Econs Chapter 5

4 macroeconomic goals:
1.
2.
3.
4.

Low unemployment
Low and stable inflation rates
Sustainable economic growth
Health Balance of Payment (BOP) and favourable exchange rate

To achieve these four macroeconomic goals, the government will have to

implement policies. They can be classified into AD management and AS
management policies.
-

AD policies monetary, exchange rate and fiscal policy

AS policies market and interventionist policy

National income:
GDP total monetary value of all final goods and services produced within the
geographical boundary (goods and services produced by foreigners and citizens
living within Singapore).
GNP total monetary value of all final goods and services produced by factors
owned by residents (goods and services produced by citizens, regardless of
whether they live in Singapore or not).
National income statistics are used to measure standard of living (SOL) and
economic growth.

Standard of living:
Standard of Living (SOL): level of economic welfare and social well-being of an
average individual.
When considering standard of living must consider both material and nonmaterial standard of living. Material SOL amount and quality of goods and
services that is available for consumption to individuals. Non-material SOL
amount of leisure consumed, life expectancy, education, pollution, etc.
While GNP takes into account material SOL, it does not take into account nonmaterial SOL.
Limitations of using GNP as SOL indicator:
1. Nominal vs Real
An increase in nominal GNP may not necessarily mean that the amount of
goods and services produced have risen (material SOL); it could have been
due to the increase in prices due to inflation. If the nominal GNP has risen
by 5% but inflation was 10%, then the amount of goods and services
available to an average individual has actually decreased and material
SOL has decreased. We need to deflate the nominal GNP by the consumer
price index (CPI) to get the real GNP which will take into account price
changes.
2. Population size

Real GNP does not take into account population size changes. If the
population increased by 10% but the Real GNP only increased by 5%, the
average individual is actually worse off. Therefore, real GNP per capita is a
better measure of SOL.
3. Income distribution
Real GNP per capita does not reflect the income distribution. If the rich
minority are receiving a larger proportion of the national income, then the
SOL for the average individual might not have actually increased. Hence,
the real GNP per capita should be complemented with the Gini coefficient
for a more accurate measure of SOL.
4. Externalities are not accounted for
GNP values do not take into account the negative externalities such as
pollution of air and congestion, which reduce the welfare of individuals.
Some developing countries prioritise economic growth and this may lead
to a deterioration of the environmental health. It is difficult to quantify the
exact value of negative externalities. Even if the real GNP per capita does
increase, SOL may not have increase as the environmental conditions
have deteriorated.
5. Leisure
The real GNP per capita could have increased due to the longer working
hours of individuals and thus producing more outputs. However, longer
working hours means less leisure time and the non-material SOL will
decrease. Hence, an increase to the real GNP per capita does not
necessarily mean that the SOL has improved.
When comparing SOL between countries, real GNP per capita might not be the
best indicator because of different currencies. Usually all real GNP per capita are
converted to USD as a common currency for comparison.
Even then, the problem is that official exchange rates could be due to
speculative activities. Also, national income does not take into account the prices
of goods in each country and therefore does not reflect the purchasing power in
each country. Hence the purchasing power parity (PPP) is used. PPP takes into
account the amount of foreign currency needed to buy the same basket of
goods. PPP eliminates the difference in price levels between countries.
Limitations of PPP: does not reflect the qualitative differences in goods and also
the basket of goods consumed may not be the same given that different
countries have different climates and culture.
Alternative measures for measure SOL:
1. Human development index (HDI) real GDP per capita, education level
and life expectancy
2. Social progress index various dimensions of social progress
Need to use multiple measures and indexes to accurately determine SOL as all
indexes miss out some aspect.
Economic growth:

Measured using percentage change in real GDP.