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Overview of the macroeconomic events

Discuss about the Macroeconomics for Principles of Economics Influence.

Principles of economics influence the market and impact the economy nationally and globally. The main purpose of the assignment is to critically analyze the article titled ‘Singapore productivity growth sluggish: Nomura’ published in October 2015 by Grace Leong. The author in the report presents the overview of a macroeconomic event that is related to the news article. Economic theories and models are applied in the article to explain the key macroeconomic problems faced by Singapore. After analyzing the key macroeconomic problems the author finds out the author also analyzes the causes of the economic problems in an economy. The economic problems have a direct impact on the economy and the society. The author explains the impact of the economic problems on the economy of Singapore. There are various policies to mitigate the problems faced by the economy. The assignment also discusses the policies implemented by the government to solve the problem. Mainly the main concern of the assignment is to discuss the economic condition of the economy. The main theme of the assignment is to manage the economy of Singapore to achieve long term growth in a globalised world (Borio 2014).  

The aim of Singapore is to increase the rate of growth of the economy by relying less on foreign labors and improving the productivity. The report suggests that the restructuring as not been successful for the economy as it has accounted for a sluggish growth over the past years. There are many reasons for the sluggish growth of the economy. The government has also implemented many policies to boost the productivity of the economy. There are various macroeconomic events attached to the article (Gandolfo 2013).

There are various macroeconomic events that are attached to the article such as unemployment, aggregate demand and supply, fiscal policy, GDP, growth, interest rates, inflation rates, and government policies. The aim of the economy of Singapore is to raise the productivity growth to two to three percent. It also aims at relying less on the foreign labor and increasing the demand for the domestic labor to solve the problem of unemployment. The rate of growth of Singapore is declining after the restructuring of the economy. As per the data and market research the growth of the economy has fallen to 2.1 percent over the five years. The main reason for the fall in growth rate is fall in the global growth rate, ageing population and tightening fiscal conditions. Rise in interest rates in United States has also contributed to the sluggish growth of the economy. The economic conditions of all the economy are interconnected. Change in one economic activities of one country leads to changes in the other economy. The debt level is rising in Singapore especially due to raise in the household and corporate debt levels. The debt level contributes to 78 percent of the total GDP of the economy. The rise in the interest rates also proves to be disadvantageous for the economy as it can have a negative impact on the property market (Coeurdacier and Rey 2013).

Economic theories and models

Nomura is a Japanese financial group that evaluates the economic conditions of the countries through market research. According to the Nomura report it is essential for the countries to maintain its productivity as it is the main contributor to the GDP growth rate. Restructuring has not been successful for the economy as it has resulted in a fall in the domestic productivity growth rate. Fall in the productivity has led to the rise in the unemployment. A chain of macroeconomic events has been affected due to the restructuring of the Singapore economy such as unemployment, interest rate, inflation rate, GDP, productivity and aggregate demand and fiscal policies (Coale and Hoover 2015). 

GDP can be defined as the gross domestic product that means the total production of goods and services in n economy. Productivity has a direct relationship with the GDP of the economy. It is the total values of goods and services produced in a particular year. The components of gross domestic product are consumption by household, investment by businesses, government expenditures, and net exports. There are three approaches to measure GDP that are production approach, income approach and expenditure approach. The fall in the aggregate demand leads to a fall in the GDP. Since the restructuring has led the productivity the GDP has fallen in the economy. The reason for the fall in the productivity is the tightened fiscal conditions that mean a fall in the money supply. Fiscal policies are the policies used by the government to monitor the functioning of the economy by altering the taxes and expenditures. Tightened fiscal policies mean fall in the government spending and increase in taxes. The main reason to use tight fiscal policies is to reduce the inflationary pressure on the economy (Ho and Wong 2016). Tight fiscal policy has resulted in a sluggish growth because it reduces the aggregate demand of goods and services in the economy. It can be explained with a help of diagram:

Tight fiscal policy

Figure: fall in demand due to tight fiscal policy

The above diagram shows that the tight fiscal policies reduce the amount of money that in turn reduces the aggregate demand in the economy. The real GDP falls from Y to Y1 as the demand curve shifts to the left.

Interest rate and GDP has an inverse relation. Rise in interest leads to fall in the real GDP that in turn results in a slow growth of the economy. Same was the case with Singapore during restructuring. The rise in the interest rate lowered the investment in the economy. The property market was experiencing a downturn that led to the fall in the total productivity (Leggett 2013). It can be shown with the help of diagram.

Effect of rise in interest rate

Figure: Effect of rise in interest rate

The above diagram shows that as the interest rate rises in the economy the investment in the economy falls. The IS curve falls to the left. Since in long run the economy is producing at full potential level, the fall in the interest rate leads to a fall in the real GDP and in turn the economic growth gets hampered.

Another macroeconomic event attached to article is rise in unemployment. The main cause for rise in the unemployment rate is mismatch in the skills and talents of the employees. The reason for the fall in productivity was rise in employment of less productive employees according to the report presented by Nomura. The country was involved in hiring employees for part time job and less skilled or old age people that were unproductive. This led to the fall in the productivity of the economy. There are various types of unemployment that exists. The type of unemployment that rule Singapore was structural unemployment that is unemployment arising due to mismatch in the skills and low productivity. Since the demand of good was low so was supply as people had less money to spend (Leifer 2013).  

Rise in costs of production and economic uncertainties or instability is another reason for a fall in the GDP of the economy. As the costs in the economy rises the aggregate supply falls and so does the investment. The fall in the aggregate supply shifts the curve to left.

GDP

Figure: fall in GDP due to fall in aggregate supply

The above diagram shows that as the cost of production increases the aggregate supply shifts to it right. The price level rises and the real GDP in the economy falls from Y1 to Y2.

The foreign demand has remained stable during the time of restructuring adding to the problem for the economy. The net export that is exports minus the imports accounts only 20 to 30 percent of real GDP. The low net exports results in sluggish productivity. Another key economic concept is that of stagflation. Stagflation is a situation of rise in prices of goods and service along with the fall in the economic growth. It is the persistent rise in the prices of goods along with the stagnant demand and high unemployment. Stagflation increases the problem for the economy further as the demand for the goods is low despite of which the prices are rising further. The main problem with stagflation is that it worsens the economic conditions pushing the economy towards sluggish growth and poverty (Leong 2015). 

Stagflation scenario

Figure: Stagflation scenario

Hence, there are various economic theories and models that can be used to describe the article. The economic theories and model are used to explain the scenario of the economy and the reasons and the effects of sluggish growth. The main factors that contribute to sluggish growth of the economy are rise in unemployment, rise in interest rate, fall in GDP due to fall in aggregate demand, stagflation, fall in foreign demand and tight fiscal policies adopted by the government (Mankiw 2014). 

The key macroeconomic problems that Singapore faces are as follows:

  • Low productivity- the main primary problem with Singapore is that growth rate has been falling since 2010. The restructuring plan of Singapore did not prove to be beneficial for the economy. The target of the economy was o increase the economic growth by two to three percent. The present economic growth of the country is only 2.1 percent.
  • Unemployment- another major problem that the country faces is rise in the unemployment rate that in turn decreases the income of the economy. The main type of unemployment that exists in the economy is structural unemployment. Structural unemployment is joblessness due to mismatch in the skills that the employees posses and the demand that employers have (Rodan 2016).
  • Low income and low standard of living- another key major macroeconomic problem that Singapore faces is low income and standard of living.
  • Stagflation- the prices of goods and services in the economy is rising but the economic growth is continually falling. The unemployment rate is high and so is the inflation. This situation is called stagflation that further increases the economic problem of the country (Sheffi 2013).

The main cause of the economic problems that Singapore faces is restructuring plan of Singapore that was launched in the year 2010. The unemployment rate is continually rising due to less availability of the job and rise in population. Another reason for the sluggish growth of Singapore economy is rise in the interest rate and tight fiscal policies. These two phenomenons leads to a fall in the aggregate demand for goods and services that in turn lead the productivity to fall. Another reason for the fall slow rise in the economy is continuous rise in prices of goods and services due to rise in the costs of production of good and high unemployment along with slow demand a situation known as stagflation (Wong and Chong 2014). The tight fiscal policy and rise in the domestic interest rates adds on to the problem for the economy. High interest rates make the investment less lucrative. The fall in the investment rate leads to a fall in capital and new business ventures that in turn decreases the money supply in the economy. Fall in money supply leads to a fall in aggregate demand of goods and services. Another reason for the sluggish economic growth of Singapore is ageing population due to fall in the fertility rate (Room 2016).

The economic impact of the economic issues is fall in productivity and fall in the income that in turn leads to a fall in the standard of living. The ageing population in Singapore leads to shrinkage in the workforce and low productivity. This has a direct impact on the business of Singapore. The impact of economic problems on Singapore is as follows:

  • Vulnerable to external shocks- the low productivity leads to a fall in the foreign demand for goods and services. The demand for the exports falls that lowers the equilibrium national output pushing the sellers to face loss (Weilun 2016).
  • Competition- globalization has led to an increase in the competition. Sluggish economic growth makes the country vulnerable to competition. Singapore has lost its comparative advantage due to the key macroeconomic problem that it faces.
  • Social tensions and crime rates- as the unemployment rate is raising the crime rate also increases putting a negative impact on society. Since people do not have money to live a good and standard life they opt for the next method that is easier such as theft, murder that puts a negative impact on society (Swee 2013).
  • Suicide rates- the suicides are also rising especially in case of male population simply because they don’t have money to feed theory family. So the only option left with them is to take away one’s life. The rise in suicides ahs both direct and indirect impact on society and economy of Singapore (AsiaOne 2016).

The economic problems that the country faces can be reduced by framing proper policies by the government. To boost the economy and increase its productivity the government expenditure should increase. The rise in the government expenditure will increase the aggregate demand and hence will further boost the GDP growth. The government should also focus on reducing unemployment by opening more job opportunities for the youth. Proper training and knowledge should be given to the youth so that the employers employ the youth that will result in higher productivity in future.  The main tool of government to solve the economic problems is fiscal policies that include the taxes and government expenditure (Scarth 2014). Rise in government expenditure for the benefit of economy such as spending on infrastructure will prove to be beneficial for the economy. The central bank should also try to reduce the interest rates to boost the investment. Rise in investment will increase the aggregate demand and the overall gross domestic product. Policies should be implemented to reduce the prices of goods and services in the economy. There are various government statutory boards that look into the economic problems of Singapore that includes:

  • Economic development board (EDB)
  • Standards, productivity and innovation board (SPRING Singapore)
  • Agency for science, technology and research
  • International enterprise Singapore (IE Singapore) (Balassa 2014).

Conclusion

No economy is perfect. All the economic events and activities are inter-connected with each other. Change in one has its affect on the other. The main problem with the economy is the sluggish growth that the economy is facing since the restructuring policies since 2010. There are various factors that contribute to sluggish growth of the economy such as low income, rise in unemployment, low demand and high prices of goods and services. Government has adopted various policies to solve the key economic issues that Singapore faces.

References

AsiaOne. (2016). Challenges facing Singapore's economy. [online] Available at: https://news.asiaone.com/news/singapore/challenges-facing-singapores-economy [Accessed 30 Jun. 2016].

Balassa, B., 2014. Development Strategies'. International Economics and Development: Essays in Honor of Raúl Prebisch, p.159.

Borio, C., 2014. The financial cycle and macroeconomics: What have we learnt?. Journal of Banking & Finance, 45, pp.182-198.

Coale, A.J. and Hoover, E.M., 2015. Population growth and economic development. Princeton University Press.

Coeurdacier, N. and Rey, H., 2013. Home bias in open economy financial macroeconomics. Journal of Economic Literature, 51(1), pp.63-115.

Gandolfo, G., 2013. International Economics II: International Monetary Theory and Open-Economy Macroeconomics. Springer Science & Business Media.

Ho, Y.P. and Wong, P.K., 2016. The Impact of R&D on the Singapore Economy: A Time Series Analysis. Available at SSRN 2719442.

Leggett, C., 2013. Workforce development and skills formation in Singapore: developing and augmenting talent (Vol. 118, pp. 89-114). Routledge.

Leifer, M., 2013. Singapore's foreign policy: coping with vulnerability (Vol. 10). Routledge.

LEONG, G. (2015). Singapore productivity growth sluggish: Nomura. [online] The Straits Times. Available at: https://www.straitstimes.com/business/economy/singapore-productivity-growth-sluggish-nomura [Accessed 30 Jun. 2016].

Mankiw, N.G., 2014. Principles of macroeconomics. Cengage Learning.

Rodan, G., 2016. The political economy of Singapore's industrialization: national state and international capital. Springer.

Room, R. (2016). Monetary Policy > Macroeconomic Review. [online] Mas.gov.sg. Available at: https://www.mas.gov.sg/monetary-policy-and-economics/monetary-policy/macroeconomic-review.aspx [Accessed 30 Jun. 2016].

Scarth, W., 2014. Macroeconomics. Books.

Sheffi, Y., 2013. Logistics-intensive clusters: global competitiveness and regional growth. In Handbook of Global Logistics (pp. 463-500). Springer New York.

Swee, G.K., 2013. The practice of economic growth. Marshall Cavendish International Asia Pte Ltd.

Weilun, S. (2016). Restructuring fails to lift productivity, drag on economy to go on: Nomura. [online] The Business Times. Available at: https://www.businesstimes.com.sg/government-economy/restructuring-fails-to-lift-productivity-drag-on-economy-to-go-on-nomura [Accessed 30 Jun. 2016].

Wong, J. and Chong, C., 2014. The Political Economy of Singapore’s Unique Relations with China. Advancing Singapore–China Economic Relations, p.32.

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