(2020) A Level H2 Econs Paper 2 Essay Q4

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4. Government expenditure on large-scale infrastructure projects such as airports and mass rapid transit (MRT) can contribute significantly to a country’s economic growth. 

(a) Explain how government expenditure on large-scale infrastructure can contribute to a country’s economic growth. [10]

Government expenditure on large-scale infrastructure can increase actual economic growth 

1. Government expenditure on large-scale infrastructure can refer to spending on infrastructural projects such as building of new highways, new airport terminals, new railway transport lines, cycling tracks (& park connectors) & universities. 

2. As the government spends on such massive large scale infrastructural projects, industries such as construction, engineering can benefit from the increase in spending 

3. Since Government expenditure is part of Aggregate Demand (AD), an increase in G → increase in AD (reflected via a rightward shift of AD from AD0 to AD1 on Figure 1) → increase real NY via k → higher economic growth 

Government expenditure on large-scale infrastructure can increase potential economic growth 

1. Government expenditure on large scale infrastructure can result in an increase in potential growth 

2. When the government spends on building of new highways / new railway transport lines → it results in an improvement in accessibility & reduces travel time / congestion → reduces firms’ time taken to transport goods/services/workers → increase efficiency → lower cost of production → more work can be done in the same time → increase in productive capacity of the economy → increase in LRAS (reflected by a rightward shift of AS from AS0 to AS1 on Figure 2) 

3. When the government spends more on the construction of universities → it eventually allows a larger proportion of the population to acquire higher education → increasing the number of skilled workers in the economy → increase in productive capacity of the economy → increase in LRAS (reflected by a rightward shift of AS from AS0 to AS1 on Figure 2) 

(b) Discuss the extent to which such government expenditure on infrastructure projects will lead to a rise in the living standards of a country. [15]

How such government expenditure on infrastructure projects may result in rise in material standard of living of a country 

1. An increase in government expenditure → increase in AD → increase real NY (via k) → higher economic growth 

2. As disposable income rises due to higher economic growth → individuals will see an increase in purchasing power → greater ability to buy goods & services → improvement in material standard of living 

3. As such government infrastructural projects often require a massive number of workers required to work on them → job creation → more unemployed workers gain employment → improved incomes → improvement in material standard of living 

4. If such government infrastructure projects are of an educational nature (building of tertiary institutions) → increased skills of workers → ability to command higher wages → more disposable income → higher purchasing power → improvement in material standard of living 

How such government expenditure on infrastructure projects may result in rise in non-material standard of living of a country 

1. An increase in government expenditure on infrastructure projects which may be classified as ‘leisure amenities’ e.g. cycling tracks & park connectors in Singapore → increase in leisure options for locals → improvement in non-material standard of living  

2. As the government spends on infrastructure projects such as railways (e.g. different MRT lines in Singapore), improving and expanding road networks → such infrastructural project eases congestion, reduces travel time → as individuals have a finite amount of time in a day, less time spent travelling = more time available for work & leisure → gain in leisure time → improvement in non-material standard of living 

3. 3Increased government expenditure on infrastructural projects such as tertiary institutions can increase the education levels of locals in the country → higher education attainment of the population → more satisfaction & fulfillment of individuals → improves non-material standard of living 

How such government expenditure on infrastructure projects may not result in rise in standard of living of a country 

1. In some countries, government expenditure on infrastructural projects are short term cyclical responses to an economic recession & planned as an ‘economic stimulus’ / expansionary fiscal policy. 

2. Such infrastructural projects are hardly well planned, and can at times be a waste of precious public funds. For example, governments sometimes embark on building of new highways which turned out to be significantly underutilised. Such highway projects can cost billions of dollars. The noise, pollution as a by-product from the construction period can also end up negatively impacting the non-material standard of living of locals living in these areas.  

3. Corrupted government officials can also siphon large parts of funding for infrastructural projects which can often result in infrastructural projects built being of sub-par quality & companies cutting corners during the construction process. These can result in safety concerns and loss of lives should accidents occur → negatively impacting non-material standard of living. 

Conclusion 

1. Well planned, well executed government infrastructural projects can result in a significant improvement in non-material standard of living. This is evident in countries like Singapore where infrastructural projects to improve the MRT system has significantly cut travel times & this has increased the amount of time workers have for both leisure & work – improving both material & non-material standard of living 

2. Yet, government infrastructural projects can at times be wasteful and can be hijacked by corrupted officials to line and enrich their own families & can end up not having a significant impact on standard of living for the country - and at times, even potentially worsening it. 

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