Chapter 11: Economic growth (Remedies)

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Chapter 11: Economic growth (Remedies) by Mind Map: Chapter 11: Economic growth (Remedies)

1. Demand-side policies

1.1. Expansionary Fiscal policy

1.1.1. Raising Government expenditure Raising Government expenditure on goods and services This will lead to rise in 'G' component of AD and cause the AD curve to shift rightwards → Increase in Real national income (RNY) Raising government expenditure on transfer payments Increase the ability to consume and hence cause an increase in consumption expenditure, a component of AD. → Cause AD to shift rightwards.

1.1.2. Adjusting Tax rate Lowering Personal Income Tax rates ↓ Income tax rate → Increase in disposable income → Increase in purchasing power. Lowering Corporate tax rates Lead to raise in after-tax profits and hence cause an increase in the investment component of AD Raising Import Taxes This can raise the preference for domestic goods (Import is more expensive now. M will decrease. The AD curve will hence shift rightwards)

1.2. Expansionary Monetary policy

1.2.1. Lowering the bank rate, lowering the cash ratio as well as purchasing government bonds. This increase in money supply ( form M0 to M1) → Lower interest rate (from R0 to R1) → Cost of borrowing falls and this rise Investment (I) →Simulate consumption (C) Increase in Equilibrium level of national income (from Y0 to Y1) via the multiplier process.

1.3. Exchange rate policy

1.3.1. Depreciate its currency, the Centre bank will sell domestic currency in Exchange rate market (ERM). This will create an increase in the ERM. This lower the ER of the country's currency The depreciation in the country's ER makes its exports cheaper and its imports dearer. This will result in the net export revenue. This also leads to a rise in AD and hence a multiplied increase In national income

1.4. Incomes and price policy

1.4.1. It can be used to raise purchasing power. This can be achieved by raising the disposable income of economic agents. Lower the employee's CPF contribution rate. This results in rising disposable income and hence increases AD

2. Short run supply-side policies

2.1. Fiscal Policy

2.1.1. Reducing Tariff Reducing import tariff → Lower cost of production and hence increase AS

2.1.2. Reducing Government Fees and Rentals Reduce land rental fees will reduce cost of production and hence raise AS

2.1.3. Government Subsidies Subsidise factor of production( Such as Labour and land) as well as resources like oil. For example: the Singapore government introduced the Jobs and Credit Scheme in 2009. This scheme subsidised labour cost for firms, with employers receiving a cash grant for each Singaporean employee on their CPF payroll.

2.2. Exchange rate policy

2.2.1. Strengthen the value of the domestic currency. With a stronger currency, the country will then be able to purchase imported raw materials at a lower price. This translate to lower cost of production, which encourages production and hence increase real national income.

2.3. Incomes and price policy

2.3.1. Controlling Factor price Price celling as seen in Figure 8, are used to prevent excessive rises in cost of factors of production. It prevents price of goods form rising uncontrollably. These are usually placed on basic necessities as well as resources such as land (rents) and labour (wages). so that the price will not increase too rapidly.

2.3.2. Lowering Wages In Singapore, the CPF is used as a tool that enables the adjustment of wages. To contain cost-push inflation, the government can reduce the contribution rate. This results in cost savings for the firms and hence raise AS.

3. Long run supply side policies

3.1. 1. Strategies that raise the quality and quantity of labour

3.1.1. Fiscal policy Provide Tax incentives To increase labour participation rate, personal income taxes can be cut to increase the incentive to work. It is argued that people who are already employed would be more inclined to work longer hours as they are now able to keep a larger fraction of their income. → More labours will be drawn into the labour market as a result of the higher after-tax wages. Increase government expenditure on workforce training and healthcare.

3.1.2. Compulsory education A more educated workforce can also raise the quality of the labour. This can be done through imposing compulsory education as that literacy rate as well as the skill level of the workforce can increase.

3.1.3. Raising Retirement Age This help to raise the quantity of labour in the country. By raise the retirement age and even lower the school leaving age so that more people can enter the labour market whilst less people would leave the labour market

3.1.4. Loosening Immigration Policy Relaxing the immigration policy can help ensure a continuous flow of labour into the economy.

3.2. 2. Strategies that raise the quality and quantity of capital.

3.2.1. Fiscal policy Providing tax incentives Lower corporate tax → raise the income of firms and encourage greater investments as the incentive to work rises. Firm may engage in more risk-taking and increase output Increasing Government expenditure on infrastructure Government can develop the infrastructure of the country so that production may be more efficient.

3.2.2. Monetary Policy It can help to lower the interest rates, this encourage investments, which in the long run can help to raise productive capacity.

3.2.3. Increase savings The process of building up the necessary stock of capital requires resources for financing it This funds come either from domestic savings or borrowing. Savings in poor countries are too low to make for rapid development. the country will also have to develop finance and credit mechanism to channels savings to investors and provide incentives for capital investment.

3.2.4. Monetary Policy

3.3. 3. Strategies that raise the quality and quantity of resources. & Evaluation

3.3.1. Fiscal policy Problems with tax incentives Evaluation Increase in Inflation rates Evaluation

3.3.2. Expansionary Monetary policy This help to lower interest rates. The same reasoning as above applies when interest rates are lowered. Interest Elasticity of investment Contractionary MP reduces AD by raising the interest rate depends on the responsiveness of investment and consumption to interest rates.

3.4. 4. Strategies that facilitate technological progress

3.4.1. The government can increase expenditure on research and development (R&D) projects as well as facilities. For example, Singapore has developed twin hubs of biomedical and engineering research at the Biopolis and Fusionopolis. The government can also develop institutes of higher learning (Including universities and polytechnics), which often also double as hotbeds of technological innovation. Government can also provide seed funding for research to attract more locals and foreigners to undertake technological research.

4. Promote economic development

4.1. Economic development comprises both the material and non-material aspects of well-being. (Real GDP per capital is the most commonly used indicator of economic development)

4.1.1. Other life expectancy, infant mortality rates, level of literacy, education enrolment, crime rate as well as pollution levels.

4.2. Economic development refers to the process of raising the standard of living and well-being pf the population of the developing countries. It includes the reduction of poverty, unemployment and inequality in the distribution of income in the context of a developing country.

4.2.1. Strategies that promote economic development Education & training policies to increase labour productivity This encompasses both formal and informal on the job training. Education efforts must go beyond attempts to increase the degree of literacy. Healthcare Policies and Public Health Facilities This help to provide better healthcare and to lower infant mortality rates and raise life expectancy. Providing a healthy working population for the country would facilitate greater productivity and incentive to work. This enhance economic growth and development. Other Socio-Cultural Institutional Reforms Land reform policies would ensure better land-use and more efficient allocation of resources so that economies of scale could be raped. It should have the political will to revamp the institutional structures.

5. Shortcoming of IPP as a SRAS policy

5.1. Price controls and Black markets

5.1.1. It leads to the creation of shortages in the market. In order to continue with their production, producers need to secure these resources. They might turn to the black market and pay higher price for resources and pass these higher cost to consumer.

5.2. Decreased Savings

5.2.1. The lowering of CPF means lower contribution to the CPF account. Most of the Singaporeans finance their housing loans using their CPF account. This might lead to lowering their disposable income in period of raising prices, Resulting in lesser savings.