Economic growth

Define actual growth and what it is indicated by

It is the percentage annual increase in national output actually produced. It is indicated by changes in RNY

Define potential growth and what it is indicated by

It is the percentage annual increase in the maximum capacity of the economy to produce goods and services. It is indicated by increase in productive capacity

Define sustained growth

It is when an economy’s output increases continually over an extended period of time without inflationary pressures. This occurs when there is both actual and potential growth

Define sustainable growth

It is when the rate of economic growth can be sustained over a period of time without creating other significant environmental problems such as depleted resources and environmental pollution for future generations

Define inclusive growth

It is when rate of growth is sustained over a period of time without worsening inequitable income distribution. This means that it has to be broadbased across economic sectors and create employment for majority of the population. It is given by sustained growth and equitable income distribution which is measured by GINI coefficient

Outline the generic positive multiplier effect explanation

As AD increases, firms see an unplanned fall in inventories and will be incentivised to increase production, leading to a rise in derived demand for labour and rise in wages paid. This induces consumption and since one man’s spending is another man’s income, there are multiple rounds of rise in income and induced consumption, with each round getting smaller due to withdrawals. AD rises from AD0 to AD1 to AD2 and a multiplied increase in RNY is observed

Outline the multiplier formula and all of its components

Multiplier=1/MPS+MPT+MPM or 1/MPW or 1/1-MPC. MPS is the marginal propensity to save, MPT is the marginal propensity to tax, MPM is the marginal propensity to import, MPW is the marginal propensity to withdraw and MPC is the marginal propensity to consume

Outline small Singapore’s multiplier with 4 components

Singapore has a high marginal propensity to import, MPM, as we are a small economy with a small domestic consumer base, hence our MPC is small as well, we are heavily dependent on imports for factors of production. Singapore has a high MPS due to our compulsory CPF social security savings and Asian societies tend to save more due to associations with stability. Our MPT is low due to low corporate and personal income taxes to attract FDI

Outline the components of injections and withdrawals in the circular flow of income

Injections consist of I, G and X while withdrawals consist of Savings, tax and M.

Outline how ADAS model is similar and different to the circular flow of income model

When injections are greater than withdrawals, it triggers a similar process to multiplier effect which both leads to the multiplied increase in RNY, likewise for when injections are smaller than withdrawals, it triggers a similar process to the reverse multiplier process which leads to multiplied fall in RNY. However, in the circular flow process, only withdrawals will increase or decrease to a new equilibrium level of national income

Define economic equilibrium

The economy is in equilibrium if planned injections equal to planned withdrawals in the circular flow. There is no incentive at this point to increase or decrease output and expenditure