EJC Econs N2022 H2 EQ6

1 2022 A-Level P2 Question 6 Singapore’s Prime Minister has stated that ‘Globalisation will be under pressure, but it is imperative for countries to cooperate, for businesses to operate across many geographies, to tap resources, to bring skills and talents and experiences together, and then serve markets all around the world.’ a) Explain the benefits and costs of globalisation to Singapore. [10] b) Discuss the most appropriate policy measures that the Singapore government should tackle to increase the benefits and reduce the costs of globalisation. [15] Part (a) - Question Analysis Approach Command Word Explain Question Type Consequences and effects Start point Increase trade, capital flow and labour movement due to globalisation End Point BUGPEES Content and Context Content - Benefits and costs of globalisation - AD/AS framework Context Singapore Introduction Globalisation, a double-edge sword, refers to the integration or inter -connectedness of national economies through trade of goods and services, capital flows and labour migration. Singapore will see an increase in trade, capital flows, labour flows and in competition. Globalisation will help Singapore achieve the four macroeconomic objectives of sustained economic growth, low inflation, low unemployment, and a healthy balance of trade (BOT) position. However, globalisation also makes Singapore more susceptible to threats from global recessions and foreign competition. Body Point 1: Benefits of globalisation to Singapore. 1. As a small and open economy, Singapore can benefit from access to external markets and capital due to the increase in trade. • Due to the differences in opportunities costs and factor endowments, it would be beneficial for countries to produce goods that they have comparative advantage in and to trade with each other. • With skilled labour and an increased access to capital, Singap ore has a comparative advantage in capital-intensive industries producing high-end chemicals and pharmaceuticals products. The production of these goods in Singapore will incur a lower opportunity cost which leads to an increase in trade with these goods.

2 • In addition, the signing of Free Trade agreements and the removal of tariffs have facilitated better trade relations between Singapore and other countries such as United States, South Korea, China. Etc. • Singapore will have greater access to the export mar ket where the rise in exports is greater than the fall in imports. Hence, there will be an increase in Singapore’s net exports (X -M), which in turn increases aggregate demand (AD) from AD1 to AD2 as shown in the Figure 1 below. • With an increase in trade due to globalisation, it will also enable Singapore to acquire imports of higher quality of factor of production which increases productive capacity and potential growth in Singapore. • In addition, with an increased in levels of trade, consumers in the trad ing companies with Singapore will be able to consume the goods at lower prices and will enjoy a greater variety of goods and services. This increases their material standard of living. • Multiplier effect: As seen from figure 1, the increase in AD will result in a multiplied increase in real income. When there is an increase in national income, it will induce more consumption in the economy. National income will now rise by another round and will further increase consumption, production, output, and income. • This process will then continue, with each round of increase becoming smaller; until the rise in income is too small to generate any further consumption. • Through this multiplier process, the initial increase in investment expenditure would lead to an eventual increase in national income. • From figure 1, this increase in investment expenditure leads to a multiplied increase of national income from Y1 to Y2, hence leading to higher actual growth. • There is also a fall in demand-deficient and cyclical unemployment as the derived demand for labour to produce goods and services increases. or 2. Globalisation brings about freer flow of capital and labour, and the inflow of foreign direct investment (FDI) has played an important role in boosting actual growth and potential growth in Singapore. • Globalisation brings about an increase in international capital flows such as the transfer of ideas, knowledge, skills, technology, and foreign direct investments. • Singapore relies heavily on attracting FDI to drive growth and will have to maintain an attractive corporate tax rate to attract inflows. • The inflow of FDI will increase Singapore’s aggregate demand from AD1 to AD2 as shown in figure 1 and hence achieving actual growth and a decrease in unemployment.

3 Figure 1: Impact of an increase in AD on the equilibrium level of real national income and general price level • For example, there is an increase in investments in capital in sectors such as petrochemical, electronics, pharmaceuticals, machinery, and equipment in Singapore. • This will boost Singapore’s productive capacity and hence decreases inflationary pressures in the long run. In addition, the inflow of technology and skills will increase the quality of the factors of production, and this increases LRAS and potential growth. • The freer mobility of labour enables more inflow of foreign talents will help with the transfer of knowledge and this improves the quality of human capital. This would as a result increases the productive capacity and potential growth of Singapore. • The access to cheaper foreign labour and imported raw materials will also lower cost -push inflation in Singapore. This raises the short run aggregate supply curve from AS1 to AS2 as shown in Figure 2. • There is also a decrease in general price levels from P1 to P2 because of the increase in productive capacity from greater quantity of capital and labour resources. • Additionally, there will be a decrease in wage-push and import-push inflation due to access to cheaper foreign labour and imported raw materials that globalisation brings.

4 Figure 2: Impact of an increase in AS on the equilibrium level of real national income and a fall in general price level Body Point 2: Costs of globalisation to Singapore. 3. With globalisation, Singapore will have a greater reliance on external demand because of an increased in trade. This would make Singapore more susceptible to external shocks. • Singapore would also be susceptible to the effects of global price changes as Singapore is heavily reliant on other countries for imported goods. • For example, Singapore experienced higher imported inflation due to the supply shock caused by the Russia Ukraine crisis. • The rising costs of imported raw materials was caused by inflation in other countries. The higher cost of production because of the increasing costs of raw materials would lead to a fall in SRAS and leading to an increase in cost-push inflation Figure 3: Impact of a decrease in SRAS on the equilibrium level of real national income and a rise in general price level

5 • With an increase in trade, Singapore may face an increase in structural unemployment. • With a greater access to trade, there will be greater access to imported goods and services. This would lead to an increase in import expenditure and could worsen Singapore’s Balance of Trade position. • Globalisation may also cost Singapore to lose its comparative advantage to more innovative countries over time. • Without relevant skillsets, workers would not be able to transition quickly to the sunrise industries, hence this leads to occupational labour immobility, and this will lead to structural unemployment. • Additionally, globalisation will allow for a greater access to cheap foreign labour. They might displace the more expensive local workers.