Using both ADAS and the PPC, explain the economic impacts of an ageing population on Singapore.
Both Singapore and Japan are facing significant challenges due to their ageing populations. In Singapore, the growing elderly demographic is placing a burden on social services such as eldercare and pension schemes, while healthcare costs and the demand for geriatric services continue to rise. Likewise, Japan is experiencing strain on its healthcare system and pension resources, along with a shrinking workforce that poses risks to sustained economic growth.
a. Using both ADAS and the PPC, explain the economic impacts of an ageing population on Singapore. [10]
Introduction
Singapore, like many developed nations, is facing significant economic challenges due to its ageing population. As the proportion of elderly citizens increases, there is growing pressure on social services, healthcare systems, and pension funds, while the economy faces potential labour shortages and slower economic growth. The effects of an ageing population can be analysed using both the Aggregate Demand-Aggregate Supply (AD-AS) model and the Production Possibility Curve (PPC). From an AD-AS perspective, an ageing population leads to a fall in aggregate demand (AD) due to lower consumption and higher taxes, while also causing a fall in aggregate supply (AS) due to a shrinking labour force. From a PPC perspective, an ageing population may result in the economy operating further away from its productive efficiency, leading to higher unemployment and underutilisation of resources.
AD impacts
An ageing population affects household consumption, taxation levels, and government expenditure, leading to an overall fall in aggregate demand (AD).
As the working-age population shrinks, a larger proportion of the population consists of retirees who are no longer earning wages. With lower disposable incomes, household consumption expenditure (C) falls, reducing AD. This decline in consumption leads to slower business activity, potentially causing firms to cut back on investment and hiring.
A lower working population means that a smaller tax base must support rising government spending on elderly care, pensions, and healthcare. To finance these expenditures, the government may need to raise taxes, further reducing disposable income and lowering private consumption.
While consumption and private spending decline, the government is likely to increase its spending on social services, particularly in healthcare and elderly welfare programs. This increase in government expenditure (G) offsets some of the decline in AD but may not be sufficient to fully compensate for the reduction in private consumption.
The fall in private consumption (C) is expected to be larger than the increase in government expenditure (G), leading to an overall decline in AD. This leftward shift in the AD curve from AD0 to AD1 results in lower economic growth from Y0 to Y1, reduced employment opportunities, and potential deflationary pressures from P0 to P1.
AS impacts
An ageing population also affects aggregate supply (AS) due to changes in the labour force and productivity.
A declining proportion of working-age individuals leads to a smaller labour force, reducing the quantity of labour available for production. This decline in productive resources causes a fall in Singapore’s productive capacity, shifting Long-Run Aggregate Supply (LRAS) to the left from AS0 to AS1.
With a shrinking workforce, firms may face labour shortages, leading to higher wage costs as businesses compete for a limited pool of workers. Higher labour costs may discourage investment in labour-intensive industries, causing a fall in short-run aggregate supply (SRAS) due to increased costs of production.
The decline in the working-age population reduces overall production potential, shifting both SRAS and LRAS leftward. This results in lower national output and reduced long-term economic growth from Y0 to Y1, exacerbating Singapore’s demographic challenges.
PPC: How ageing population will affect Singapore’s economy
The Production Possibility Curve (PPC) illustrates how an ageing population affects resource allocation, employment, and economic efficiency.
As aggregate demand falls, firms produce less, leading to lower demand for labour and an increase in unemployment. This results in an economy operating at a point further from the PPC, reflecting underutilisation of resources and lower productive efficiency, as shown from point A to B.
Over the long term, as the working population declines and labour shortages persist, the overall productive capacity of the economy shrinks. This is represented by an inward shift of the PPC from PPC0 to PPC1, indicating a permanent loss in potential output due to demographic constraints.
With fewer workers and a slower pace of innovation, Singapore’s potential growth rate declines, reducing its long-term economic competitiveness. A declining workforce may also lead to reduced foreign direct investment (FDI), as businesses look to invest in economies with a larger, younger workforce.
Conclusion
An ageing population presents significant economic challenges for Singapore, affecting both aggregate demand (AD) and aggregate supply (AS) while also reducing the economy’s overall productive capacity (PPC). The decline in AD, caused by lower consumption and higher taxes, results in slower economic growth. Meanwhile, the reduction in AS, due to a shrinking labour force and rising business costs, further weakens Singapore’s economic potential. From a PPC perspective, an ageing population leads to higher unemployment and underutilisation of resources, causing the economy to operate further from its full capacity.
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