(2012) A Level H2 Econs Essay Q6 Suggested Answer by Mr Eugene Toh (A Level Economics Tutor)
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6 (a) How do economists compare the economic performance of different countries? [10]
Introduction
The performance of an economy can be assessed based on the fulfilment of various macroeconomic objectives such as low inflation, low unemployment, healthy balance of payments and sustained economic growth.
Inflation
Inflation refers to a sustained increase in the GPL of an economy.
CPI Inflation tracks changes in prices of a large range of goods and services in an undisclosed basket.
CPI Inflation is also a common indicator that is being used in other countries
It reflects the level of price increases in an economy and gives a general idea of how much inflation is present in the economy.
2-3% is considered healthy, and a country is considered to be doing better than the other if the inflation rate falls within this ‘healthy range’
Some countries, like Singapore, use two different indicators to measure inflation. These are “CPI” Inflation and “Core” Inflation. Core inflation discounts the changes in accommodation and private transport costs. (does not affect everyone, every year + influenced by government policy). This can be seen today by the contrasting Core Inflation and CPI Inflation in Singapore.
Unemployment
Unemployment is a situation whereby individuals are willing and able to work but are unable to find work.
The unemployment rate is used to measure level of unemployment
Expressed as number of unemployed persons / total labour force
2-3% is considered to be acceptable for small economies while 3-5% is acceptable for large economies (based on the natural rate of unemployment)
A lower rate of unemployment is better when comparing unemployment rate across different countries
Balance of Payments
Balance of payments is a record of all economic transactions between the residents of the country and the rest of world in a particular period of time
The BOP summarises the inflow and outflows of economic transactions that happen between a country and the rest of the world.
Countries generally favour a surplus (where inflows are greater than outflows) as opposed to a deficit (where outflows are greater than inflows)
Persistent BOP deficits are usually a cause for concern
Economic Growth
Economic growth refers to the attainment of actual and potential growth within an economy
General indicator used will be real GDP (which accounts for inflation)
For countries like Singapore, reports on latest GDP growth generally features “GDP at 2010 prices” which compares GDP year on year with 2010 as the base year.
Country is considered to be experiencing moderate growth if real GDP is between 2-4% (for a developed one like Singapore)
A country is considered to have better economic performance than another if its real GDP growth rate is higher
Conclusion
Most governments use similar indicators to assess economic performance. save for “Core Inflation” which is an additional indicator used to look at price stability as in the case for Singapore.
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