What this lesson teaches
I can explain the causes of weak growth, unemployment, inflation or deflation and a large trade imbalance.
Syllabus 9570, 3.2.2(a). Macroeconomic Issues: Macroeconomic issues and their causes; Undesirable economic growth - persistently low or negative, unsustainable, non-inclusive due to factors such as changes in AD or AS, environmental degradation, inequitable income distribution; Unemployment - demand-deficient, structural, frictional due to factors such as lack of AD, technological changes, mismatch of skills, transition between jobs; Price instability - demand-pull inflation, cost-push inflation, deflation due to factors such as changes in AD, costs of production, productive capacity; Persistently large balance of trade deficit or surplus due to factors such as changes in global conditions, international competitiveness, exchange rates
Make a guess
Repeated power cuts stop factories from filling the orders they have. What is holding back growth?
- Supply: firms cannot produce, even with orders.
- Demand: people are not buying enough to keep factories busy.
- Neither: the orders will simply be filled later.
Show the answer
Supply: firms cannot produce, even with orders.
Demand is there, but production is blocked. This is a supply-side cause, which needs a supply-side fix.
Growth can be weak because demand is too low, because supply is held back, or both.
Low growth caused by weak demand: falling exports, cautious consumers or low investment mean firms sell less and cut output. This is a recession if real GDP falls for two quarters in a row.
Low growth caused by supply problems: poor infrastructure, skill shortages, disruptions or slow productivity growth hold back how much the economy can produce.
For a small, open economy like Singapore, weak global demand is the most common cause of a downturn, as in 2009 and 2020.
Prolonged low growth can do lasting damage: firms cancel investment and unemployed workers lose skills, which reduces future capacity.
- Demand causes
- Weak exports, consumption or investment.
- Supply causes
- Skill shortages, disruptions, slow productivity growth.
Worked example: Fewer orders and power cuts
An economy loses export orders for two years, and firms leave machines idle. Separately, repeated power cuts stop factories from meeting the orders they do get.
- Lost export orders: AD falls, a demand-side cause.
- Power cuts: firms cannot produce, a supply-side cause.
- Both slow growth, but they need different solutions.
- If investment stays low for years, future capacity also suffers.
Watch out for this
Low growth is always caused by low demand.
Supply problems, such as skill shortages or disruptions, can also hold back growth.
Check your understanding
A global recession cuts demand for Singapore's exports. What is the likely effect?
- AD falls, so real output growth slows or turns negative.
- AS falls, so prices rise.
- Growth is unaffected, because domestic demand is unchanged.
Show the answer
AD falls, so real output growth slows or turns negative.
Right. Exports are the biggest part of Singapore's AD.