Explain the indicators commonly used to measure a country’s economic performance.
a. Explain the indicators commonly used to measure a country’s economic performance. [10]
Introduction
To evaluate how well an economy is performing, governments and economists track a range of macroeconomic indicators. These indicators provide insights into how successfully an economy is achieving key goals such as sustained economic growth, low inflation, low unemployment, and a healthy balance of payments.
Inflation
Inflation refers to the sustained increase in the general price level of goods and services in an economy over time. A common indicator used to measure inflation is the Consumer Price Index (CPI), which tracks the price changes of a representative basket of goods and services typically consumed by households.
CPI inflation provides an indication of how much prices have risen, and whether purchasing power is being eroded. In many countries, an annual inflation rate of 2% to 3% is considered acceptable, as it reflects moderate price increases consistent with economic growth, without undermining consumer welfare.
In Singapore, two different inflation measures are often cited: CPI-All Items Inflation and Core Inflation. CPI-All Items includes all price changes, including volatile components such as accommodation and private transport. In contrast, Core Inflation excludes these components because they may not affect all households uniformly and can be heavily influenced by government policies (e.g. COE quotas or changes in housing supply). This distinction allows policymakers to focus on the underlying, persistent drivers of inflation. For instance, in a year where accommodation and private transport costs fall, CPI inflation may show deflation (e.g. -1%), while Core Inflation—tracking broader, more stable components—might still reflect mild inflation at around 1%.
Unemployment
Unemployment occurs when individuals who are actively seeking jobs are unable to find employment. The unemployment rate is the standard measure, expressed as the number of unemployed individuals divided by the total labour force, multiplied by 100.
A low unemployment rate is desirable because it indicates that resources—especially labour—are being utilised effectively. For small, open economies like Singapore, an unemployment rate of 2–3% is considered healthy, accounting for frictional and structural unemployment. Larger economies with more diverse sectors and geographic labour markets may accept 3–5% as a natural rate.
Balance of Payments
The Balance of Payments (BOP) is a comprehensive record of a country’s economic transactions with the rest of the world. It includes the current account (covering trade in goods and services, income flows, and transfers) and the capital and financial account (covering investments and financial transactions).
A surplus in the BOP indicates that inflows (e.g. export earnings, investment receipts) exceed outflows (e.g. import spending, capital outflows), generally seen as a sign of strength. A persistent deficit, on the other hand, raises concerns over a country’s competitiveness and long-term sustainability. It may require the country to borrow from abroad or draw down its foreign reserves, which can undermine financial stability.
Economic Growth
Economic growth is most commonly measured by the increase in real Gross Domestic Product (real GDP)—the total value of all final goods and services produced in a country, adjusted for inflation. Real GDP provides a clearer picture than nominal GDP, which can be distorted by price level changes.
In Singapore, economic reports often refer to “GDP at 2020 prices,” which compares GDP values year-on-year using 2020 as a base year. This allows for more accurate comparisons over time, isolating changes in output volume from price changes.
A developed economy like Singapore is generally considered to be experiencing healthy growth when real GDP rises by 3% to 4% per annum. Sustained growth at this pace typically reflects strong aggregate demand (consumption, investment, government spending, and net exports), rising productivity, and improvements in living standards. Conversely, negative or stagnant growth signals economic slowdown or recession, with consequences for employment, business confidence, and public revenues.
Conclusion
In summary, the key indicators used to measure a country’s economic performance include inflation, unemployment, balance of payments, and economic growth. Together, these indicators provide a multi-dimensional view of an economy’s health. In Singapore’s case, close monitoring and prudent policymaking around these indicators have enabled the country to navigate global challenges and maintain macroeconomic stability.
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