The Strait Times article on April 15th 2010, “Superlatives greet Q1 GDP numbers” reports on Singapore’s exceptional Q1 growth. It prompts the government to raise its forecast on Singapore’s 2010 GDP growth by 2.5% with the Ministry of Trade and Industry (MTI) expecting economic growth from 4.5% – 6.5% to 7% – 9%. Advanced GDP estimates at 2000 prices projects 2010 Q1 growth at 13.1% on year to year basis and 32.1% in annualised seasonally adjusted quarter-on-quarter terms.
If you need assistance with writing your essay, our professional essay writing service is here to help!
The recovery of global semiconductor chip sales and the surge in biomedical output are the 2 key contributing factors projecting tremendous performance in electronic productions as the manufacturing sector out-performed at 139% in Q1 2010 from its -29% contractions in Q4 2009. Construction activity was stagnant on quarter to quarter but rose 11.3% year on year supported by public sector civil engineering activities and an increase in the number of residential construction projects. Service sector grew 8.4% year on year and 11% quarter on quarter.
Economic recovery in the United States (US) shows growth in both their manufacturing and services sector. With the strengthening of business conditions and earnings prospects, consumer spending starts to firm up. The US labour market is also beginning to show signs of a turnaround with strong employment growth in March 2010. These developments will help to shore up the recovery of private sector demand in the US. Within Asia, economic growth is expected to remain firm, supported by China’s buoyant demand for electronics goods and commodities.
The Monetary Authority of Singapore (MAS) comments that the economic has now fully recovered its output lost and economic activities in broad range of industries had also exceeded its pre-crisis peak. MAS will therefore exercise monetary tightening as the output gap is now positive and risks are turning from growth to inflation due to rising commodities prices and persisting private road transport costs. The overall CPI inflation forecast for 2010 is revised from 2.0 to 3.0 per cent to 2.5 to 3.5 per cent in view of the strong economic recovery.
Improvements in electronics had created strong manufacturing growth in Q1 leading some manufacturers worrying on increases in wages rate. Economist also expects the National Wages Council to revise its wage rate to full restoration and adjust pay and bonus to reflect the economic upswing.
The topics that we will discuss relating to the article will be
Factors affecting GDP growth
Aggregate Demand(AD) and Aggregate Supply(AS)
Recessionary and Inflationary gap
Monetary & Fiscal Polices
Factors affecting GDP growth
For Singapore to grow we must understand the 4 factors of production. They are land, labor, Capital and Entrepreneur. Singapore faces scarcity mainly in Land and Labor, where we are a country with little natural resources and face limited land availability.
With 4.99 mill (June 2009 est.) people living in just 667 sq km of land, our economy relies heavily on exports to boost GDP (where our exports of goods and services represents 200% of GDP), major investments particularly in consumer electronics, information technology products, pharmaceuticals, and on a growing financial services sector. There are needs for effective and productive use of resources, labor productivity, population growth and aggregate hours to produce more goods and services to increase Singapore’s real GDP.
During the economic downturn, the government exercises fiscal and monetary stimulus policies to temper the contraction in GDP and with the current pickup in global trade and finance, economic growth is forecast to rebound strongly at 2.5% GDP where low inflation is expected by the government and measures are gradually coming in place.
The Expenditure Approach
Based on the article in 15th April 2010, Singapore’s exceptional performance has caused the government to raise their forecast for 2010 GDP growth by 2.5% and MTI will be expecting a 7% – 9% economic growth this year.
The article shows the statistics for 2010 Q1 advance estimates based on quarter-on-quarter for manufacturing at 139%. A tremendous improvement compared to -29% in Q4 2009 and for services producing industries at 11%, a 4.4% increase from 6.6% in Q4 2009. Construction activity was stagnant but increased at 11.3% at year-on-year, mainly due to public infrastructure spending and building of large casino entertainment projects namely Resorts World Sentosa and Marina Bay Sands which opened early this year.
The 2010 Q1 GDP values projected in the article are advance estimates complied widely from data from the first two months of the quarter in 2010. These data serve as early indications for GDP growth for Q1 and are subjected to revision after comprehensive data are available. In (Parkin M, 2010), we understand that GDP equals Aggregate Expenditure (AE) equals Aggregate Income (Y). The concept below can be used to explain what the first column of the article is talking about and the current economic conditions of our economy.
Y = C + I + G + (X – M)
The increase in GDP forecast at 2.5% means that Singapore is facing a rise in (AE) and (Y). For Singapore’s (AE) to increase we will see a rise in the economy’s Consumption expenditure (C), Investments (I), Government expenditure (G) and planned Exports (X) minus Imports (M).
With the global economic improving, there is a sharp increase in Singapore’s exports. Higher exports demands from the US firms in private sectors and electronic goods and commodities from China resulted in the surge in global semiconductor chip sales and biomedical output. With the increase in exports (X), the aggregate spending in firms increases as well in the investments (I) for new capital equipments and labor to produce more goods and services to match the export demands. Increased labor, employment and income will increase the consumption (C) as households had the ability to spend more on consumer goods and services. As a result the economy grows in this cycle of increase buying and selling of activities under the circular flow of expenditure.
Based on latest data on 20th May 2010, Singapore’s overall growth mainly in manufacturing, wholesale and retail trade, financial and business services had allowed Singapore to achieve a 15.5% growth on a year-on-year in the Q1 2010 at 2005 market prices.
Sources of Economic Growth
The factors affecting an economy’s growth are aggregate hours and labor productivity. With the economy now picking up due to increased exports (X), improved job climate and rising wages, statistics on the labor market for the first quarter 2010 shows the total employment to have rose 36,500, which is 1000 slightly lower than 37,500 in Q4 2009. (Teh Shi Ning, 2010) comments on SIM University Labour economist Randolph Tan view that dramatic growth in Singapore was possible, as there are fewer lay-offs during the recession allowing firms to harness excess capacity to ramp up production rapidly. This can be seen in the increase in government spending (G) under the fiscal policy during the recession.
During the economic downturn, the Singapore government (Ministry of Manpower (MOM)), business (Singapore National Employers Federation) and labour (National Trade Union Congress) applied the Tripartism approach of, “Cut costs to save jobs”. Fiscal policies like the Jobs Credits Scheme (JCS) were introduced in the Singapore Budget to preserve jobs in the economic downturn. Incentives in terms on government subsidies of up to 12% of an employee’s wages are provided for businesses for every job saved.
As labor productivity (Physical and Human capital growth) is eminent for economic growth, the government also funded a financial support and skills Programme for Upgrade and Resilience (SPUR). It is a re-training programme and was said to cost the Singapore government more than 5 billion dollars as it funds 90% of the training fees and absentee payrolls. An article dated 23th Feb by (Zakir Husssain: 2010) also reports a $7 billion boost by the government to transform the economy over the next 5 years with the aim of boosting productivity, build superior skills, quality jobs and higher incomes.
Technological Advances can also be seen in the government spending (G) and investments (I) in building more reservoirs, desalination plants and water reclamation studies as early as 1972, a master plan to convert used water to potable water.
As Singapore faces scarcity of water and relies on water imports (M) from Malaysia through 2 water supply contracts ending next year in 2011 and 2061. The country uses about 300 million gallons of water daily and imports 40% of it from Malaysia, paying 3 sen per 1,000 gallons of raw water as well as maintenance fees for the waterworks in Johor State where the water is withdrawn. Besides that, Singapore’s dependency on Malaysia for water is used as a political tool.
Therefore, there is an urge for technological advancements in membrane studies and construction activities in building of water supply infrastructures for NEWater with the aim to become more self-sufficient in water by 2061. Currently the country has 4 operational NEWater plants in Singapore and together with the fifth and largest plant in Changi in full operation later this year 2010. It is said to meet 30% of Singapore water supply usage.
The reduced in water imports in the near future from Malaysia in 2011 and in 2061 will reduce the government’s spending (G) for water from Malaysia and at the same time create more employment in country’s area of water production thus contributed the factor to increase Singapore’s GDP as well.
Aggregate supply (AS) and Aggregate demand (AD)
With the economy now doing well in the manufacturing sector, the article mentions that the manufacturers are now worrying about increasing workers’ wages during a recovery. Full restoration of wage cuts, pay adjustments and bonuses are expected from the National Wages Council. The change in money wage rate can be explained later using the long-run aggregate supply (AS) curve and can explain why manufacturers are starting to worry.
. C:Documents and SettingsEricDesktopgraph.gif
Figure 1.1: Price level at given money wage rate in short-run curve
The above diagram (Figure 1.1) is used as an example to describe the manufacturers during the recession period. When there is a change in price levels, with a given money wage rate from A to B, manufacturers enjoy increased profits on the short-run curve by increasing their production and price level thus resulting an increase in GDP to the economy.
C:Documents and SettingsEricDesktopChange in Potential GDP.gif
Figure 1.2: Change in Potential GDP shifts the LAS and SAS left or right
With the current economic growth and status represented in the AS diagram above (Figure 1.2), potential GDP as stated by (Parkin M, 2010) increases due to factors like increase in full employment, quantity of capital and advancement in technology (where all unemployment is frictional and structural). The change in technological advancements and quantity of capital like NEWater shifts the LAS and SAS to the right, increasing overall real GDP.
C:Documents and SettingsEricDesktopChange in Money wage rate.gif
Figure 1.3: Change in money wage rate shifts SAS left or right along LAS
The diagram (figure 1.3) represents the situation where manufacturers worry about the increase in wages. As stated by (Parkin M, 2010), The rise in wages increases the price level at equal percentage on the LAS curve yet decreases production levels resulting in higher manufacturer’s costs. Increased wages reduces the quantity of goods produced in general thus manufacturers gain less profits and obtain no incentives to change production and increase the overall GDP of the economy. Therefore we will see a left ward shift in the SAS and not the LAS. The rise in money wage rate decreases the short-run aggregate supply from SAS 0 to SAS 1.
Our academic experts are ready and waiting to assist with any writing project you may have. From simple essay plans, through to full dissertations, you can guarantee we have a service perfectly matched to your needs.
On the other hand we need to understand that as the spending power increases, the households have the ability to buy more goods and services increasing consumption (C) levels. This issue of wages adjustments had to be handled carefully as this change can mean departures from full employment and expectations of increasing inflation will result in money wage rate to rise faster and increase price levels.
C:Documents and SettingsEricDesktopChange in AD.gif
Figure 1.4: Changes in Aggregate Demand (AD) and Price levels with other things remaining the same
In (Parkin M, 2010), we understands that the demand for goods and services in Singapore depends on several factors like price level, expectations, fiscal policy and monetary policy and the world economy as shown in the (AD) curve diagram (Figure 1.4) above.
During the recessionary period with other things remaining the same, it generates more real wealth and interest rates (IR) are relatively lower in the economy, resulting people to decrease in saving, apply for more bank loans and increase spending. This attracts consumption (C) and exports (X) and decreases imports (I) of foreign domestic goods causing an increase in real GDP demanded.
On the other hand if there is a rise in the price levels of the goods and services from B to C with other things remaining the same during a recovery period. It causes the real wealth of the people to decrease and people decide to hold less money and save them up in banks and decrease their spending, resulting higher bank interest rates (IR) and reduce in consumption (C) levels decreasing the exports (X) ultimately reducing GDP.
Future estimates in the article reveals expectations of future income, inflation and profits change in aggregate demand, therefore will increase people’s consumption (C). As future inflation is expected, it increases aggregate demand from AD 0 to AD 1, as people wants to buy more goods and services at a lower price now before the price levels increases later. This can be seen in the 2nd column of the article where inflation is much of a concern due to upward pressure in rising commodities prices and private road transport costs (big-ticket items in rising COE prices and car). Therefore (AD) will shift to the right based on these following factors.
As fiscal policies like the JCS and SPUR is used to fight the recessionary period as mentioned earlier, the government also uses monetary policy during a low inflation and contracting GDP. The Monetary Authority of Singapore (MAS) maintained an effective loosening of monetary policy in October 2008 by allowing a depreciation of the nominal effective exchange rate. As stated in the article that the economy has now fully recovered the output lost during the recession and industries had exceeded to its pre-crisis peak, monetary tightening and fiscal policies had to scale down gradually.
C:Documents and SettingsEricDesktopgraph.gif
The changes in real GDP and price levels in Singapore can be summarized clearer in the combined AS-AD model in (Figure 1.5)
Applying the Keynesian view during the recession, as the economy is below full employment equilibrium in which potential GDP exceeds real GDP at (A), a decreasing AD09 and SAS09 creates a recessionary gap as show above. In order to close up the recessionary gap, a short-run effect in the government spending exercises expansionary fiscal and monetary policies to overcome a recession. This increases government expenditure (G) and reduces taxes (T) together with a government spending multiplier process at (B) with the aim to increase (AD) enough to bring it to its potential GDP.
With the strong rebound in global electronic sales, increase in exports (X) and implementation of fiscal and monetary policies in AD 10, full restoration of wages will bring about inflation in prices, a decrease in (AS) and (AD) and ultimately reducing overall GDP on a long-run. Therefore wage rate adjustments had to be handled carefully according to the increase in price levels as workers will experience a fall in their spending power and demand for higher wages. If firms profits and do not raise money wage rate, they will suffer risk of losing their workers or hire less productive ones. An article by (Esther Ng and Imelda Saad, 2010) comments that in long term, pay increments need to lag productivity gains to be sustainable. And sustainable wages increases depend on firm’s performance and prospects.
Therefore greater focus on productivity rather than increase in labor force is a strategy that show be looked into to drive future growth.