The February Issue of the Wall Street Journal has provided an article on the economic mentality of Singapore. The article contains many economic facts and constructs, which could be analysed and discussed. These constructs are derived from theory and provided in the context of Singaporean economic system.
The first point raised by the writers of the article was that the economic system of Singapore experient recession during 2009 and started retrieving in 2010 ( Holmes and Venkat, 2010 ) .
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“ We remain optimistic about Singapore ‘s mentality in 2010 and go on to anticipate the economic system to return to positive growing of 5.1 % in 2010, although we reiterate this twelvemonth ‘s recovery is likely to be gradual and uneven ” ( Holmes and Venkat, 2010, p.1 ) .
The Singapore economic system can be good explained by the economic theory of concern rhythms. In general the theory suggests that capitalist society is unstable. Economic growing will ne’er go on steadily but will be developing cyclically.
Figure 1: Gross Domestic Product of Singapore in $ ‘million
The theory distinguishes four major types of concern rhythms which are classified under Kitchin rhythms, Juglar rhythms, Kuznets rhythms and Kondratiev rhythms. The economic system of Singapore reached its trough in 2009 in Figure 1.
All of them have different clip spans. Kitchin rhythms last from 3 to 5 old ages ( Kitchin, 1923 ) . Juglar concern rhythm would last from 7 to 11 old ages. Kuznets rhythms would last from 15 to 25 old ages ( Glasner and Cooley, 1997 ) . The longest concern rhythm is the 1 described by Kondratiev and Stolper ( 1935 ) . It is instead considered a technological moving ridge that has a span from 45 to 60 old ages.
The twelvemonth 2010 started with the contraction or growing stage of the concern rhythm. The analysis of historical indexs of GDP would let for placing at least four concern rhythms that developed in the period from 1960 to 2010.
From Figure 1 it can be observed that the recent economic recession in Singapore was a portion of the authoritative Juglar rhythm that lasted from 2000 to 2010. It had a span of a small over than ten old ages and had a long stage of enlargement with instead a short period of lag. Prior to this, there was a short Kitchin rhythm that lasted from 1998 to 2000. During these three old ages, the economic system went through a trough, recovery, extremum and another lag.
Figure 2: Annual Inflation Rate in Singapore
It is valid to account for the monetary value degree and existent GDP of the state for the appraisal of the concern rhythm. Real GDP is the nominal GDP deflated by the rate of rising prices. High rising prices would overrate the value of GDP and economic growing would be presented higher than it truly is. The alterations in the one-year rising prices rate of Singapore are presented in Figure 2.
During the old ages 1998 and 2009 when the economic system of Singapore was sing recessions, the rising prices rate was lower than during the stage of enlargement. This observation indicates that rising prices is higher when the economic system is turning because concerns foremost tend to increase monetary values and so the end product when extra demand appears. During the stage of lag, the state of affairs is the opposite. Inflation rates tend to travel down and nominal GDP approaches the value of existent GDP.
Aggregate Demand and Supply
The expected economic enlargement in Singapore in 2010 can besides be explained by the theory of aggregative demand and supply. By and large, when demand ( AD ) increases, the monetary values rise and this in bend stimulates manufacturers to increase supply or end product ( AD ‘ ) . As a consequence both nominal and existent GDP would turn continuously.
Figure 3: Aggregate Demand and Supply Model
During the recession consumer demand for goods and services was down and hence both the monetary value degree represented by rising prices rate was lower and the existent GDP declined. In the period of enlargement that started in Singapore in 2010 ( Holmes and Venkat, 2010 ) , both the rising prices and existent gross domestic merchandise are expected to increase harmonizing to the jurisprudence of supply and demand. As consumers start passing more money on lasting and non-durable goods and services, concerns will increase the monetary values and get down spread outing production, which would take to the growing of entire end product in both existent and nominal footings. This is demonstrated by the supply and demand theoretical account in the Figure 3.
Price Level and Unemployment Rate
It is interesting to observe that there is besides a relationship between the monetary value degree in the state and the unemployment rate. When the rising prices ( A to B ) increases in the state, unemployment rates will travel down because rising prices is thought to be associated with economic growing and enlargement. This relationship is explained by the economic construct of Phillips curve.
Figure 4: Long Run Phillips Curve
In the long tally, nevertheless, the Phillips curve will be a perpendicular line ( C ) established at the natural rate of unemployment shown in Figure 4. In the instance of Singapore, the short term Phillips curve was a valid theoretical account to stand for the relationship between rising prices and unemployment. By July 2009 the unemployment rate reached its upper limit while the rising prices rate declined, therefore back uping the economic construct of Phillips curve shown in Figure 5 and Figure 6.
Figure 5: Singapore Unemployment Rate
Figure 6: Inflation Rate by Month
It is valid to observe that aggregative demand was stimulated during the recession by the cardinal bank ‘s pecuniary policy. Without pecuniary stimulation, it would take much longer for consumers to get down disbursement once more and derive assurance in the hereafter. The cardinal bank started take downing the base loaning rate ( Trading Economicss, 2010 ) , which represented the short term involvement rates in the state, in order to do it easier for consumers to borrow so that they could get down passing more. The kineticss of the short term involvement rates in Singapore is shown in the Figure 7.
Figure 7: Singapore Interest Ratess
It is valid to observe that in the pre recession period the state had already had instead low involvement rates that ranged about 3 % . In 2008, the cardinal bank started cut downing the nightlong loaning rate until it reached about 0 % by 2010 ( Trading Economicss, 2010 ; Figure 7 ) .
The article in the Wall Street Journal states that the outlook of contraction in the Singaporean economic system and the 5.1 % one-year growing are executable because the cardinal bank does non be after to cut down the nightlong loaning rate excessively shortly. As a consequence, there will be stimulus for adoption, consumer disbursement and investment.
Figure 8: Interest Rate Vs Money Supply
The economic theory suggests that there is a direct relationship between the money supply and involvement rates as shown in Figure 8. In fact, the involvement rates are the monetary value of money or the cost of money. When the cost additions, the demand for money will diminish. Similarly, when involvement rates rise ( I* to I** ) , the demand for money will fall. Both the consumers and concerns ( S ) will get down borrowing less ( Sloman, 2006 ) .
However, different school of economic idea offer different constructs on what would be an effectual step to excite the economic system. For illustration, the Keynesian economic school argues that during the period of recession, it is indispensable to excite aggregative demand ( AD ) . This has been seen in the instance of Singapore when the cardinal bank started exciting aggregative demand by loose pecuniary policy in 2008 – 2010 ( Trading Economicss, 2010 ; Holmes and Venkat, 2010 ) .
Figure 9: Keynesian AS/AS Model
The Keynesian position is that aggregative demand, if stimulated by pecuniary and financial policy, would finally take to the growing of the entire end product and aggregative supply. However, the neo classical school of economic sciences offers a different solution. The neo economic system states that the authorities should instead excite and undertake aggregative supply ( Yte to Yrec ) instead than demand. One of the steps that this school of economic science proposes is to increase the money supply at a changeless rate. The enlargement of money supply is used to excite aggregative supply and economic enlargement, therefore cut downing the volatility of the economic system.
The authoritiess of developed states in the European Union and the United States, nevertheless, continue to adhere to Keynesian steps of exciting the economic system and active recession. This has besides been found in the instance of Singapore ( Holmes and Venkat, 2010 ) . Since the recession had lasted merely about a twelvemonth in Singapore until the contraction and enlargement started, Keynesian steps of exciting the economic growing can be assessed as effectual in malice of the unfavorable judgment from the neo classical economic school.
It is valid to summarize the chief statements of the treatment of economic constructs in the context of Singapore that were based on the article in the February Issue of the Wall Street Journal. This article defended the place that the economic system of Singapore will spread out and accomplish an impressive growing of up to 5.1 % in 2010. This outlook has been discussed in the visible radiation of the economic theories of concern rhythms, the theoretical account of aggregative demand and supply and the theory of pecuniary policy and relationship between the involvement rates, money supply and entire end product. From the point of views of the theories and the fact that the cardinal bank of Singapore does non be after to alter its loose pecuniary policy, the economic enlargement and growing of 5.1 % are executable and can be achieved.