(2014) A Level H2 Econs Essay Q6 Suggested Answer by Mr Eugene Toh (A Level Economics Tutor)
(2014) A Level H2 Econs Paper 2 Essay Q6
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6. Since the economic crisis of 2008, rates of economic growth across the world have differed considerably.
(a) Explain the key determinants of actual and potential economic growth. [10]
Key determinants of actual growth
Actual growth is largely driven by an increase in AD
Therefore, determinants of actual growth are what affects the various components of aggregate demand
Interest rates – Interest rate changes can influence levels of Consumption & Investment, for example, a decrease in interest rates can encourage an increase in Consumption as more consumers may borrow to finance spending on large ticket items
Economic sentiments – Positive sentiments about the economy can drive consumers to spend more and vice versa.
Government policy – Changes in personal and corporate income taxes can affect Consumption & Investments and the government can also change its level of spending.
Key determinants of potential growth
Potential growth is largely driven by an increase in LRAS.
Therefore, determinants of potential growth are what can affect the LRAS
Size of the labour force – The size of the labour force can be affected by demographic changes such as a decrease in birth rates or due to government policy for example a welcoming approach towards importing foreign migrant labour. An increase in the size of the labour force can increase the productive capacity of the economy.
Technological changes – Changes in the level of technology can also increase the ability of the economy to produce. For example, a move towards autonomous vehicles can free up drivers to take up jobs in other productive parts of the economy allowing increased production.
Productivity changes – Training & upgrading of workers can increase the productivity of workers which can then increase production levels.
(b) Assess the alternative economic policies that the Singapore government could adopt to maintain a sustained rate of economic growth into the future. [15]
Maintaining a sustained rate of economic growth
Requires an increase in both actual and potential growth
Thus, to bring about a sustained rate of economic growth, there needs to be both policies to increase actual and potential growth
When considering alternative policies, we can consider demand management policies vs supply side policies
Demand management policies
Demand management policies such as an expansionary fiscal policy can be adopted to bring about an increase in AD
For example, increasing government expenditure on infrastructure projects or cutting personal income taxes / corporate income taxes to increase Consumption & Investments à this will increase AD à increasing real NY
Using government expenditure to bring about increases in AD may not be sustainable as
Constantly increasing G / cutting taxes can result in a budget deficit
Budget deficits require borrowing or drawing down from reserves in where there is an opportunity cost
It may not be a good idea to constantly fall back on using fiscal policy to increase growth
Furthermore, increasing government expenditure can result in the following trade-offs
Increasing G when economy is already operating near full employment level can cause inflation
Increase government expenditure in certain areas like healthcare can crowd-out private investors as Singapore has a small domestic market
Therefore, it might be a better idea to focus on supply side policies
Supply side policies
Spending on education and retraining & reducing reliance on foreign labour
Singapore takes a 2-pronged approach towards increasing potential growth & increasing our productive capacity
On one end, we attempt to reduce our reliance on foreign labour through measures to tighten the inflow of foreign labour via increasing foreign worker levy / reducing dependency ratio ceiling
On the other end, we increase spending on policies to encourage re-training and education e.g. SkillsFuture Credit à such spending increases the skills & productivity of workers à allowing a rightward shift of LRAS
The two policies, when taken together, allows Singapore to achieve a sustainable way of increasing our productive capacity
Policies to encourage retraining and education takes time; productivity increases take time
At the same time – increasing foreign worker levy and reduction in dependency ratio ceiling can cause an increase in cost of production à leftward shift of SRAS
This can cause cost push inflation
Conclusion
Both demand management and supply side policies can be geared towards policies that can
Increase both AD and AS
Support an increase in export competitiveness & investments (to avoid excessively increasing G which can cause crowding out effect)
For example, infrastructure spending on improving transport links and technological infrastructure can encourage investors to invest in Singapore.
This can increase both AD & AS.
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