To be considered successful, an economy needs to achieve long-term economic growth and stability. Explain this statement. [10m]
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.
(a) Explain the main causes of unemployment in Singapore in the recent years. [10m]
Cyclical unemployment is caused by a lack of demand in the downswing of the business cycle. During the downswing (recession or depression), aggregate demand decreases and firms find they cannot sell all their current output and so there is an unplanned accumulation of inventories. Firms will then adjust to the deficiency of demand by cutting back on production and hire fewer workers, leading to an increase in cyclical unemployment. Therefore, cyclical unemployment is sometimes referred to as demand-deficient unemployment.
In the recent Global Financial Crisis (US sub-prime mortgage crisis) in 2008/09, the economy went into sharp contractions as a result of these external shocks. These shocks badly affected our export trade with the rest of the world, tourism and international banking as well as financial services sectors. In short, components of AD were negatively affected.
Furthermore, exports from Singapore are dominated by high-end manufactured goods and services which tend to have a high income elasticity of demand, falling global income thus had pronounced adverse effect on the global demand for Singapore’s exports. As AD falls, firms will recognise the fall in the demand for their goods and services. This will cause them to cut back on production and thus reduce their employment of factors of production like labour. In so doing, it gives rise and worsens cyclical unemployment in Singapore.
Structural unemployment arises from a change in the economic structure of an economy. For example, when an economy changes from an industrial/manufacturing type to a service-orientated one, workers are made redundant in the declining sector, but may not have the necessary skills/knowledge to meet the job requirement in the emerging sectors, or are unwilling to move from one region to another in order to take up jobs in which they have suitable skillsets for. These are cases of occupational and geographical immobility of labour respectively.
In the case of Singapore, there is a decline in her competitiveness in the manufacturing industries. This is due to competition from low-cost emerging countries that have entered the world market. For example, China’s low-cost manufacturing sector and India’s IT software industry have permanently reduced the demand for Singapore’s manufacturing and IT exports. Singapore’s domestic firms in these industries either cut back on production or shut down completely, resulting in the retrenchment of workers. While there are job vacancies available in the sunrise industries of the economy, like the tertiary sectors, these retrenched workers are unable to fill these vacancies due to the lack of necessary skills. This is a case of skills mismatch and occupational immobility, leading to structural unemployment in Singapore.
Structural unemployment is common in Singapore as the country moves from one industry to another due to her changing comparative advantage. As the country moves from the secondary to the tertiary sector, labour finds itself with a mismatch between their skills and the requirements of the jobs in the sunrise industries.
Frictional unemployment arises because of imperfect information in the labour market as it takes time for job-seekers to be matched with suitable jobs. It is also known as search unemployment. On one hand, job-seekers have imperfect information on the jobs available in the job market, along with the job prospects, job requirement, salaries, benefits, to name a few. On the other hand, firms also have imperfect information on the job-seekers available and their qualities, skillsets, working attitude etc. Since both the firms and job-seekers are trying to find what they deem to be the best match available, time will be taken for job-seekers to be matched with suitable firms. During this period of time, some job-seekers will be frictionally unemployed.
Furthermore, the unending flow of people into (e.g new graduates) and out of the labour force (retirees, women leaving labour force to take care of their children etc), and the process of job creation and job destruction create the need for people to search for jobs and for firms to find suitable employees. This type of unemployment is common in all countries inclusive of Singapore. In Singapore, for example, it is common to see new graduates taking about 3-6 months to find themselves suitable jobs. During this period, they are frictionally unemployed.
(b) An increase in inflation levels is more likely to cause problems for the domestic than the external sector of the Singapore economy. Discuss. [15m]
One of the macroeconomic aims of the Singapore government is to maintain price stability (low inflation levels) so as to create a conducive environment for investment, maintain export competitiveness to sustain non – inflationary economic growth. There are two main types of inflation – demand-pull and cost-push. An increase in the inflation levels will lead to problems for both the domestic and the external sector.
Thesis: Increase in inflation levels may cause more problems for the domestic sector
An increase in inflation levels will lead to greater uncertainty in the economy and firms will face difficulty predicting future costs, revenue and profits. This will reduce business confidence and the expected rate of returns from investment will fall. Firms will thus reduce their investment expenditure.
Part of these investment expenditure could have been channeled into useful investment projects like Research and Development (R&D) to search for cheaper and more efficient methods of production, which will serve to increase the productive capacity in the economy. However, since firms are deterred from taking up investment projects in view of the higher inflation levels, potential economic growth is hindered.
Furthermore, if the increase in inflation levels is due to cost-push inflation, where there is persistent increases in cost of production, it may lead to an increase in unemployment in the country. This is because with higher costs of production, existing firms may be encouraged to relocate part of their operation and production processes to other countries with lower cost of production. These firms will bring out with them job opportunities, which will then lead to increase in unemployment in the country.
On the overall, the high inflation rates will negatively affect the economic growth and employment levels in the economy. This illustrates how increase in inflation levels can cause severe problems for the domestic sector, adversely affecting the macroeconomic aims of the economy.
Anti-Thesis: Increase in inflation levels may cause more problems for the external sector
1) Worsening of current account
An increase in the inflation levels is likely to worsen the current account of the Balance of Payment.
When the domestic inflation rate is relatively higher than that of trading partners, exports from the domestic country will become more expensive in the foreign market (less price competitive). The price demand elasticity of Singapore’s exports is expected to be more than 1 (PEDx > 1), given the wide availability of substitutes in the global market, the increase in the price of exports will lead to a more than proportionate fall in the quantity demanded of exports. Overall export revenue falls.
At the same time, imports will become relatively cheaper in the domestic market, i.e more price competitive when compared to the more expensive domestically produced goods. As consumers are inclined to switch to buying the relatively cheaper imports, demand for imports increases and total expenditure on imports increases.
The value of net exports (X-M) will hence fall, worsening the current account and the Balance of Payment of the country.
2) Exchange Rate
The fall in the quantity demanded for the country’s exports will lead to a fall in foreigners’ demand for the country’s currency (e.g DDSGD falls). At the same time, the rise in the demand for imports will increase the supply of the country’s currency in the foreign exchange market (e.g SSSGD increases).
As a result, there will be a depreciation in the country’s currency. For countries that are heavily dependent on imports (e.g Singapore), a depreciation in the currency may eventually lead to / worsen cost-push inflation as imported factor inputs become relatively more expensive.
3) Worsening of Capital and Financial account
Cost-push inflation means higher production cost. Foreign investors may hence be less willing to invest in the domestic country, leading to a fall in inflow of new Foreign Direct Investments (FDIs) into the country. At the same time, existing foreign firms may also choose to relocate their production to other countries with lower cost of production, leading to an increase in outflow of FDIs.
Furthermore, an increase in inflation levels will also lead to capital flight as people prefer to put their money in countries where the monetary situation is more stable, resulting in short–term capital outflow. This will worsen the Capital and Financial Account (CFA) and hence the Balance of Payment of the country.
Evaluation (Making a Judgement)
Singapore is endowed with little natural resources of her own and with a small domestic market. Thus she is very highly dependent on imported factor inputs (e.g raw materials) for her domestic production processes. At the same time, she is also highly reliant on foreign markets as key destinations for her exports of finished products. In addition, Singapore is also very reliant on capital flows and FDIs. Since Singapore is such an open economy with high dependency on trade and FDIs, an increase in inflation levels is expected to cause more problems for her external sector than her domestic sector.
However, problems from the external sector will have spillover effects on the domestic sector as well. E.g. an increase in inflation levels will reduce the price competitiveness of Singapore’s exports, leading to a fall in the quantity demanded for exports. Since Singapore is an export–reliant country, a fall in the quantity demanded for exports will severely affect her AD. The fall in AD will lead to a fall in real national output by multiplied times, through the multiplier effect. This would trigger a fall in domestic production, employment and economic growth.
In general, an inflation rate of 2 – 3% on average would not cause much of a problem for the domestic or external sectors of the economy. In fact, mild demand–pull inflation may be favourable to economic growth since the excess demand and the prospects of higher returns may serve to stimulate investment and production in the economy.
Nonetheless, inflation is of great concern to Singapore and therefore the government has to be vigilant in keeping inflation rates in check.
Explain the potential causes of a balance of payments deficit on current account. [10m]
The balance of payments is a record of receipts and payments arising from all economic transactions between a country and the rest of the world over a period of time (usually a year). The BOP comprises of 2 main accounts, the Current Account and the Capital and Financial Account. The Current Account records the country’s trade in goods and services with the rest of the world, as well as income flows and transfers of money and assets across borders. The Current Account includes the (i) Goods balance, (ii) Services balance, (iii) Income balance and the (iv) Net current transfers.
|Explain how an appreciation in the domestic currency can cause a Current Account deficit.
An appreciation of the exchange rate will lead to an increase in the external value of the domestic currency with respect to foreign currencies.
The appreciation will lead to an increase in the price of exports in terms of foreign currency in the foreign markets. This will lead to a decrease in the quantity demanded for exports. The extent by which Qdx falls by depends on the price elasticity of demand for exports.
At the same time, an appreciation will lead to a decrease in the price of imports in terms of domestic currency. This will lead to an increase in the quantity demanded for imports. The extent by which Qdm increases by depends on the price elasticity of demand for imports.
On the overall, if the Marshall-Lerner condition holds i.e the absolute sum of price elasticities of demand for Exports and Imports is more than 1 (|PEDx + PEDm| > 1), an appreciation will lead to a fall in the value of net exports (X-M), thus worsening the BOT and this may eventually lead to a BOP deficit.
Explain how higher Economic Growth relative to other countries can lead to Current Account deficit.
A relatively higher economic growth rate in a country, like Singapore, relative to other countries can lead to a Current Account deficit. A relatively higher economic growth rate means that the level of real GDP is rising faster than that of other countries.
The increase in real national income leads to a rise in the purchasing power of households, leading to an increase in demand for goods and services in general, which includes imports. The increase in demand for imports will lead to an increase in the total import expenditure. Assuming that the total revenue from exports remains unchanged, there will be a fall in the net export revenue, hence the current account and BOT will worsen and may eventually lead to a current account deficit.
The extent of this depends on the marginal propensity to import (MPM). If MPM is high, rise in income will lead to significant rise in imports, hence worsening the current account to a large extent. On the other hand, if MPM is low, an increase in income may not increase import expenditure substantially, and will thus have little effect on the Current Account.
For example, Singapore has a high dependence on imports, which take up about 150% of GDP. A large proportion of consumption goods, including necessities, in Singapore are imported. In addition, many raw materials and intermediate goods used in production are also imported. This means that the marginal propensity to import is fairly high. Hence a rise in income relative to other countries would lead to a large increase in imports, resulting in a possible current account deficit.
Explain how higher domestic inflation relative to other countries can cause a Current Account deficit.
When the domestic inflation rate is relatively higher than that of trading partners, exports of that country will become more expensive in the foreign market (i.e less price competitive). Assuming the price demand elasticity of exports is more than 1 (|PEDx| > 1), given the wide availability of substitutes in the global market, the increase in the price of exports will lead to a more than proportionate fall in the quantity demanded for exports. Overall export revenue falls.
|At the same time, imports will become more price competitive when compared to the domestically produced substitutes in the domestic market. As consumers are inclined to switch to buying the relatively cheaper imports, demand for imports will increase, hence total expenditure on imports will increase.
The net exports revenue (X-M) will hence fall, worsening the current account and the Balance of Payment of the country. This eventually leads to a BOP deficit on the current account.
Explain how changes in immigration policies and corporate tax rates on foreign firms can lead to Current Account deficit.
Current account deficit can occur when the government relaxes its immigration policies and allows the entry of a larger number of foreign workers into its country. These foreign workers will remit part of their wages back to their home countries. Thus, when there is a rise in the number of foreign workers, there will be an increase in the amount of remittances flowing out of the country.
Likewise, when the government reduces the corporate tax rates imposed on foreign firms, it will attract more foreign investors to set up production plants and subsidiaries in this country. These firms will send part of their profits back to their home countries. Thus, when there is an increase in the number of foreign firms, there will be an increase in the amount of profits flowing out of the country.
This will worsen the current account and eventually leading to a current account deficit.
|In conclusion, there are several factors that can lead to a deficit on the current account. This includes the inflation rate of the domestic country relative to that of its trading partners. Relative economic growth is another important factor to consider.|
‘The overall Singapore government budget for Fiscal Year 2013 is estimated to have recorded a surplus of S$3.9billion (1.0% of GDP)’
Source: Recent Economic Developments in Singapore, 6 June 2014, MAS
Assess the likely impact of the budget surplus on the Singapore economy, both domestically and internationally. [25m]
(a) Explain the macroeconomic policy decision-making is made more difficult by possible conflicts between government objectives. [10m]
(b) Assess the relative effectiveness of the alternative macroeconomic policies that the Singapore government could adopt to maintain a low rate of unemployment. [15m]
Between 2012 and 2013 the number of Singapore dollars required to buy US Dollars and Chinese Renminbi increased by 3.5% and 6.6% respectively, while the number of Singapore dollars required to buy Japanese Yen and Malaysian Ringgit fell by 15.2% and 3.5% respectively. (Source: MAS)
(a) Explain how an appreciation of a country’s currency might affect the current account of its balance of payments. [10m]
(b) Discuss the likely overall effects of the changes in the exchange rate in 2012-13 on Singapore’s domestic economy. [15m]
In its September 2013 Recent Economic Developments Statement, the Monetary Authority of Singapore noted that inflation was expected to rise moderately. Strong GDP growth in Q2 2013 was mainly due to increased output in the manufacturing and trade-related service sectors with a slowing of growth in private consumption. There was expected to be continued strong pressure from persistent tightness in the labour market caused by shortages in labour supply accompanied by steady expansion in demand for goods and services from the US, Japan and the Eurozone.
(Source: Recent Economic Developments in Singapore, MAS, 5 Sep 2013)
(a) Explain how the above-mentioned factors might have caused the rate of inflation to rise in Singapore. [10m]
(b) Discuss whether exchange rate appreciation should remain the most important policy instrument in controlling the rate of inflation in the Singapore economy. [15m]
During the recent world-wide recession, many European countries chose low interest rates as a monetary policy approach rather than adopting demand-led fiscal policy stimulation. At the same time, with most of these countries’ governments introducing large cuts in government expenditure in order to reduce their budget deficits, a fiscal contraction actually resulted.
Discuss which policy approach is appropriate for a country during a world-wide recession. [25m]
“We are restructuring to become more competitive, not less.” Mr Lim Hng Kiang, Minister for Trade and Industry, The MTI Times, Committee of Supply 2013
(a) Explain why an economy’s comparative advantage might change over time. [10m]
(b) Assess the measures adopted by the Singapore government to improve its global competitiveness. [15m]
In 2011 Singapore’s GDP at 2005 prices grew by 4.9%, the total population grew by 2.5%, inflation (as measured by the consumer price index) was 5.2% and overall unemployment stood at 1.9%.
(Source: http://www.singstat.gov.sg/stats/latestdata.html, accessed 30 January 2013)
Discuss the limitations of these statistics in both assessing the change in the standard of living in the Singapore economy in 2011 and comparing it with that of other economies. [25m]
The following data relate to the Singapore economy in 2011.
(Source: http://www.singstat.gov.sg/stats/latestdata.html, accessed 30 January 2013)
(a) Economies consist of several key sectors such as households, firms, government and the rest of the world. Explain the relative importance of these key sectors of the circular flow of income in determining the national income in Singapore. [10m]
(b) Discuss the likely effects on Singapore’s national income and its components when its exchange rate appreciates. [15m]
Since the economic crisis of 2008, rates of economic growth across the world have differed considerably.
(a} Explain the key determinants of actual and potential economic growth. [10m]
(b) Assess the alternative economic policies that the Singapore government could adopt to maintain a sustained rate of economic growth into the future. [15m]
|In order for specialisation to be beneficial, it must be accompanied by exchange.
(a) Explain how benefits to the economy can arise from specialisation and exchange. [10m]
(b) Very often these benefits are not fully achieved in domestic and international markets. Discuss the reasons for this. [15m]
Governments have aims in relation to unemployment, economic growth and the balance of payments.
(a) Explain the consequences of failing to achieve these aims. [10m]
(b) Discuss whether failure to achieve these macroeconomic aims is more likely to be caused by domestic or international factors. [15m]
On 1 September 2011, the Monetary Authority of Singapore (MAS) reported that inflationary pressures remained strong because of the tight domestic labour market, high consumer spending and rising global commodity prices.
(a) Explain how the factors mentioned above will lead to inflationary pressures remaining strong in Singapore. [10m]
(b) Discuss alternative economic policies that the Singapore government might consider adopting to alleviate these inflationary pressures. [15m]
On 14 October 2011 Premier Wen Jiabao of China called for joint international efforts to combat rising trade protectionism, which he said was damaging the world economy amid on-going global economic turbulence.
Discuss whether the use of protectionistic policies can ever be justified during a period of worldwide economic recession or whether governments should follow Premier Wen’s advice and adopt a policy of greater free trade. [25m]
(a) Explain how the relative importance of the components of the circular flow of income for a small and open economy might be different from a large and less open economy. [10m]
(b) Assess the usefulness of the components of the circular flow of income to compare different countries’ standard of living. [15m]
In 2014 Singapore’s GDP at 2010 prices grew by 2.9%, the total population grew by 1.3%, inflation was 1% and overall unemployment stood at 2%.
Source: http://www.singstat.gov,accessed July 2016
(a) How would you assess whether the standard of living in Singapore has risen? [10m]
(b) Discuss whether the openness of the economy helps in achieving higher standard of living in Singapore. [15m]
According to data from the World Bank, 2014 GDP (PPP adjusted) figures were US$17.6 trillion and US$17.4 trillion dollars for China and USA respectively. However if GDP statistics are not adjusted for cost of living, the U.S. economy still dwarfs China’s, at US$17.4 trillion versus US$10.4 trillion.
(a) Explain the indicators that could be used to complement or replace GDP, when measuring the various aspects of standards of living. [10m]
(b) Discuss the problems of using PPP adjusted GDP in making international comparisons of the various aspects of living standards between these two countries. [15m]
Pump priming is an action taken by the government to stimulate an economy, usually during a recessionary period.
(a) Explain why such a measure is more effective when a greater portion the extra income earned by households is consumed than withdrawn. [10m]
(b) Assess the view that a large increase in national income is always desirable. [15m]
“Inclusive growth is economic growth that creates opportunities for all segments of the population and distributes the dividends of increased prosperity, both in monetary and non-monetary terms, fairly across society.”
Source: http://www.oecd.org, accessed on 10 July 2016
(a) Explain why a government might aim to achieve inclusive growth. [10m]
(b) Evaluate the measures adopted by the Singapore government to achieve inclusive growth. [15m]
UK is in battle over stagflation. Growth has slowed due to its austerity measures and the European debt crisis, while unemployment and oil prices have risen. Economists consider stagflation particularly tough to battle.
(a) Explain the key causes of stagflation in UK. [10m]
(b) Discuss the most appropriate policy that a government could adopt when confronted with stagflation. [15m]
a) Explain the causes of disequilibrium in the balance of payments. 
b) Do you agree that the Singapore government focus should always be to correct a balance of payments deficit? [15m]
(a) Explain why a small economy should embrace globalisation. [10m]
(b) Discuss whether protectionism is justified during times of worldwide recession. [15m]
Explain how globalisation has changed Singapore’s pattern of trade and discuss whether Singapore is among the economies that have most to gain from globalisation. [25m]
(a) Explain the economic case for free trade between countries. [10m]
(b) Discuss whether governments should be concerned about the changes to a country’s balance of paymentsposition brought about by globalisation. [15m]