(2021) A Level H2 Econs Essay Q6 Suggested Answer by Mr Eugene Toh (A Level Economics Tutor)
(2021) A Level H2 Econs Paper 2 Essay Q6
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6. The annual rate of real GDP growth in Singapore dropped from 4.6% at the start of 2018 to 1.2% at the start of 2019. However, the Gini coefficient remained stable at around 0.46.
(a) Explain one potential demand-side cause and one potential supply-side cause of real GDP growth. [10]
What is real GDP growth
Real GDP measures the total aggregate value of final output produced within the geographical boundaries of a country over a given period of time, usually one year, after adjusting for inflation.
Real GDP growth measures the change in real GDP compared to a previous time period (usually the previous year)
One potential demand-side cause of real GDP growth
An increase in real GDP growth can be caused by an increase in Aggregate Demand. Aggregate demand is measured by C + I + G + (X-M).
An increase in government infrastructure spending on projects like building new roads, railways, schools or hospitals can result in an increase in AD → rightward shift of AD from AD0 to AD1 → increase in real NY from Y0 to Y1 → increase in real GDP growth as seen in Figure 1
This only applies if the economy is not already operating at full employment level.
Comment: can discuss any other factors that affects components of AD (C, I, G or X-M)
One potential supply-side cause of real GDP
An increase in real GDP growth can also be caused by an increase in Long Run Aggregate Supply (LRAS).
An increase in the number of workers in the labour force (demographic changes due to higher birth rates OR increase in number of foreign workers) → increase in productive capacity of the economy → increase in LRAS → rightward shift of AS from AS0 to AS1 → increase in real NY from Y0 to Y1 → increase in real GDP growth.
This only applies if the economy is operating at near full or at full employment level.
Comment: can discuss any other factors that shifts SRAS or LRAS to the right
(b) Discuss whether a reduction in the rate of real GDP growth makes it harder for Singapore to achieve both inclusive and sustainable growth. [15]
How a reduction in real GDP growth may not make it harder for Singapore to achieve both inclusive and sustainable growth
High growth rates usually associated with worsening income inequality
Globalisation, technology & financial development are key drivers of economic growth, but because their benefits may not be spread uniformly throughout the population, they have been associated with rising income inequality
Globalisation tend to spur greater economic specialisation as countries allocate a larger share of their productive resources towards industries that use more intensively the input that is relatively abundant
In countries where skilled labour is more abundant; specialisation will boost the growth of sectors that uses relatively more skilled workers to produce goods & services. All else being equal, this will result in skilled workers benefiting from higher wages while unskilled workers gain less or even see a drop in wages
A reduction in the rate of real GDP growth may therefore not make it harder for Singapore to achieve inclusive growth
High growth rates can cause more environmental degradation
Higher growth rates can indicate a higher level of economic activity
This can mean more industrial activity causing a higher level of pollution, more vehicles on the roads (transporting goods & services and workers) causing more emissions
As a result, environmental degradation can accompany higher rates of economic growth
A reduction in the rate of real GDP growth may therefore not make it harder for Singapore to achieve sustainable growth
How a reduction in real GDP growth makes it harder for Singapore to achieve both inclusive and sustainable growth
Reduced fiscal resources
Tax revenues collections are usually correlated with economic growth ; higher economic growth rates implies personal incomes & corporate incomes are rising in tandem - allowing the government to collect more tax revenue
A reduction in real GDP growth will also mean that there will be a reduction in the rate of tax collections by the government
As government tax revenues grow as a slower rate - this will make it harder for Singapore to achieve both inclusive growth and sustainable growth
Why reduced tax revenues will make it harder for Singapore to achieve inclusive growth
The government tries to achieve inclusive growth by reducing income inequality while raising the rate of economic growth
Key policies used to address income inequality include schemes such as the Workfare Income Supplement & forms of transfer payments such as the permanent GST vouchers
The Workfare Income Supplement for example, provides regular income topup for low income workers through both cash grants and topups to their CPF accounts.
Similarly, Permanent GST vouchers provide cash grants, CPF topups & rebates to utilities bills for low income households
These policies are largely transfer payments - the ability to make such transfer payment or progressively boosting / increasing such transfer payments to reduce income inequality can be dependent on the country’s fiscal position.
With a better fiscal position (brought about by higher tax collections) - the government can be in a better position to achieve inclusive growth
Why reduced tax revenues will make it harder for Singapore to achieve sustainable growth
The Singapore government has pledged to set aside $100 billion over the next 100 years to fund climate change protection measures
Such measures include building of sea walls & setting up coastal defenses against rising sea levels. These measures are essentially to ensuring that growth remains sustainable and that environmental degradation as a result of climate change doesn’t cause Singapore to become unlivable for future generations.
Such climate change protection measures are essentially considered to be public goods & can only be sustainably funded by the government.
Again, without an adequate healthy fiscal position contributed by healthy / strong GDP growth rates - it would be hard to set aside funding to ensure that policy measures like these to help achieve sustainable growth are met.
Conclusion
While higher GDP growth rates are usually correlated with higher income inequality and greater environmental degradation - they are also provide tax revenues, boosting a country’s fiscal position & allowing the government to solve / mitigate issues to allow growth to remain inclusive & sustainable
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