Explain the key economic problems arising from low economic growth, unequal income distribution, and reduced trade activity.
a. Explain the key economic problems arising from low economic growth, unequal income distribution, and reduced trade activity. [10]
Introduction
Economic challenges such as slow growth, income inequality, and a decline in trade can have significant implications for a country’s overall economic performance and long-term sustainability. These issues are interconnected, as slow growth can exacerbate income inequality, while falling trade can further dampen economic expansion. In the case of Singapore, external factors such as the US-China trade war and domestic structural constraints contribute to these economic concerns. A slowdown in trade reduces net exports (X-M) and aggregate demand (AD), leading to lower economic growth and rising unemployment. Slow growth, in turn, limits opportunities for inclusive economic expansion, while persistent income inequality poses challenges for social mobility and equitable wealth distribution.
Fall in Trade
A decline in trade has negative implications for economic activity, employment, and the balance of payments. The US-China trade war has significantly reduced global demand, leading to lower incomes in both the United States and China, which are key trading partners for many economies, including Singapore.
As global incomes fall, stock market declines and lower investor confidence further reduce household wealth in other trading nations, decreasing demand for goods and services worldwide.
For Singapore, this results in a decline in net exports (X-M), reducing aggregate demand (AD) and leading to a fall in real national income (NY).
A negative multiplier effect takes place, where the initial fall in trade leads to lower consumption and investment, worsening economic conditions and slowing growth further.
With reduced demand, firms cut back on hiring, leading to higher cyclical unemployment, particularly in export-oriented industries such as manufacturing, electronics, and logistics.
A decline in trade also leads to a worsening of the current account balance, negatively impacting the country’s overall balance of payments (BOP).
Given Singapore’s high dependence on trade, a prolonged downturn in global trade activity can severely restrict economic growth and employment opportunities.
Slow Growth
Singapore’s economic growth is closely tied to its trade performance, and persistent global trade uncertainties have limited AD expansion, resulting in slow economic growth.
Since net exports are a key driver of AD, a fall in trade reduces overall demand, restricting economic expansion.
Singapore operates near full employment, with an unemployment rate of around 2% to 2.2%, meaning that any attempt to stimulate AD through expansionary policies may be ineffective or lead to inflationary pressures rather than real economic growth.
Economic growth requires increases in both AD and aggregate supply (AS), but while efforts to expand long-run aggregate supply (LRAS) through productivity improvements and innovation are ongoing, these measures take time to produce tangible results.
As a result, Singapore faces structural challenges in achieving higher economic growth, particularly in the face of declining global trade and limited domestic market expansion.
A prolonged period of slow growth can weaken investor confidence, reduce employment prospects, and limit improvements in living standards.
Income Inequality
Despite Singapore’s strong economic performance over the years, income inequality remains a significant issue, affecting social mobility and economic inclusivity.
Singapore has a relatively high Gini coefficient of 0.459 before government transfers, which improves to 0.401 after redistributive measures such as subsidies, cash transfers, and social welfare programs.
Income inequality in Singapore has largely been driven by rapid economic growth and globalization, where high-skilled workers in finance, technology, and professional services have seen significant wage increases, while lower-skilled workers face wage stagnation.
Addressing income inequality is essential for ensuring inclusive growth, as rising wealth disparities can lead to lower social mobility, reduced consumer spending, and potential social tensions.
While government intervention through progressive taxation, education subsidies, and social assistance programs has helped mitigate the issue, continued efforts are needed to narrow the income gap and promote equal economic opportunities.
Conclusion
The economic issues of slow growth, income inequality, and declining trade are interconnected challenges that can significantly impact Singapore’s long-term economic resilience. A fall in trade reduces net exports and aggregate demand, leading to lower economic growth and rising cyclical unemployment. Slow economic growth further limits job creation and wage increases, exacerbating income inequality. While government redistributive policies help alleviate some disparities, ensuring sustainable and inclusive growth requires a balance between trade expansion, productivity improvements, and social policies that support equitable income distribution. Given Singapore’s reliance on trade, managing these challenges effectively is crucial for maintaining economic stability and competitiveness in the global economy.
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