ACJC H2 Domestic Macro Issues Part 2

1 ©ACJC Econs Dept/2024/H2 Domestic Macroeconomic Problems ANGLO-CHINESE JUNIOR COLLEGE JC2 Economics H2 DOMESTIC MACROECONOMIC ISSUES (2) ECONOMIC GROWTH, UNEMPLOYMENT, & INFLATION Section Content Page Overview 2: Domestic Macroeconomic Aims and Problems 2 2 ECONOMIC GROWTH 5 2.1 Definition and Measurement 5 2.2 Types of Economic Growth 7 2.3 Causes and Types of Undesirable Economic Growth 19 2.4 Consequences of Undesirable Economic Growth 22 3 UNEMPLOYMENT 25 3.1 Definition & Measurement 25 3.2 Causes and Types of Unemployment 26 3.3 Consequences of High Unemployment 30 3.4 Limitations in the Measurement of Unemployment Rate 34 4 INFLATION AND DEFLATION 37 4.1 Definition and Measurement 4.2 Degrees of Inflation 37 38 4.3 Causes & Types of Inflation 39 4.4 Consequences of High Inflation 44 4.5 The Problem of Deflation 47 4.6 Limitations in the Measurement of Consumer Price Index 49 Annex and Learning Reflection 50

2 ©ACJC Econs Dept/2024/H2 Domestic Macroeconomic Problems Overview 2: Domestic Macroeconomic Aims and Problems In this set of notes, we will be studying the 3 domestic macroeconomic objectives and its related problems. For each macroeconomic problem, it is important to understand the (1) causes and the (2) consequences of the problem. We will learn the external macroeconomic problem and the respective policy tools used by governments to address these problems later in the term.

3 ©ACJC Econs Dept/2024/H2 Domestic Macroeconomic Problems Article: Singapore must prepare for economic challenges Amid the war in Ukraine and rising cost of living, Singaporeans must be prepared for more economic challenges, but the Government is doing all it can to cushion the impact on Singaporeans and alleviate the cost -of- living pressures. However, the Government also cautioned that despite the assistance, inflation will remain high and global growth will be weaker, and there may be a global recession within the next two years. There could be two contrasting scenarios Singapore could face in the coming months. If the global economy is able to grow despite some slowing down, Singapore’s economy might follow suit. In this scenario, the labour market would remain tight and unemployment rates low. On the other hand, a global recession could spell negative growth and higher unemployment rates for Singapore. Source: Channel NewsAsia (CNA) & The Straits Times, 1 May 2022 & 22 Jun 2022 (Pre-Lecture) Questions: What are some potential internal challenges that Singapore might face in the near future? (Hint: What components of the Singapore’s AD and AS could be affected by a global recession?)

4 ©ACJC Econs Dept/2024/H2 Domestic Macroeconomic Problems Overview: Root Causes of the Internal Macroeconomic Problems (AD-AS Analysis) Recall that a country’s domestic aims are (1) sustainable and inclusive economic growth, (2) low unemployment and (3) price stability. However, a country may not always achieve the aims as they face various macroeconomic problems, such as negative economic growth and high unemployment. The macroeconomic problems are caused by the mismatch and shocks in AD and AS conditions. The table below provides illustrations how changes in the AD and/or AS can lead to various economic problems. Table 10: Diagrammatical AD-AS analysis (Note: the numbering is continuation from Domestic Macro Issues Part 1) AD-AS RELATIONSHIP MACROECONOMIC PROBLEMS Scenario 1: A severe fall in AD to below productive capacity (full employment). 1. Negative economic growth or fall in real national income. Recession occurs if a country face two or more consecutive quarters of negative real economic growth. 2. Problem of high unemployment . This type of unemployment is also known as demand-deficient unemployment (see Section 3). 3. Fall in general price level. Deflation (negative inflation) occurs if the fall in general price level is sustained over a period of time (see Section 4). Scenario 2: Increase in AD excessively, at full employment of resources. 1. Excessive increase in AD is not complemented by similar increase in long-run AS. Rising AD coupled with limited resources (or unavailable resources) leads to higher costs and wages, causing nominal income to increase but not real income (as economy already reaches full capacity). There is no actual and potential growth. 2. Problem of high inflation. This type of inflation is also known as demand- pull inflation (see Section 4).

5 ©ACJC Econs Dept/2024/H2 Domestic Macroeconomic Problems Scenario 3: Fall in short run aggregate supply SRAS, supply shocks causing rising general price level. 1. Problem of high inflation. This type of inflation is also known as cost- push inflation (see section 4). 2. Negative economic growth or fall in real national income. 3. Problem of high unemployment, similar to Scenario 1. 2. ECONOMIC GROWTH 2.1 Definition and Measurement Do note that this is not entirely new to you as you would have learnt it under Introduction to Macroeconomics. Recall that economic growth is an increase in the country’s output level or real national income over a period of time . Economic growth occurs when the economy produces more goods and services using its existing resources. A country’s actual economic growth is the rate of increase in its national output or national income (i.e. real GDP) . It can be calculated as the % change in real GDP. For example, in the period from 2023 to 2024, using the following formula: A positive real GDP growth indicates that the economy is growing in terms of real GDP while a negative real GDP growth indicates that real GDP has fallen. Real GDP in 2024 – Real GDP in 2023 Real GDP in 2023 X Real GDP = growth 100% SLS Lesson: Package A Activity 1 & 2

6 ©ACJC Econs Dept/2024/H2 Domestic Macroeconomic Problems The following table shows Singapore’s GDP growth rates over the years. Table 11: Singapore’s GDP at 2010 Market Prices (Real GDP) (Data based on chained 2015 Dollars) Source: Singapore Statistics Year Overall GDP (S$ mil) % Growth 2009 296,599 0.1 2010 339,681 14.5 2011 361,210 6.3 2012 377,326 4.5 2013 395,578 4.8 2014 411,156 3.9 2015 423,444 3.0 2016 437,540 3.3 2017 457,319 4.5 2018 473,313 3.5 2019 479,680 1.3 2020 453,821 -5.4 Note: Falling economic growth means that the growth rate is decreasing. Example from Yr 2010 (14.5%) to 2012 (4.5%). If the growth rate is still positive but declining , the real GDP is increasing at a smaller rate and does not mean real GDP is falling. Example: Yr 2010 (S$ 3 39,681 mil) to 2012 (S$ 377,326 mil).

7 ©ACJC Econs Dept/2024/H2 Domestic Macroeconomic Problems 2.2 Types of Economic Growth 2.2.1 Actual Economic Growth Recall that actual economic growth refers to an increase in the country’s output level or real national income over a period of time (usually per annum). Actual economic growth can be illustrated and explained using three different models: (1) the PPC model, (2) the circular flow of income model or (3) the AD -AS model. Although there are various ways to illustrate economic growth, the AD-AS model is most commonly used. Table 12: Actual Economic Growth explained using three models (1) Actual Economic Growth illustrated using AD-AS diagram In the AD-AS model, actual economic growth can be caused by: 1. an increase in AD and/or 2. Increase in SRAS. If the country is not at full employment, an increase in the AD leads to an increase in real national income, and hence illustrates actual economic growth. Recall that AD = C + I + G + X – M, the AD increases when any of the factors affecting these four components changes. (Refer to your Introduction to Macroecon