Introduction This paper is to assess a country’s current macroeconomic position and discuss what policy options have been adopted by the monetary and fiscal authorities in the past years in order to correct any inflation, unemployment or growth problems that exist. In this paper, Singapore economy will be discussed. Like most other countries, Singapore wants growing living standards, high employment and low unemployment, as well as avoidance of recessions and inflation. These things are known as the targets of policy.
Instruments are the policies used to achieve the targets. Two main instruments that are used in the economy are fiscal and monetary policies. The macroeconomic policy problem is to choose appropriate values of the policy instruments in order to achieve the best possible combination of the outcomes of the targets. This is continually changing problem because targets are perpetually being affected by shocks from various parts of the world economy. Singapore is an important hub for the South East Asian region.
It has a highly developed and successful free market economy, and strong service and manufacturing sectors. Singapore economy always depended on international trade ND on the sale of services. Its major industries include petroleum refining, electronics, oil drilling equipment, rubber products, processed food and beverages, ship repair, entropy trade, financial services and biotechnology. It is moving to reduce its reliance on the manufacture and export of electrical products by developing its chemical and petrochemical industries.
Singapore small population and dependence on external markets and suppliers has pushed Singapore toward economic openness, free trade, and free markets. This and the Government’s dominant role in planning and regulating economic development eave been the key factors in Singapore consistently strong economic performance. Singapore is an economy characterized by a seemingly paradoxical adherence to free trade and free markets in combination with a dominant government role in macroeconomic management and government control of major factors of production such as land, labor, and capital.
Internally, the delicate improvement in the services sector in the fourth quarter of 2002 dissipated in the first half of 2003. Uncertainties associated with the war in Iraq and the CARS outbreak hit the hospitality, retail sales and travel- dependent services sectors hard. External demand remains sluggish. Manufacturing output, which has largely propelled growth in recent years, has not provided a major boost in 2003, with cumulative output for the January-May 2003 period rising Just 0. 4 per cent year-on-year; a 6. Per cent year-on-year rise in manufacturing output in the first quarter was followed by a 7. 5 per cent year-on-year drop in output in the second quarter. The key electronics sector is still sputtering given the lack of global IT demand; biomedical and chemical exports initially propped up growth, although biomedical output slid in the second quarter. GAP Gap In all economies, changes in the general price level reflect the consequences of the ample interactions among numerous factors, both at the macro and the microeconomic levels.
Although many of these relationships are not completely understood, there is general consensus that an important determinant of inflation directions is excess capacity – the extent that the productive capacity of an economy exceeds the demand places on it. Formally, we define economic excess capacity as the output gap: The output gap measures the difference between actual GAP growth and the growth in GAP potential. A positive gap would imply that actual GAP growth exceeds its potential growth rate.
This would occur during the peaks of the business cycles, and then would translate into sharp temporary spikes in productivity and a higher level of resource utilization. As demand exceeds the potential of the economy, the economy ‘over-heats’ and intentionally pressures increase. On the other hand, a negative gap would imply that actual GAP growth is lower than the potential rate, and this would then translate into declines in productivity, higher unemployment and below full capacity.
It is worth noting that an economy may still experience deflationary pressures even if t is growing at a fast pace, so long as the actual growth rate is below its growth potential. Therefore, whether deflation occurs depends on whether a negative output gap exists and not simply the rate of output growth. Singapore is involved in such situation. Economic indicators suggest that excess economic capacity has existed in Singapore since early 2001 with falling growth, rising unemployment and lower capacity utilization in office and factory space. Economic Survey of Singapore Second Quarter 2003) The adverse effects of the weak global economic environment have affected more than Just Singapore exports. Private investments have also fallen sharply because firms have been reluctant to add on more capacity in the face of uncertain demand. While domestic consumption has held up better than the other categories of real expenditures, its rate of growth has also been affected. Inflation The general weakness of the global economy in 2002 as well as continuing over- capacity in the high-tech sector provided little impetus for an increase in prices of traded goods during the year.
Imported inflation in 2002 was, consequently, weak. Domestic price pressures were also contained due to weak economic conditions and using unemployment. Reflecting these developments, most broad measures of prices in Singapore fell in 2002. The ICP fell by 0. 4 percent in 2002, compared with a 1. 0 percent increase a year ago. The drop was attributed to both domestic and external factors. Domestic sources were responsible for 0. 1 percent of the decline in the ICP while external factors reduced ICP by 0. 3 percent. The main items contributing to the fall in overall prices were energy prices and accommodation costs.
The 2. 2 percent fall in housing cost, in particular, reflected both lower electricity tariffs and accommodation cost. While the . 0 percent decline in the transport and communications index was partly due to lower petrol prices, the reduction in road tax implemented during the year also helped to keep transport costs down. In order to quantify the deflationary impact of the recent economic over-capacity, the potential output growth for the Singapore economy between 1986 and 2003 has been estimated to compute the output gaps for the period.
In the 1986-2003 periods, there were 3 significant episodes to negative output gaps – 1985-86 recessions ( the Asian financial crisis and (3) the post dot. Com bust. In addition, there were 2 there periods of smaller negative output gaps – although the Singapore economy continued to register positive growth – during the US recession in 1991-92 and the global electronics downturn during 1996. Unemployment Singapore labor market remained soft in 2002 due to a slow recovery in external demand. A second consecutive year of below-trend growth saw total employment contracting by 22,900 in 2002, after a marginal decline of 100 in 2001.