Essay: Impact Of Macroeconomic Variables On Singapore's Economy." (70 Characters)

Describe the Intermediate Microeconomics For the Global Economy. 

Macroeconomic Variables and their Impact on Singapore's Economy

The global economy is interconnected with one another and is highly sensitive to reactions of one or more macroeconomic variables. According to Frydman and Phelps (2013), macroeconomic variable are those factors that influences the changes in the socio-economic pattern of the economy as a whole. It usually includes components like Gross Domestic Product (GDP), Consumer Price Index (CPI), inflation and unemployment. Through this report recent news article about Singapore has been chosen to describe the understanding about the macroeconomic variable and its impact on the economy.

The report started with the giving a brief introduction about the first article followed by the definitions of the key economic variables that has been highlighted in the article. Then the report tries to interpret the influence of those variables on the economy with respect to the given article and tries to highlight the possible consequences as a result of these changes (Argy 2013). The report has then been summed up with the findings of both the articles. 

According to the article by Ann Williams, one of the top level journalist of Strait Times it has been observed that Singapore has been able to curb their inflationary pressure on their economy. It has been observed that the nation, which has been able to reduce the inflation, does not face equal impact in the entire sector. Data states that during the first half of 2016, there has been a decline of around 0.9% of CPI and consequently in the second half it was around 0.2%. The decline in the CPI is indeed a good sign for the growth of the entire nation (Williams 2016). It implies that there has been deflation within the economy. Due to deflation, there has been increase in the purchasing power amongst the people of the nation. On other hand the reduction in inflation did not created equal impact on every members of the population. According to data from Singapore Statistics, it has been observed that the lowest income earning population was mostly benefitted. It has been seen the lowest one-fifth of the population reaped the greatest benefit. They are the group who has been benefitted by the decline in the provision of health care service. In contrary to this situation it has also been seen that the people falling under the top 5% of the income did not face any changes in their economic situation. The blame could be given to the rise in fees and taxes and also to some extent the food prices. Data suggests that in the year 2016, the lowest 20% faced a decrease of 1.1% inflation whereas the highest 20% faced only 0.5% decline. Singapore faced this unexpected decline in the inflation rate not due to fall in food price but due to fall in the price of electricity bills, accommodation costs, reduction in the cost incurred in the healthcare service provision. On other hand the food price saw an upsurge but the amalgamated effect of the various reductions surpassed this food price escalation. This unexpected change in the economic outcome has far-reaching effect on Singapore, which is going to be discussed in the later sections.

Article by Ann Williams

Inflation: According to Karl, Arslaner and Arslaner (2015), whenever the economy is facing an increase in the price level of the overall fixed basket of goods and services for certain period of time, then the phenomenon is said to be Inflation. Inflation is often termed as the plague of the economy. It does not affect the economy alone but instead start on influencing other macroeconomic factors of the nation. Inflation has been associated with other factors like change in the value of currency. The interest rate is also affected as a result of inflation. Again, whenever inflation comes with associated high level of unemployment, it has been termed as stagflation that is the economy has become stagnant at a very degrading position. On other hand, when the inflation rate in any economy rises at an unprecedented rate of double digit, then the phenomenon has been termed as hyperinflation (Coibion and Gorodnichenko 2015). Inflation can also be categorized under two types depending on the force, which enacts on it. The two types of inflation are cost-pull inflation and demand push inflation.

Consumer Price Index: Consumer Price Index also termed as CPI in economics. It is the way by which the changes in the price level of a pre fixed basket of goods and services are measured to shade light on the economic swings of any nation. The pre decided basket of goods and services are measured with respect to some fixed base year so that the it can be highlighted that whether the economic condition degraded or upgraded within the nation. The CPI is measured on yearly basis so that the nation can constantly keep a track of the economic happenings (www.economictimes.com 2016). In case of Singapore, the recently adjusted base year was 2010. CPI has been calculated with respect to 2010 base year to understand the changes that the economy has been facing.

Deflation: The eccentric phenomenon of reduction in the overall price level of any economy is known as deflation. There exists a difference between disinflation and deflation. When deflation is constant decrease in the level of overall prices, disinflation on other hand is the reduction in the rate of inflation. In other words, it can be said that deflation can be termed as negative inflation whereas when the inflation is positive but reduces at an increasing rate it is called disinflation (Karl, Arslaner and Arslaner 2015). Like inflation, deflation can also be categorized as cost-push and demand-pull deflation.

Inflation

The concept of inflation, deflation and consumer price index has been seen in the first article. The reduction in the inflation rate within Singapore has far-reaching effect on the entire economy through several channels like changes in interest rate, investment pattern, GDP and others. Lowering of inflation is indeed good news for any economy. Especially if a developing economy can curb its rate of inflation, then the people are going to be hugely benefitted. On other hand, highly developed economy, which already has a low rate of inflation, can fall into a disastrous trap if inflation is reduced within the economy. In case of Singapore, the economy already had very low level of inflation within the economy.

LRAS

AD2

AD1

P2

P1

Y2

Y1

REAL GDP

PRICE  LEVEL

Table 1: Effect Of Inflation On Real Gdp

(Source: As Created By The Author)

The relation between inflation and real gdp has been shown. In the figure, LRAS is the long run aggregate supply curve and AD is the aggregate demand curve. It could be sen that with the iflation rate low, the price level faced by the economy is quite low at P1, than the estimated price level P2. Hence, the real gross domestic product corresponding to such a price level is lower than that of the planned GDP in the economy. This responds to an output gap in the economy.

It can be stated that the inflation rate was already below the average for Singapore since 2013 onwards. On other hand, during 2014, inflation rate increased a bit to move upward into positive but then again in 2016 the inflation rate fell below average. Usually in case of reduction in inflation, the economy is benefitted as people now get the power to purchase commodity at lower prices. Overall, the producers are not benefitted by selling the goods and services. Interest rate falls down as a result of falling inflation and hence, investment becomes attractive. On one hand as a result, of lowered inflation, Singapore is expected to face a reduction in their aggregate demand but on other hand, it is going to get many investors eager to invest in their economy. The economy is also going to face a rise in its export level with the decline in the rate of interest rate, which occurred as a consequence of reduced inflation. However, with declining inflation, the producers also feel lack of incentive to continue their production and as a result, they get into a tendency of shirking off their employees and consequently the unemployment level rises. In addition, people gets into speculation of getting into a deflationary trap and often it has been observed that these speculations turns into reality and the economy falls into deflationary trap. It is always expected that the economy should have some level of inflation existing within the economy to maintain a subtle balance between the unemployment level and price level. The way in which the economy is going to be affected from this inflation depends on the type if inflation that occurred within the economy. If the decline in price level occurs due to high level of aggregate demand in the past period, then people gets into the notion that there may be possibility of further decline in price. People with this notion are going to be reluctant to hold back their money so that they can get the goods and services at further lower prices. On other hand, if inflation falls because of implementation of better technology then it is beneficial for the economy. This is because on one hand, the productivity increases and the aggregate supply increase.

Consumer Price Index

Conclusion:

The report can be wrapped up by stating that article 1 highlights that the Singaporean economy has been showing signs of high level of development. On one hand, the economy has been successful in curbing the inflationary pressure to a great extent and on another it has been able to maintain an increasing trend in the GDP. The government of Singapore must have been able to drive the nation into the channel whereby it automatically adjusted the inverse relationship of unemployment and inflation and maintain low levels in both the scenario. The further challenges for the economy remain in the aspect of maintaining the subtle balance between the inflation and unemployment level within the economy. 

The economic variable like inflation, unemployment and GDP has already been discussed while trying to explain the first article. This part of the report speaks about aggregate demand and supply. It talks about the concept of GDP and GNP and the way in which these two concepts differs. Again this article also tries to describe the ways in which Singaporean economy flourished by improving in different segments of their manufacturing sector.

The report initially starts with a brief summary about the article followed by key concepts used and then an explanation of these concepts in context of the article. Finally the report is summed up with the briefing about this article.

The second article has also been taken from one of the Singapore’s leading daily named Strait Times. Similar to article 1, it has also been authored by Ann Williams, the reputed journalist of the leading daily. This article talks about the flourishing economic performance of the nation during the year 2016. Just like the previous article where the nation out-performed its expectation in curbing inflation, this article speaks about the outperformance of the nation in terms of production in manufacturing units. It has been observed that Singapore saw an upsurge in the manufacturing sector. The report published by Economic Development Board of Singapore that the unit engaged in production of bio-medical manufacturing has been mostly involved in the sudden increase in the manufacturing output (Williams 2017). According to statistical data, the other sectors that helped in the growth of manufacturing sector are semiconductors, pharmaceutical sectors, engineering clusters and few other segments. It has been seen that the production in output increased to 21.3%. This increase has been nearly twice as expected. The pharmaceutical segment showed maximum growth of around 53.8% whereas the second highest growth rate of 49.4% was found in the electronic sector. On other hand, bio-medical sector expanded by the 44.9%. The sector, which performed worst amongst all the sectors, was transport-engineering cluster. On other hand, the printing sector slowed down and declined by 14.6%.

Deflation

Aggregate Demand: The summation of all the goods and services that are being available for final consumption within an economy at a particular point of time and which is going to be completely purchased by the consumer is known as aggregate demand of the economy. Often it has been seen that aggregate demand (AD) is considered as the GDP of the economy. According to Michaillat and Saez (2015), AD is the quantity of goods that are going to be sold out at all the possible level of prices in the economy.

Price

Quantity

Aggregate Demand

P1

P0

Q1

Q0

Table: 2 Aggregate Demand Curve

Source: Created by the Author

The aggregate supply curve of any economy at any particular point of time. Since there is an inverse relationship between the demand of a nation and the price of the products, henceforth, AD is negatively sloped or in other words it can be said that is sloping downwards (Argy 2013).

Aggregate Supply: The sum-total of all the services and goods within an economy that any producer is willing to bring into the market for sale at a fixed point of time is known as the aggregate supply of the economy. Whenever the prices of goods are high, producer can earn more profit by selling more of their products whereas when price is low, producers earn less profits. Hence, it has been observed that an inverse relationship exists between the aggregate supply and the price of the product the economy is dealing with.

Price

Quantity

LRAS- Classical view

Keynesian part

Intermediate

SRAS

Table 3: Aggregate Supply Curve

Source: As Created by the Author

The aggregate supply curve as in short run and long run. The AS curve can be categorized into three different parts depending on the view from which it is looked at. Under Keynesian economics, it is horizontal, the intermediate stage shows upward rising and the Classicalist views it as vertically sloping curve. The intermediary part where the curve is upward sloping portrays the short run situation whereas the classical part with vertical curve highlights the long run scenario.

Gross Domestic Product (GDP): The GDP being one of the most important macroeconomic components has been defined as the monetary value of all the goods and services produced within the territory or geographical boundary of any nation at a particular point of time (Argandona 2016). Usually the time is taken to be a single year. In economics, GDP has been often equalized with the aggregate demand of the economy and vice-versa. There are four main component of GDP namely, consumption, government expenditure, investment and net exports of the nation (Coyle 2015). In other words, mathematically it can be written as:

Impact of Inflation on Real GDP

GDP = C + G + I + NX

Gross National Product (GNP): The GNP is another important macro economic variables which measures the monetary value of volume of total goods and service produced within a period of time, usually one year by the nationals of the country. Though the definition of GDP and GNP seems to be almost same, but there exists a stark difference between the two measures (Argandona 2016). The measurement of GNP is done based on the production of the nationals staying within the country and also at abroad. On other hand, GDP considers only the productions taking place within the geographical territory by both the nationals and foreigners residing in that particular country. Therefore, mathematically GNP can be represented as:

GNP = GDP+ (Foreign production by domestic company -- Domestic production by foreign company)

Economic Growth: According to Choi (2014), economic growth is the increase or upsurge of the aggregate demand due to increase in the aggregate productivity of the nation. In other words, economic growth can be defined as the escalation in the amplitude of production whenever it is compared with its production done in the previous period. Economic growth is always measured in terms of increase in per capita productivity and not total productivity (Allin and Hand 2015).

The second article shows interesting figures about Singaporean economy. It has been observed that there has been unexpected growth rate within the economy. The growth has taken place as a result of improvement in the manufacturing sector. This is indeed a good sign of future prosperity for the economy. The improvement in manufacturing sector has directly influenced the economy by improving the GDP of the nation.

SRAS

SRAS1

LRAS

AD

Y1

Y

PRICE LEVEL

P

P1

REAL GDP

Table 4: Effect On Real GDP

(Source: As Created By The Author)

It could be shown that with the advancements in the manufacturing sector of the country, the real gross domestic product of Singapore would be able to show a substantial rise. The aggregate supply curve in the above figure would shift towards the right, which would reduce the price level from p to p1 and increase the level of output from y to y1. This would thereby be helpful in raising the gross domestic product in the economy.

It could be clearly stated that growth rate of GDP during 2016 has been fluctuating during the year 2016 when there was an unexpected increase in the level of manufacturing. As a consequence of this result, the economy has seen a positive level of growth rate of GDP in the year 2017. It can also be said that since the growth has taken place in the manufacturing sector, it implies that the government is taking care of infrastructural development to ensure further growth of the economy in the future. It has been seen that the sector which yielded the maximum benefit was pharmaceutical segment. This implies that the nation has invested bulk of money in their research and development. In addition, it can also be commented that the economy can generate huge amount of profit by exporting life saving pharmaceutical drugs and equipments and also by earning royalty by issuing their patent rights over certain drugs. The decline or slowdown in the growth rate of printing sector can also be cited as a symbol of development as people are getting used to more electronic media and henceforth require less of print media. It can also be cited as a classical example of sustainable development as less of paper is required due to reduction in usage of print media. The aggregate demand of the economy is going to increase with the increase in the GDP and the aggregate supply is also expected to improve due to the improvement and advancement in the technological factors within the economy.

Conclusion:

The Singaporean economy has mainly been able to maintain its position because of advancement in technology and manufacturing sector. The second article clearly highlights the different segments in the manufacturing sector which has shown great improvement in Singapore and also highlighted the segment which has shown least development. By ensuring a proper development in those sectors, the already developed Singaporean economy can expect to sustain and retain its position in the global economy. Henceforth, it can be said that the economy has signs for success in future years by maintaining sustainability in their daily spheres. 

References:

Allin, P. and Hand, D., 2015. Getting the measure of modern life. Significance, 12(1), pp.40-42.

Argandoña, A., 2016. Gross Domestic Product (GDP) and Gross National Product (GNP).

Choi, H., 2014. The Triple-Zero Definition of GDP. Browser Download This Paper.

Coibion, O. and Gorodnichenko, Y., 2015. Is the Phillips curve alive and well after all? Inflation expectations and the missing disinflation. American Economic Journal: Macroeconomics, 7(1), pp.197-232.

Coyle, D., 2015. GDP: A brief but affectionate history. Princeton University Press.

Data.worldbank.org. (2017). GDP per capita (current US$) | Data. [online] Available at: https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?end=2015&locations=SG&start=2006 [Accessed 26 Feb. 2017].

Kal, H., Arslaner, F. and Arslaner, N., 2015. Sources of asymmetry and non-linearity in pass-through of exchange rate and import price to consumer price inflation for the Turkish economy during inflation targeting regime. Central Bank of the Republic of Turkey Working Papers, (15/30).

Michaillat, P. and Saez, E., 2015. Aggregate demand, idle time, and unemployment. The Quarterly Journal of Economics, 130(2), pp.507-569.

The Economic Times. (2016). Definition of 'Consumer Price Index' - The Economic Times. [online] Available at: https://economictimes.indiatimes.com/definition/consumer-price-index [Accessed 26 Feb. 2017].

Tradingeconomics.com. (2017). Singapore GDP Growth Rate | 1975-2017 | Data | Chart | Calendar | Forecast. [online] Available at: https://www.tradingeconomics.com/singapore/gdp-growth [Accessed 26 Feb. 2017].

Williams, A. (2016). Singapore manufacturing output jumps 21.3% in December, best in 5 years, smashing forecasts. [online] The Straits Times. Available at: https://www.straitstimes.com/business/economy/singapore-manufacturing-output-jumps-to-5-year-high-of-213-in-december-smashing [Accessed 26 Feb. 2017].

Williams, A. (2017). Inflation for Singapore households continued to ease in second-half of 2016, but by smaller 0.2%. [online] The Straits Times. Available at: https://www.straitstimes.com/business/economy/inflation-for-singapore-households-continued-to-ease-in-second-half-of-2016-but-by [Accessed 26 Feb. 2017].