Economic Growth

Indicators of economic growth include indicators of living standards, as well as the growth in real GDP and the growth in real GP per capita. Economic growth include actual growth, potential growth, sustained growth, sustainable growth and inclusive growth.

Actual growth

This refers to the real economic growth experienced by a country over a specific period, typically measured by the annual percentage change in Real GDP. It reflects the actual expansion of the economy's productive capacity and the resulting increase in the production of goods and services.

Graphically, it is usually illustrated by an increase in AD, but can also be achieved via an increase in AS or both such that there is a rightward shift in the AD curve, AS curve or both.

Potential growth

This represents the economy’s maximum production in the long run. It refers to the increase in output brought about by an increase in the productive capacity (full employment output) of an economy. It considers factors like quantity and quality of available resources, technological advancements, and more.

Graphically, it is represented by a sustained outward shift in AS, such that there is a rightward shift in the LRAS curve.

Sustained Economic Growth

Combines the ongoing increase in actual GDP (year-on-year) with the gradual expansion of the economy's potential growth over time, which means adding up both actual growth and potential growth. This signifies a continuous improvement in the economy's ability to produce goods and services, leading to rising living standards and improved well-being for the population.

Graphically, it is represented by a sustained rightward shift in both AD and AS curves.

Sustainable growth

An actual increase in real national output of an economy that can be sustained without any significant trade-offs related to microeconomic or macroeconomic objectives, or negative consequences like depletion of resources and environmental degradation so future generations can continue to enjoy economic growth. These conditions need to be met for sustainable growth:

Potential Economic Growth: Actual economic growth is constrained by potential economic growth. A continuous increase in AD without accompanying rise in AS will likely cause high demand-pull inflation, which is undesirable and unsustainable.
Environmental Sustainability: Ensuring economic activities don't deplete natural resources or cause irreversible environmental damage and negative externalities which negatively impact the future economic growth
Resource Management: Utilising resources efficiently and promoting renewable energy sources.

Simultaneously, these issues should not manifest themselves in a significant manner when the economy grows:

Higher inflation (Measured by changes in CPI and increase in GPL): Increases in AD where the economy is already operating at full employment level are not matched by an accompanied increase in AS
Higher Income Inequality (Measured by GINI coefficient): Wages increase more rapidly for higher income groups but stagnant or slow for lower income groups.
Increased Environmental Degradation (Measured by various environmental indicators such as the Pollutants Standards Index): A rapid increase in economic activity may result in more pollution due to an increase in energy use, waste generation and emissions.
Significant Increase in Public Debt: Growth financed by fiscal spending may lead to future generations having to pay higher taxes or higher interest payments which occupies a portion of the government budget which is an opportunity cost for future generations.

Inclusive growth

This refers to economic growth that is distributed fairly across society and creates equitable opportunities for all. It focuses on productive employment rather than direct income redistribution as a means of increasing the incomes of relatively poor and excluded groups and raising their living standards.

In Singapore, the focus is on including low-skilled workers in the pursuit of economic growth through education and training to:

Reduce Income Inequality: Narrowing the gap between the rich and the poor through policies that promote equal access to education, healthcare, and economic opportunities.
Empowerment and Participation: Ensuring all segments of society have the chance to contribute to and benefit from economic growth.

Indicators that measure inclusive growth include:

GINI Coefficient (After government taxes and transfer payments): To inspect if redistributive programmes have had an impact on levels of income inequality
Growth in Median Wages: Whether an average worker has seen an increase in wages by the same extent as those in different income brackets.

Benefits of Economic Growth

1. Increased Living Standards

Economic growth leads to higher real GDP per capita, signifying greater production of goods and services per person. This translates to higher incomes, improved access to goods and services, and a better overall quality of life.

2. Employment and Reduced Poverty

As economies grow, more jobs are created, leading to lower unemployment rates and reduced poverty. This fosters greater social stability and well-being.

3. Fiscal Dividend

Higher economic activity generates increased tax revenue for the government. This allows for increased spending on public services like education, healthcare, and infrastructure, further improving living standards.

4. Investment and Innovation

Economic growth creates an environment conducive to investment in physical and human capital, as well as technological advancements. This fuels further growth and expands the economy's productive capacity.

5. Increased Consumer Demand

As incomes rise, consumer demand strengthens, stimulating production and economic activity through the multiplier effect.

Costs of Economic Growth

1. Environmental Degradation

Increased economic activity often leads to higher resource consumption, pollution, and environmental damage. This can have long-term consequences for sustainability and human well-being.

2. Worsen Income Inequality

Economic growth may not be equally distributed to all segments of society. Unequal access to opportunities and resources can lead to widening income gaps and social unrest.

3. Resource Depletion

Unsustainable economic practices can lead to the depletion of finite natural resources, hindering future growth and posing long-term challenges.

4. Inflationary Pressures

Rapid economic growth can sometimes lead to excess aggregate demand, putting pressure on prices and causing inflation. This can erode purchasing power and create economic instability.

5. Social and Cultural Disruption

Rapid economic change can disrupt traditional social structures and cultural values, potentially leading to social unrest and a decline in social cohesion.

Poor / Slow Economic Growth

Stagnant Growth:

Refers to a situation where the economy experiences minimal or no real GDP growth over an extended period. This can be caused by various factors:

Low Investment: Insufficient investment in physical and human capital can lead to a stagnant economy with limited potential for expansion.
Technological Stagnation: The absence of significant technological advancements can hinder productivity growth and limit the economy's ability to produce more with the same resources.
Institutional Inefficiencies: Corruption, weak property rights, and other institutional shortcomings can create an environment that discourages investment and economic activity.

Technical Recession:

Occurs when an economy experiences two consecutive quarters of negative real GDP growth. Singapore narrowly missed a technical recession in Q3 2019 and entered one in Q2 2020. This signifies a contraction in economic activity and can be triggered by various factors:

Sudden Economic Shocks: Events like financial crises, natural disasters, or trade wars can significantly disrupt economic activity and lead to recessions.
Policy Mistakes: Unsound economic policies, such as excessive interest rates or fiscal tightening, can dampen economic activity and trigger recessions.

Consequences of Poor / Slow Economic Growth

Consumers:

Reduced Income and Living Standards: Stagnant growth or recessions lead to lower wages, job losses, and decreased purchasing power, impacting overall well-being.
Reduced Confidence and Spending: Economic downturns erode consumer confidence, leading to decreased spending and further dampening economic activity.
Increased Debt Burden: Job losses and income reductions can make it difficult for consumers to manage existing debt obligations, leading to financial stress.

Producers:

Reduced Profits and Investment: Lower consumer demand and economic uncertainty lead to decreased profits for businesses, discouraging investment and expansion.
Job Losses and Production Cuts: Recessions often necessitate production cuts and layoffs, resulting in unemployment and economic hardship for workers.
Increased Financial Strain: Businesses may face difficulties meeting loan obligations and managing cash flow during economic downturns.

Governments:

Reduced Tax Revenue: Lower economic activity translates to lower tax revenue, limiting the government's ability to provide essential public services.
Increased Social Spending: Recessions often lead to increased demand for social safety nets and unemployment benefits, putting pressure on government finances.
Political Pressure: Economic downturns can lead to public dissatisfaction and pressure on governments to implement policies to stimulate economic recovery.

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