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Free «Economic Policy and the Global Environment» Essay Sample


The rising inflation in the Asian markets in the recent times has been one of the issues of discussion among policymakers in these countries. In line with this, the Asian markets have been working out on different ways of dealing with inflation as well as sustaining economic growth. In an article 'Inflation Seen to Increase Rather than Growth' that appeared in Singapore Business Review magazine in October 2010, it is clear that inflation was rising at an alarming rate, a factor that threatened the overall growth of the economies in the Asian region.

Following this, there are different areas that are mentioned in the article that were affected more than the others by this inflation. Some of these areas include the transport segment, the pharmaceutical segment and the labour market which recorded rising wages. In addition, food prices, commodity prices, fuel prices, wages and property prices were rising tremendously (Singapore Business Review 2010). The rising prices in the above mentioned segment have continued to threaten the overall growth of the Asian markets and thus their economies since the rising inflation has increased the cost of capital and investment in general. Therefore, the article mentions that there are different approaches that are being used by the Central Banks in this region, especially among the G3 countries to combat the inflation and enhance their economic growth. However, the policymakers have to focus on developing an appropriate strategy to combat inflation to avert dire consequences that accompanies rising inflation rates.



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Aggregate Supply and Aggregate Demand

The Singapore economy was among the most affected economies in this Asian region. To begin with, it was reported that the domestic consumer price index inflation rate rose from 0.9% in the first quarter in 2010 to 3.1% in the second quarter of the same year (Monetary Authority of Singapore 2010). With this in mind the aggregated supply of basic commodities were sharply interrupted leading to a low supply and as a result, heightened price levels. According to Baumol & Blinder (2008, p.318), anything that retards the growth of aggregate supply -for example, an increase in the price of foreign oil -can shift the economy's aggregate supply curve inward. In this regard, the economy growth of Singapore was showing downshift signs in 2010 while its economy contracted by 19.8% on a quarter-on-quarter seasonally adjusted annualised basis in Q3 2010 (Monetary Authority of Singapore 2010). On the other hand, the aggregate demand for different products in Singapore was on the rise due to limited supply of important goods.

It is important to understand that there are different issues that arise from inflation and aggregate supply and aggregate demand. Important, inflation can either arise from both aggregate supply and aggregate supply. In reference to Baumol & Blinder (2008, p.318), demand-side inflation was normally accompanied by rapid growth of real GDP whereas supply-sided inflation was normally accompanied by stagnant or even falling GDP. Therefore, Singapore's inflation was as a result of aggregate supply as there were indications that it had been affected. Therefore, the economy of this country was most likely to stagnant over the next few months.

GDP and Economic Growth

The inflation that was being experienced in Singapore was largely as a result of the global inflation since the economy of this country depended heavily on imports (Government of Singapore 2011). As it was mentioned above, the inflation that was being experienced by Singapore emanated more from supply-side as opposed to demand-side. In this respect, this inflation was going to affect the overall economic growth and the GDP of Singapore. Note that whereas inflation would increase the GDP of Singapore, it was a threat to the overall economic growth of this country since it affected important areas that contributed to this growth such as labour and employment. According to Singapore Business Review (2010), there were vital areas in the economy of Singapore that had downsized or were seeking for alternative goods and services that would assist them to remain in the market. Therefore, whereas the current inflation would increase the GDP, it was going to leave consumers at a worse off point, thus tampering with the overall economic growth. The weakness with the economic model of determining GDP in this case is embedded in the fact that in most cases, GDP does not reveal the wellbeing of consumers in a particular economy.

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Labour Market: Unemployment and Inflation

The labour market of Singapore was also likely to be affected by the current economic inflation. According to Joll (1983, p.341), a rise in import prices, would act immediately on the union wages and on labour supply, but there would be no positive effect upon labour demand. According to Mukherjee (2002, p.39), the higher the rate of unemployment, the lower will be the rate of inflation; and the lower the rate of unemployment, the higher will be the rate of inflation. In other words, unemployment and inflation have an inverse relationship. In this regard therefore, the rising inflation in Singapore was more likely to result in a reduced or a constant unemployment rate.

However, whereas this is the theoretical relationship between unemployment rate and inflation rate, studies indicate there are various measures which could be taken to reduce the steepness of the relationship between the two. According to Kee & Hoon (2010) in an article that appeared on the World Bank website, the tremendous increase in capital stock of the exporting sector has been the main reason behind Singapore's declining unemployment rate. This has been irrespective of the rising inflation in the recent times. In other words, the inflation rate of Singapore has not affected tremendously the unemployment rate as it would be expected theoretically. The inability to factor in some of the important factors that contribute to

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The Government and Fiscal Policy

The rising inflation rate continues to be a serious threat to the overall development of Singapore's economy. However, the government of this country has focussed on developing fiscal policies which would promote low inflation rate. In this respect, it was argued that the inflation rate in Asia and particularly in Singapore had been rising and there was a need to implement fiscal policies that would promote growth and keep these inflation rates at a low rate. Therefore, creating an environment that would foster savings and investments was an important part that could assist this country to deal with the current inflation. However, one weakness with implementing the savings and investment model was embedded in the fact that a good percentage of the current inflation rate was external and could not be control easily since this country depended heavily on imports for its sustainability (Singapore Business Review 2010).

The central bank and monetary policy

The inflation rate across the globe was worsened by the dropping exchange rate in Singapore. Therefore, the central bank of this country had been working on developing appropriate monetary models that would ensure that the exchange rate of Singapore was kept as low as possible. In reference to Singapore Business Review (2010), average inflation level across the region has already risen above its historical average level and policymakers will now have to play their cards properly against the impending inflationary risks. In this respect, laying down appropriate monetary policies such as dealing with interest rate was vital in dealing with this inflation. However, a weakness with this approach is seen in the fact that most challenges emerged from external sources as opposed to internal sources, thus exposing the country to vulnerable situations when the inflation challenges are dealt from an external point of view.


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