Economics Tuition Singapore A Level H2 H1 Economics Tuition – Fears are growing that the UK

Fears are growing that the UK is running the risk of a period of painful “stagflation” – the toxic cocktail of stagnating growth, high unemployment and rising prices

Discuss whether the Singapore government should focus more on achieving low unemployment or price stability.

Introduction 

• Every government has four macroeconomic objectives that it seeks to achieve, i.e. sustained economic growth, low unemployment, low inflation and a healthy balance of payments.
• Clarify key terms:
• Price stability
• Low unemployment 

Body 

Singapore government should focus more on achieving price stability compared to low unemployment rate.

• External Benefit – Improvement in balance of payments

      Price stability will ensure Singapore’s exports remain competitively priced which will generate greater external demand since Singapore’s exports are relatively cheaper compared to other countries. At the same time, price of imports will be more expensive and assuming demand of imports is price elastic, quantity demanded of imports will fall more than proportionately. This leads to a áTRx + âTem and in turn a á net Xs which helps to improve current account.

      In addition, price stability in which there is lower inflation leads to lower costs & uncertainty in the country as future projections of costs and revenues are more accurate with price stability. This can help to improve a country’s attractiveness as an FDI location. So investors will move their funds into Singapore from other countries.

• Internal Benefit – Economic growth and low unemployment

Price stability will maintain the purchasing power of savings if the nominal interest rate paid on savings greater than the rate of inflation. Hence, people will have more incentive to save due to higher returns from savings. This will lead to a á in the volume of savings and in turn a á funds available for productive investment. As a result, there will be a á productive capacity of the whole economy seen by a rise of the aggregate supply and hence potential economic growth is achieved. 

However, on some occasions, the Singapore government has changed its priority to focus more on achieving low unemployment rate goal when high unemployment problem is more severe than inflation problem. 

For example during recession in Singapore as a result of US sub-prime crisis in 2008, real national output will be contracting and the economy will be operating well below full-capacity. Hence the Singapore government chose to depreciate the currency to stimulate economic growth and achieve full unemployment.

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