchange rate system
Not a major issue in Singapore due to market driven foreign exchange rate (flexible exchange rate system)
Conclusion
- Some goals are more important than other (country dependent)
- Possible to pursue 1 goal to achieve another
- Possible for 1 goal to conflict with another
- Policy options are available to goverments
