ACJC_H2_ECONS_P2_essay_Q1_(GST and growth)

1 1. Singapore government is set to raise GST from 7% to 9% sometime between 2021 and 2025, depending on the state of the country’s economy / economic growth. It will also increase the GST Voucher cash pay-outs when the GST is increased, to provide more help to lower-income households and seniors. Source: Straits Time, 20 February 2018 Discuss how the combination of an increase in GST and rising economic growth might affect expenditure by consumers on different types of products. [25] Approaching the question: • Unpacking the effects of each change in question: o Using PED to explain the effects of GST on consumer expenditure (CE) on different types of products e.g. luxury goods and necessities. o Using YED to explain the effect of higher economic growth on CE on different products. • Weighing/considering the effects of concurrent changes (of both GST and economic growth increases), making considered conclusions on whether CE will rise or fall. • Evaluation will include factors that will contribute to the outcomes, such as government’s mitigation measures to help lower income households deal with effects of GST rise. Introduction • Consumers’ total expenditure is the product of price and quantity bought (price x quantity demanded). Price is determined by t he demand and supply of the good. Demand is the willingness and ability to pay for a goods at given prices at a given time ceteris paribus. Supply on the other hand is the producer’s ability and willingness to sell or produce the good at given prices in a period of time ceteris paribus. • The overall effects of the combined changes of higher GST and economic growth on different goods depends on these two critical forces: o Whether demand for a good is price inelastic or elastic in demand o Whether demand for a good will rise or fall in response to higher earnings from higher economic growth o The extent of change in demand from income change Considering how GST affects CE on different products: CE will rise if demand for good is price inelastic, vice versa for those goods with price elastic demand • GST is an indirect tax paid through the producers / sellers on the consumers’ behalf. An Increase in GST by 2% will cause SS curve to pivot out to the left, shifting upward and the gap between old and new SS curves is larger for higher prices as GST is in percentage. This supply shift will cause prices to rise towards higher equilibrium points and quantity will fall towards lower equilibrium points. • Prices will tend to rise more for products or consumers which are less sensitive to price increases. The impact of higher GST on CE arising from the increase in price can be explained by using the concept of price elasticity of demand (PED). • PED refers to the degree of change in quantity demanded in response to a change in the price of the good. PED differs between goods and for a specifi