Actual Growth takes place when is an increase in the country’s real GDP. Gross Domestic Product (GDP) refers to the value of all final goods and services produced within a given country during a given period of time. Potential Growth refers to an increase in the productive capacity of an economy. Stability can be understood as a situation where an economy has a fairly constant output growth and low & stable inflation. When there is LT EG and stability, there is an increase in household’s real incomes and hence their purchasing power. This increases their ability to purchase and enjoy more goods and services, leading to an increase in the material standard of living (SOL) of the country.
Secondly, as a result of LT Economic Growth and stability, there will be an increase in the economy’s real GDP and household incomes. The government can then collect more tax revenue. The tax revenue collected can be used to finance expenditure on infrastructure, education and healthcare services enjoyed by the citizens. This is especially beneficial to developing countries. Furthermore, economic growth can help bring about greater income equality. As there is an increase in tax revenue collected by the government, it will be easier for the government to redistribute the additional tax revenue from the higher income group to the lower income group without the need to raise tax rates. In addition, since lower-income households tend to spend a larger proportion of their income on essential services like healthcare and education, as compared to the higher-income groups, the increased expenditure on education and healthcare services mentioned above is likely to benefit the lower-income groups more, helping to narrow income inequality gap.
Stability can be in the form of low and stable inflation. When inflation is low and stable, it creates a more certain environment in which both businesses and households can plan and operate more efficiently. For example, firms can predict future revenue, costs and thus profits with greater certainty, encouraging them to undertake more investment. Part of these investment undertaken could be in the form of acquiring new capital goods like machineries and equipment, which may serve to increase the economy’s productive capacity in the long run. Furthermore, foreign investors may also be attracted to invest in the country due to relatively lower costs of production as compared to other countries with higher inflation rates. As foreign investors set up production plants and subsidiaries in the domestic country, they will employ domestic labour, hence increasing job opportunities and reducing unemployment in the domestic economy. Overall, stability in an economy will lead to higher investment, output and jobs.
Lastly, stable prices allow a country to enjoy export competitiveness. When the domestic inflation rate is relatively lower than that of trading partners, exports of that country will become cheaper in the foreign market (more price competitive). Assuming the price elasticity of demand for exports is more than 1 (PEDx > 1), the fall in the price of exports will lead to a more than proportionate increase in the quantity demanded for exports. Overall export revenue increases. At the same time, imports will become relatively more expensive in the domestic market, i.e less price competitive when compared to the cheaper domestically produced goods. As consumers are inclined to switch to buying the relatively cheaper domestically produced goods, the demand for imports will decrease, and hence total expenditure on imports will decrease. The value of net exports (X-M) will hence increase, improving the current account and the Balance of Payment of the country. Again, stability allows the government to achieve the aim of maintaining a healthy position of their balance of payments.
It is important that an economy looks towards long term economic growth and stability in particular, price stability. With economic growth, households’ standard of living will experience an improvement. At the same time, a low and stable inflation rate will help to maintain the real value of money. This is one reason why the Monetary Authority of Singapore (MAS) aims to promote sustained non-inflationary economic growth in Singapore.