Discuss about the Microeconomics and its Application.
The article provides an overview about Nomura that attitudes a fall in productivity to a higher employment share on lower-productivity sectors. The other factors that led to fall in output are the increasing costs in the course of higher international economic vagueness. The increase in unit labor costs leads firms to increase prices, stoking apprehension over stagflation. According to the IMF estimates, Singapore was considered as the richest country in the world. It was also considered as the most competitive as well as business-friendly country in the world. However, the country was infected by deep structural inequality as well as widespread poverty and high unemployment. The productivity growth of Singapore was not expected to pick up in the next few years due to fall in global growth. The article shows that fiscal policy is likely to be a stable balancing act with the government probable to remain in the course of restructuring. The outlook for Singapore corporate may not be miserable in spite of the sluggish GDP growth rate. It has also become difficult for Singapore to totally decouple from the gentleness in foreign demand with net exports accounting for 20 to 30 per cent of real GDP (Leong 2016).
The drive of Singapore to restructure its economy in order to lift productivity has failed so far. This is mostly due to the increase in aging population that had led to fall in potential growth rate. Productivity is considered as the efficiency with which resources like labor and capital are converted into outputs such as commodities and services. Outputs are mostly measured by market value in order to enable global comparison. In the context of Singapore, value-added per employee is what the officials of government mostly refer. Labor productivity is considered as an imperative measure as it is associated closely to the incomes of the individuals. the improvement of productivity is an imperative aspect for countries like Singapore as its inputs factors are close to being completely utilized. In the early stages of development, countries were able to expand their economies by organizing under-utilized factors on inputs. As these factors are utilized, the competence with which these are utilized then turn out to be the most imperative factor (Reuters 2016).
Despite of having tight labor market, the growth of wages in Singapore diminished sharply as compared to the wage growth of 2013. As a result, economic growth and productivity slowed down. Singapore also announced a shock loosening of monetary policy in order to start the shuttering economy. In the context of Singapore, growth development forms the central objective due to the fact that Singapore is a developing country. As a result, it is imperative to have a stronger economic growth in the country as it affords the individuals with the prospects to join the ranks of developed economies in the world. The economic policies in Singapore are mostly implemented to trade-off negativity of growth. The slower growth rate of Singapore is also likely to lead to probable recession. A recession mostly leads to fall in real GDP. Due to recession, Singapore is likely to have a period of negative economic growth (Tanzi 2015).
Demand side shock is considered as one of the major cause that leads to recession. This in turn will also lead to decrease in aggregate demand in Singapore due to high rate of interest rate that in reduces borrowing and investment (Greenstone, Mas and Nguyen 2014).
Another most imperative cause that leads to recession is supply side shock that leads to lower level of real GDP as well as higher rate of inflation. A level of national income changes during the short-term during supply-side shock. There are several causes that lead to supply side shocks. The most common factor is level of wages that affects the unit labor cost of a firm (Coibion and Gorodnichenko 2015).
Economic growth is mostly a long-run procedure that takes place as the potential output of the economy raises. As aggregate demand and aggregate supply changes, changes in real GDP from quarter-to-quarter fluctuate. Economic growth is mostly defined as a procedure with the help of which an economy accomplishes an outward shift in the production possibilities curve. In order to produce potential level of output, Singapore requires to operate on its production possibilities curve (Nicholson and Snyder 2014). This will in turn imply an outward shift in the production possibilities curve. In the structure of the macroeconomic model of aggregate demand and supply, economic growth shifts towards the right in the long-run aggregate supply curve. There are three key points that leads to economic growth:
Growth is a procedure: It is not considered as a single procedure rather an unfolding series of events.
Growth is defined in terms of the ability of the economy to produce commodities and services as specified by its level of output.
Growth also suggests that the ability of the economy to produce commodities and services is increasing.
In order to increase economic growth as well as decrease unemployment, the government of Singapore requires to increase investment on commodities and services. The government of Singapore had implemented the Resilience Package that includes a rise in investment on infrastructure to raise economic growth in the crisis. This will also lead to an increase in disposable income to raise consumption expenditure by diminishing direct taxes or increasing transfer payments. A decrease in corporate income tax leads to larger expected after-tax proceeds along with increase in consumption expenditure on designed investments that result in a rise in investment expenditure. On the other hand, the increase in consumption expenditure as well as investment expenditure on commodities and services leads to an increase in aggregate demand. This results in an increase in national output that leads to an increase in the demand for workers in the economy, ensuing in the fall in unemployment (Chong Tee 2013).
Economic growth is also likely to lessen the problems related to poverty that would raise the standard of living of the general population directly. This will also help to create more jobs and can also determine the internal macroeconomic objectives. If the growth in aggregate demand is so fast that rises in the productive capacity, constancy is undermined as Singapore will risk inflation as the economy experiences blockages (Ostry, Berg and Tsangarides 2014).
In the half-yearly Macroeconomic Review, it has been noted by the Central Bank that the economy of Singapore has been presently in a cyclical downturn after logging a sharp contraction of 4.1 percent. Singapore also has a small multiplier mostly due to the high savings and high imports. The Monetary Authority of Singapore administers policy by letting the Singapore dollar increase or decrease against the currencies of its major trading partners within an unrevealed trading band on the basis on its nominal effective exchange rate. The country uses currency policy rather than rate of interest as a tool to pull the economy of the island. It manages the dollar against an unrevealed basket of currencies of its key trading partners as well as competitors. The country had originally boarded on industrialization with the most important objective of providing employment for its domestic inhabitants. Value-added per employee is mostly used in Singapore in order to measure labor productivity (Tang, Liu and Cheung 2013).
Another most imperative macroeconomic indicator is that of rate of savings. This savings could be raised that indicates less dependency on foreign borrowings. The rate of saving in Singapore is considered the maximum in the world. The mobilization of domestic assets materializes to have played a very imperative role, along with foreign capital in the economic expansion of the country. The development policy of the Singapore state is mostly marked by large saving and investment (Hermes and Lensink 2013).
The report also provides an overview about the fact that increase in unit labor cost may force firms to increase prices encouraging concern over stagflation as well as higher core inflation in spite of lower economic growth. However, to decrease inflation the government requires to diminish expenditure on commodities and services. Fiscal policy is a demand-side policy that is required to control expenditure of the government to manipulate aggregate demand (Cohen and Amorós 2014).
One of the major solutions to decrease stagflation is to increase aggregate supply side policies. In other words, stagflation can also be decreased with the help of privatization and deregulation to augment efficiency. The concern was over stagflation as well as higher core inflation as stagflation is a term that is used by most of the economists to describe an economy that has inflation. The economy of Singapore can also have a slow or sluggish economic growth due to stagflation that leads to high rate of unemployment. The policymakers of the country are trying to get rid of stagflation at any cost. This mostly because, high rate of unemployment further adds to slower economic growth (Cohen-Setton, Hausman and Wieland 2016).
According to economists, any disadvantage to the Singapore economy to be counterbalance by stronger US demand that a rate high ought to denote. High tax rates are likely to deject work, saving, investment as well as innovation. Economic activity reflects a balance between what individuals, trades and governments requires to purchase as well as what they want to sell. In the long run, supply plays the important role to determine economic potential. The long run effect of tax policy not only depends on their inducement effects but also on deficit effects. The broadcast to Singapore from shifts in rates of US money market will be fast and significant. However, the most negative collision from a US rate hike on Singapore market is likely to come from the foreign exchange markets. High tax rate is likely to affect the economy through changes in federal finances. However, if the change is revenue-neutral, there will no issues related to financing effects. The initial tax rate is likely to have an impact on the tax cut of a given size. The tax cut should be financed by some combination of future expenditure cuts or future tax rises. In the absence of future expenditure cuts, tax cuts are likely to increase the federal budget deficit (Tan 2016).
High tax rate will lead to increase in cost of borrowing. Interest payments on credit cards are more costly and as a result, it discourages individuals from borrowing as well as saving. On the other hand, people who already have credit cards will have less disposable income as they are likely to spend more on interest payments. As a result, other areas of expenditure are likely to fall. Mortgage interest payments will also be increased. Hence, consumer expenditure will be impacted largely. Higher interest rate will make it more attractive for increased incentive as it will make it more attractive to save in a deposit account. The economy of Singapore is likely to face fall in both investment and consumption. As a result, the confidence of both customers and business are likely to be decreased (Atkinson and Stiglitz 2015).
Economic Policy Chosen by the Government
The government will require to reduce borrowing as a percentage of GDP. In other words, future budgets require to restrict investment as well as increase taxes. The risk that is associated with high tax rise is that if tax are increased too early or too fast, it could slaughter out the recovery as well as lead to a further recession. If taxes are not increased, markets may be distressed at size of borrowing. With economic growth to remain sluggish in Singapore amid a monotonous international outlook, the government is reviewing its forecast of 1 to 3 percent growth. The Monetary Authority of Singapore (MAS), along with the Ministry of Trade and Industry, will mostly conduct the review. The government has also displayed its overall obligation towards the policies of active export promotion as well as openness towards overseas trade. The government had also recognized prospects in Western markets that also encouraged local investors to work together. The government had also generated an environment to progress reliability as well as reputation (Reinhart and Rogoff 2013).
The investment made by the government also leads to crowding-out impact that is mostly viewed as complementary to private investment. The policy of the government is mostly intended to promote export-led development as well as attract foreign investors by making Singapore as the most attractive places to invest in. The government of Singapore subsidies private investors with the help of active strategies. This comprises high quality infrastructure, education, and training. Subsidies are also mostly concentrated on strategic industrial clusters as well as those who are targeted by the government to influence overseas investors (Brander, Du and Hellmann 2015).
It can be concluded that the economy of Singapore has had an experience that was not popular among other former colonies that includes continued economic growth. It is important to have a stronger economic growth in the country as it affords the individuals with the prospects to join the ranks of developed economies in the world. A steady macroeconomic environment with low level of inflation had generated a positive environment for a long-standing business viewpoint in the planning investment decision. It can also be concluded that Singapore requires to operate on its production possibilities curve. This will in turn imply an external shift in the production possibilities curve. The economy of Singapore is mostly relied on exported commodities that include customer electronic goods, information technology products and pharmaceuticals. The country also has large inflow of overseas capital and it also has the largest investment ratio. Higher interest rate will make it more attractive for increased incentive as it will make it more attractive to save in a deposit account. The outward and inward investment has also steadily increased in Singapore. It can also be concluded that the slower growth rate of Singapore is also likely to lead to probable recession that will also lead to sluggish growth rate in the country.
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