Causes of High Real GDP Growth and Whether Faster Growth Means Higher Living Standards

Answer

Equilibrium real GDP is set where aggregate demand meets aggregate supply, so high growth springs from rises in either — but a higher growth rate in Vietnam tells us only about the change in output, not the level of welfare. The thesis is that faster growth does not establish a higher standard of living in Vietnam, because of data limitations on material living standards over space and the absence of non-material indicators.

Causes of high real GDP growth

Demand-side causes. A higher level of aggregate demand raises real national income. A larger population (consumer base) raises consumption C; greater investor confidence in a stable, opportunity-rich economy raises investment I. Where the multiplier is large, a given rise in AD produces a more-than-proportionate rise in real income, and so a higher growth rate.

Supply-side causes. A higher level of aggregate supply raises capacity. More labour (larger population), more and better capital, higher-quality labour through education, and better technology all raise output and lower unit costs, shifting LRAS rightward and raising potential output.

State of the economy is decisive. The same AD or AS rise yields very different growth depending on where the economy sits on its aggregate supply range.

On the Keynesian/intermediate range (large spare capacity, e.g. Vietnam) a rise in AD₀ to AD₁ raises output strongly (Y₀ to Y₁). Near the classical range (e.g. Singapore at near-full employment) the same AD rise yields little extra output but more inflation.

A developing economy like Vietnam, with large spare capacity, sits on the Keynesian range, so a given AD rise delivers a high growth rate (7.1%). A near-fully-employed economy like Singapore sits close to the classical range, so the same impulse yields a modest 3.1% with more inflationary pressure. The level of development therefore explains much of the growth-rate gap.

Does faster growth mean a higher standard of living?

The case it might. Adjusting for population, Vietnam’s real GDP per capita grew faster (≈7.1 − 1.0 ≈ 6.1%) than Singapore’s (≈3.1 − 1.3 ≈ 1.8%). On the material front, Vietnamese citizens enjoyed a larger increase in purchasing power and consumption relative to the previous year — a faster improvement in material living standards year-on-year.

Why this does not establish a higher level of living standards. Three limitations undercut the inference.

First, the data give growth rates, not absolute real GDP per capita. A higher rate of change says nothing about the level: as the more developed economy, Singapore almost certainly starts from a far higher absolute real GDP per capita, so a slower increase can still leave it materially better off than fast-growing Vietnam. Comparison over space requires the levels, which are absent.

Second, the supporting indicators point the other way. Vietnam’s unemployment (4.65%) exceeds Singapore’s (2.2%), so a larger share of Vietnam’s labour force lacks wage income — weakening, not strengthening, the material-living-standard claim. And growth is a statistical mean that ignores income distribution; without each country’s Gini coefficient, fast average growth may mask wide inequality, so the typical citizen’s gain is unknown.

Third, real GDP measures the quantity of output, not the quality of life. The non-material dimension — pollution, working hours, health, leisure, political freedoms — is entirely absent from the data. Indeed, Singapore’s higher development plausibly delivers better healthcare, education and infrastructure, raising non-material living standards regardless of the growth-rate gap.

Judgement. Higher real GDP growth in Vietnam means only that its output and material living standards are improving faster than Singapore’s, not that they are higher in level. Establishing the latter would require absolute real GDP per capita, distributional data such as the Gini coefficient, and non-material indicators — none of which the preamble supplies. Given Singapore’s far higher development, lower unemployment and stronger public services, Vietnam’s faster growth almost certainly does not place its standard of living above Singapore’s; the growth rate measures the direction of travel, not the position reached.