How economic growth can benefit a country like Vietnam
Economic growth is mainly characterized by an increase in the real Gross domestic production (GDP) over a particular period like one year. Furthermore, economic growth is also reflected in the increase in production output and a higher average per capita among households. Economic growth is also stimulated by two factors; the increase in aggregate demand and aggregate supply forces in the economy. Aggregate demand is also illustrated through economic variables like increased consumer spending and purchasing power, and Increase in Capital investments, increased government spending, increased exports, and low imports. On the other hand, aggregate supply, which is also called the total supply, is the aggregate/total amount of goods that producers in the economy are willing to sell at the existing economic price levels.
The economic growth rate index is important for any government due to the benefits affiliated to an increase in Economic growth. Some of the major implications of economic growth rate are reflected in higher income levels among households. If human welfare in the economy is also associated with consumption, economic growth also increases the welfare of households. Availability of high investment capital, higher government expenditure due to the increased government revenue, and Increased productivity due to optimal aggregate demand (AD) and aggregate supply (AS).
From the extracts A and B, the major aspects paralyzing the Vietnamese economic growth index are public debt (due to a low aggregate demand) and the budget deficit (High government spending but low government revenue). Therefore, Economic growth will be advantageous to the Vietnamese economy especially regarding alleviating the public debt in state-owned enterprises and economic budget deficit. Notably, the major implications of the Economic growth on the Vietnamese economic situations will be reflected in the ability to influence the activity of Aggregate Demand and Aggregate supply forces. Notably, aggregate supply will be influenced by the high purchasing power due to a higher average income. Furthermore, the high investment capital will also ramp up production in both state-owned and private enterprises.
Since Vietnam has a population of upto 95million people, the presence of required job skills among such a population immensely improves productivity. Increased productivity and demand, the government will also generate more revenue from taxes on economic activities. Increased government revenue also enhances government spending on availing the relevant structural, economic, and social requirements that are necessary to foster the rate of economic growth. The identified outlook of aggregate demand and aggregate supply can jointly alleviate the public debt in state-owned enterprises and the cut on the budget deficit incurred by the government as the basis of promoting economic growth.
Question two
Are Fiscal Policies alone the best way for Vietnam to reduce its budget deficit?
. A budget deficit in the economy is incurred by the government when the level of government spending is greater than the tax revenue or income generated. Moreover, whenever the budget deficit is unsustainable it leads to the accumulation of the public debt and increased interest paid by the government on bonds. In Vietnam, the budget deficit is responsible for the debt of State-owned enterprises (which is estimated to be 30.6% of the GDP). Since this scenario is common in many nations, there are various ways used to reduce the budget deficit.
Firstly, the budget deficit can be financed using either fiscal policies or monetary policies. Fiscal policies particularly focus on addressing the deficit by regulating government spending and taxes in the economy. On the other hand, monetary policies are introduced by the Central bank in terms of Interest rates to control economic phenomena like Inflation and money supply. Similarly, the budget deficit and public debt of Vietnam can be addressed using both fiscal and monetary policies.
Since household businesses in Vietnam contribute 30% of the GDP, The primary target is to create preferential policies that will turn household businesses into enterprises as a way of increasing government revenue in the long-run. Therefore, in the short run, some of the fiscal policies that will form the scope of preferential policies for household business include increasing government spending. The government can increase spending sustainably by cutting on some programs like pension spending and funding important aspects of the public investment sector. This approach increases the productivity of the economy by availing investment capital and economic support structures like the transport systems to foster transportation of raw material and ready products.
Secondly, another fiscal policy will be to increase taxes. Due to a sustainable increase in government expenditure towards addressing proactive factors of the deficit and public debt, the taxes will also increase overall economic activities to fund the shift in expenditure. Ultimately, the fiscal policies will be applied slightly to increase the government revenue and increase spending on major factions of the public investment sector as a way to promote gradual economic development. However, due to the increase in taxes, monetary policies will also be applied to increase the supply of investment capital, especially for household business owners to grow into enterprises. Therefore, the government will be required to reduce the interest rates on loans. However, the applicability of fiscal policies alone will be limited in reducing the government deficit and stimulating economic growth. The inability in the fiscal policy framework is partially supported by the fact that increasing taxes with a limited increase in government spending can leader to lower spending by households in the economy. Therefore, revising the monetary policy framework to reduce interest rates on investment capital fosters the money supply, aggregate supply, and the purchasing power of households among other aspects of the aggregate demand.
SECTION B
Question one;
Consequences of fall in Crude Oil prices in exporting countries
Oil is one of the most essential products manufactured and consumed globally. Moreover, Crude oil is refined into various consumer products like petrol, diesel, and oil, plastics, bearing grease, and more than forty other products. Therefore, since it is used in various forms, the fall in prices of crude oil is expected to reduce the marginal cost of manufacturing the products identified. Besides the reduction of costs and a positive balance of payment (BOP) for importers of crude oil like India (who important 75% of the oil consumed in the country), Major exporters like Nigeria and Russia continue to face the risk of a deficit, debt, and losses.
Oil is the most traded commodity in the world stock market. Furthermore, it has direct implications on the transport costs on a global scale. On consumers, the fall in prices of crude oil particularly means that households can spend less on oil commodities and use the increased disposable income on other household commodities. On an economy, the macro-economic implications of oil prices can vary. Nevertheless, the significance of oil globally can have two implications on an economy.
Firstly, it can lead to inflation and can also promote economic growth. The sharp drop on crude oil prices since March 2020 is however a rare economic scenario. In normal incidences, as explained above, the scope of benefits enjoyed by the consumers when oil prices depreciate is wide. However, the reduction in oil prices as a result of the Coronavirus pandemic emerges particularly from travel and economic restrictions. Therefore, reducing the price of crude oil may have minimal implications on households and the economy. For instance, there is minimal gain when the price of petrol is low but people cannot travel frequently due to travel restricted. The marginal gain from such an incidence of fall in crude oil prices lower than other economic incidences.
Importing countries like India will exhibit a positive balance of payment due to the economic costs that will be saved from the reduced prices of crude oil. The economy will realize a lower expenditure on importing oil which not only reduces the balance deficit but also creates surplus income for government expenditure. The graph below illustrates how to reduce crude oil prices will promote short-run economic growth on large scale crude oil exporters like India.
Graph one: Impact of reduced crude oil prices for importing countries.
From the illustration, in graph one, the original forces of Aggregate demand and short-run aggregate supply are illustrated by AD and SRAS1. The original market price of oil before the coronavirus pandemic is illustrated by GPL1 and Y1 is the corresponding gross domestic production index. After the coronavirus pandemic, the prices reduce to the General Price level (GPL2) and the increased GDP output is illustrated by Y2. Therefore, the short-run aggregate supply curve shifts to the right to SRAS2. The major implication of reduced crude oil prices on the economy will be an increase in the real GDP as a result of an increase in the short-run aggregate supply which is reflected in the graph by the shift from SRAS1 to SRAS2. Notably, Experts speculate that a 10% reduction in crude oil prices can lead to 0.1% on the GDP
In 2020, the fall of oil prices has been intense since most producers in the US and Russia are selling it lower than the cost price. Therefore, firms that have loaned investment capital to increase the number of oil minefields face the risk of closing down. On the other hand, exporting countries like Nigeria and Russia will also be affected by the reduction in crude oil prices. For instance, 70% of the tax revenue of Russia is sourced from oil and gas. Therefore the falling prices of oil and natural gas have affected Russia’s ability to meet the budgetary expenditure which could be a source of a deficit. Furthermore, further reduction in the prices can lead to devaluation of the Rouble and the possibility of an economic recession
For the case of Nigeria, it is the leading exporter of oil and gas in Africa. As of May 2020, Nigeria’s Oil exports had plunged by 13.97% from 1,754 barrels per day in April to 1,509 barrels per day. Europe used to account for 41% (800,000barrels) of crude oil exports from Nigeria. However, due to the Coronavirus pandemic, Europe takes only 400,000barrels due to travel restrictions, lockdown, and the cheaper US light oil retailing in Europe. Therefore, the reduced prices of crude oil also subject the Nigerian Government to budget deficit due to a shortage of income from exporting oil and natural gas. Nigerian oil mining companies are also vulnerable to closing down due to the reduced profit margins. The implications on aggregate demand and supply in the short run can be illustrated by the following graph.
Graph two: Impact of reduced crude oil prices for exporting countries.
In graph two, the original forces of Aggregate demand and short-run aggregate supply are illustrated by AD1 and SRAS. The original market price of oil before the coronavirus pandemic is illustrated by GPL1 and Y1 gross domestic production index. After the coronavirus pandemic, the prices reduce to the General Price level (GPL2) and the reduced GDP output is illustrated by Y2. Therefore, the aggregate demand curve shifts to AD2. The major implication of reduced crude oil prices on the economy of an exporting country will be a reduction in the real GDP as a result of reduced aggregate demand which is reflected in the graph by the shift from AD1 to AD2.
From the illustrations in this section, the implications of reduced crude oil prices on either importing or exporting countries are vividly illustrated. However, it is also paramount to mention that Middle East oil exporters like Saudi Arabia and the United Arab Emirates depend on the significant foreign currency reserves accumulated to cushion the economic implications of reduced crude oil prices on Aggregate demand and Aggregate supply.