Discuss the view that a large increase in national income is often but not always desirable. [15]
Introduction
The increase in national income will mean that the economy has attained actual growth and this is very often understood to be beneficial. However, there are circumstances where such actual growth may not be beneficial or desirable. To assess whether economic growth would be desirable or not, we need to examine how it will affect the economy from its impact on the various aims of the economy.
Main Body
1. Explain why a large increase in national income is beneficial
Large increase in national income is often considered beneficial as it will mean that there is an increase in employment as there is an increase in monetized production of goods and services. This implies that there is greater utilization of labor in the economy and there is lesser need of unemployment benefit. Furthermore, there is higher collection of tax revenue as more people are employed and they are subjected to direct income tax imposition and there is also greater corporate tax revenue from the industry. As a result, there is more tax revenue and lesser government expenditure which will prevent budget deficit from occurring and this will prevent the government from experience rise in public debt.
Large increase in national income will be beneficial as there will be higher level of standard of living. A large increase in national income or real GDP will mean a higher level of real GDP, indicating that there is a higher level of purchasing power for average citizens and thus, higher level of standard of living for the people due to a higher level of material comfort enjoyed by the people. Its tax revenue will increase with higher level of national income and this will mean that there is higher level of funding for social welfare and infrastructural development to make life more comfortable and convenience for the people. A higher national income level will mean a higher level of production capacity of goods and services to allow higher level of consumption, indicating an improvement in consumer welfare.
Higher level of national income will also imply that there is a higher level of consumption, raising the size of the consumer market. This will induce higher level of investment from local or foreign investor which will create an accelerating and multiplier effect to raise economic activities and thus, stimulating growth of the economy. This will raise the level of national income and provide more funding for investment as there will be a higher level of saving. Thus, higher level of investment is possible to induce further potential and actual growth.
2. Explain why a large increase in national income is not beneficial
However, the excessive rise in national income can lead to inflationary condition as it will crease demand-pull inflation when the economy is experiencing rising cost condition or full employment. As national income rises, there will be higher level of increase in consumption or investment which will raise price level due to the excess demand condition. This is seen more extensively if the increase in national income is due to a rise in export demand or foreign direct investment brought about by an economic boom.
As seen from the diagram, the rise in AD from AD₀ to AD₃ will lead to inflation (rise in price level) when the economy is experiencing rising cost condition from Y₁ to Y₂ or it is at full employment at Y₂=YF.
The impact is also considered undesirable when there is structural unemployment brought about by economic growth. This occurs when the economy focuses on high-valued industries to promote economic growth. Although these industries can create high-valued production and raise economic growth extensively, their contribution to employment is minimal and even adverse at times. These industries will only employ very few highly-skilled workers as industries are mainly capital-based production and technological skill requirement for workers is high and advanced. Consequently, there is skill incompatibility or displacement of workers, contributing to structural unemployment as seen in Singapore. Structural unemployment is severe as the conditions are entrenched, prolonged and very difficult to eradicate.
3. Evaluate the key factors that will determine whether a large increase in national income is desirable or not
Higher national income may create high degree of unequal of distribution of income as the gain in economic growth is usually lopsided, including to a small group of people who are highly skilled to earn high income level or who are owners of assert or resources to gain from asymmetry of assets or resources during an economic boom. The rising disparity of income will undermine the majority extensively, creating social dissatisfaction as the living standard is compromised with rising prices of goods and services and stagnation of income increment.
Lastly, higher national income may not be favoured as this may be attained at the expense of the qualitative aspect of the standard of living. Workers may have worked harder and longer hours, contributing to higher stress levels which will strain their health condition. Very often, higher national income may be attained with least regard for environmental concern, implying that the qualitative aspect of life in terms of Measurement of Economic Welfare (MEW) is lowered. Thus, higher national income may not be beneficial if the rise in national income is at the expense of the qualitative aspect of life.
Conclusion
In sum, the increase in national income which implies high level of economic growth and may be the main aim of government but the possible detrimental impacts may make it not desirable at certain times. Thus, it is imperative for the government to pursue economic growth with the consideration of these detrimental impacts, so as to avoid the problems for surfacing and thus, undermining the interest of the country.
