Q18.

Discuss the usefulness of national income statistics for comparing the

economic performance and standard of living of different countries.
1. Content requirements: 2. Thinking requirement
I.1 What is meant by ‘NY statistics’? What does ‘discuss’ the
usefulness entail?
• GDP and GNP (Nominal and real)
• Consider both usefulness &
• Breakdown of GDP in terms
limitations
i. of value added by sector (output statistics),
• Make judgments about the
ii. type of expenditure (expenditure statistics) , severity of the limitations
iii. type of income (income statistics) • Draw implications from the
• Per capita GDP and GNP discussion
• Real figures
• GDP or GNP at PPP
I.2 What is meant by ‘economic performance’?
Extent to which the country is able to achieve its
4 macro goals: economic growth, full
employment, price stability, BOP equilibrium
I.3 What is meant by ‘SOL’?
Extent to which wants and needs (material and
non-material) of the residents are met.
I.4 What criteria do you use for ‘usefulness’ of the
measure?
• Completeness
• Accuracy
Essay outline
1. Intro
• Point out that (good) macro performance pertain to the 4 macro goals.
• Define SOL.
• Briefly highlight the info available from NY statistics.
• Spell out the terms by which the judgement will be made –
The usefulness will be examined in terms of the extent to which it can completely and
accurately measure economic performance & SOL.
2. Body
Usefulness Limitations
Economic Compare output performance Employment
performan – By comparing growth rates which – Can use NY statistics to infer about
ce is YOY % change in real GDP. the unemployment situation in the
– Explain the meaning of GDP and country.
‘real’. • Because real GDP growth rate
– Highlight that changes in real GDP usually co-relate with
reflect changes in the quantity of employment level.
output produced and not mere – However, unemployment could be
price changes. rising together with GDP
– Country with a higher ‘+’ve growth • Because growth could be
rate has a better output accompanied by structural
performance. changes that cause structural
unemployment.
 • E.g. S’pore in 2003
Price stability
– NY statistics do not measure
inflation rate of the country.
BOP
– NY statistics only shed partial light
on current account performance .
• It indicates value of net exports
and net property income from
abroad.
However, knowledge of net unilateral
transfers and S-T & L-T capital flows
are not provided
SOL GDP and GNP per capita Income distribution
– Define ‘per capita’ – The income approach in NY
– Explain that comparison of these statistics provides some indication
values between countries require of income distribution which
converting them into a common affects SOL.
currency – But it is not correct to conclude
– Explain why the conversion factor that a higher GDP per capita imply
used should be purchasing higher SOL for all residents since
power parities (PPP) instead of income distribution may not be
the market forex rates. distributed in the same manner in
all countries.
Purchasing power parities are the
rates of currency conversion that – Thus, need additional data e.g. Gini
equalise the purchasing power of ratio
different currencies by eliminating the Non-material aspects of SOL
differences in price levels between – NY does not measure the non-
countries. Hence, it is the exchange material aspects of SOL.
rate that allows you to buy the same
basket of goods in each country using – E.g. China may have higher GDP
their domestic currency. per capita than Cambodia or
Myanmar but she also has poorer
Explain why GDP or GNP per head air quality and/or her workers work
in PPP is useful for comparing SOL longer hours and have less time for
– Higher output value ⇒ higher family and social interactions.
income level ⇒ higher – This means additional indicators
consumption level that can measure these non-
– Higher income levels ⇒ more tax material aspects are needed. Give
revenue from direct taxation ⇒ examples.
enable govt to spend on items that
contribute to HHs’ SOL. E.g. health
care, education , sanitation.
– Empirical evidence show that
countries with higher per capita
real GDP score higher in quality of
life indicators.
– GNP per head useful for comparing
SOL of countries which are open to
FDI

Limitations for comparing output performance and SOL

Inaccuracy of NY statistics due to
– Omission – underground economy
• This problem is bigger in LDCs.
• However, while it is difficult to compare the extent of differences with accuracy, the
rank order of the comparison is probably still valid if the countries being compared
have same extent of underground economy.
Inaccuracy of PPP
– Difficult to determine a common basket of goods to calculate the PPP rate

3. Synthesis and conclusion

• With regards to comparing different countries’ economic performance, NY statistics
are rather useful for comparing output performance only. For a complete
comparison, unemployment figures, inflation rates and BOP figures are also
needed.
• As NY is actually intended to measure a countries output performance it is thus
more useful for comparing output performance than SOL.
• But since material SOL is a big aspect of SOL and is largely dependent on a
country’s output/Y level, NY statistics remains a useful measure for comparing
SOL.
• To improve on the comparison, supplementary measures that address the
limitations ought to be used as well.
Q19. A government’s macroeconomic aims are low inflation, low unemployment,
balance of payments equilibrium and economic growth.
Which of these aims do you consider most significant for Singapore and why? [25]

I. Dissecting the question

• What are ‘macro aims’?
– Economic growth.
– Low unemployment (UN rate is at its natural rate.)
– Low inflation (< 2%).
– BOP equilibrium
• ‘which’ => Need to make a judgment.
• What criteria do you use for ‘most sig’?
– The aim itself is significant
– Its achievement aid the achievement of the other aims
– ‘for S’pore’ => Need to consider the special chts of S’pore – small and open &
DC
• ‘why’ => need to justify with economic analysis and consideration of S’pore context
II. Outline
1. Intro
• Briefly define the 4 macroeconomic aims.
• Briefly highlight that S’pore is a small and open & that has reached DC status in
terms of GDP per head.
• An examination of which aim is the most important for S’pore requires
examination of the significance of each aim and their inter-links with each other.
• Assessment will be made on the basis of
o The extent of importance of the aim
o The extent to which it aids the achievement of the other aims
2. Body
A. Explain the importance of each macro goal
a. Economic growth
• Very significant goal because it is the basis for improvement in material SOL.
o Higher production level → higher income level for HHs → ability to satisfy
more wants and needs.
o Higher income levels → more tax revenue for G on on health care, education
etc.
• S’pore already reached a high material SOL but , the goal of economic growth
remains relevant – areas for improvement include non-material which require
funding by the govt.
b. Full employment
• Full employment is an important goal because unemployment leads to severe
hardship for those unemployed.
• When economic growth is accompanied by full-employment, it means that the
fruits of economic growth are widely enjoyed.
c. Low inflation
Explain the impt of this goal by explaining the negative effects of inflation.
 • Inhibits price signals from playing is allocative role efficiently
• Fall in SOL for fixed Y earners
d. BOP equilibrium
=> no problem of external indebtedness
When imports spending exceed export earnings, and the imports are largely
consumer goods & services, current SOL are actually enhanced but the country would
have to be borrowing in the current period to pay for the imports and the servicing of
the debt will mean lower SOL in the future.

B. Economic growth is the most significant goal

a. Attainment of economic growth enables the achievement of other goals
• Economic growth is needed for full N: When there is actual growth with AD
shifting to the right, there will be a reduction of involuntary unemployment.
• Economic growth facilitates income redistribution by the govt
=> Growth can be considered to be the most significant goal since it is an
important goal both for the long-term (for improvement in SOL over time) and
short-term (if the economy is in a recession).

b. Economic growth is most significant but it can’t be achieved without attaining

the other goals
• Inflation → lower economic growth
Reasons
o High and cost push inflation → fall in domestic I and FDI will be
discouraged.
o Inflation → downward pressure on the forex rate. The loss of forex stability
lowers FDI.
o It can thus be seen that the achievement of inflation is a pre-requisite for
economic growth for a small and open economy like S’pore that is dependent
on international trade and FDI for growth.
• Deteriorating BOP → higher UN
o Rising current a/c deficit, ceteris paribus → fall in AD → decreases in GDP and
rising involuntary UN.
o Since S’pore, as a small economy is dependent on rising external demand
and FDI for economic growth, S’pore cannot afford to be having rising current
account deficits (that is due to rising trade deficit) and rising BOP deficits
(that is due to falling FDI) over time.

c. However, although economic growth is the most significant goal, it can’t be

pursued as the sole objective
Economic growth may → DD-pull inflation, structural UN, income inequality

3. Synthesis and conclusion

• Economic growth is the most significant economic goal. This is because it is the
basis for improvement in SOL.
• However, the other goals are also important. For example, the attainment of price
stability is important in itself and for the achievement of economic growth in
Singapore. The ideal is for economic growth to be achieved together with internal
and external balance.
• It should also be noted that economic growth can adversely affect the attainment
of other goals.
=>This means in the formulation of economic policies, there must be an
adequate mix of policies to match the various goals of the country. E.g. If growth
is being promoted through measures to encourage firms to adopt new
technology, then the govt needs to at the same time implement measures to
facilitate re-training to manage the resultant structural unemployment.