ACJC International Trade Answers Essay Qn 3

1 2024 International Trade Tutorial – Essay Q3 Suggested Responses [2022 A Level Question 6] Singapore’s Prime Minister has stated that Globalization will be under pressure but it is imperative for countries to cooperate, for business 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] Question Analysis: Command Explain • Start: Globalisation • End: Singapore’s macroeconomic aims , benefits and costs to economic agents such as consumers Concepts Globalisation, benefits and costs, AD/AS analysis, macroeconomic aims Context Singapore Introduction: Globalization refers to the development of an increasingly global economy. It is characterised by free trade of goods and services, free flows of capital, and labour mobility. As a small and open economy, Singapore has greatly benefited from globalisation but there has also been costs incurred as a result. R1: Benefits – Higher Economic Growth and Employment Globalization allows countries to exploit their comparative advantage. Comparative advantage refers to the ability of a country to produce a specific good or service at a lower opportunity cost than others. As a small economy, it is necessary for Singapore to tap on external demand to boost its economic growth. By specializing in producing tech-intensive and capital-intensive goods and services, Singapore can exploit its comparative advantage to export those goods and services to other countries and import goods that others produce more efficiently. Recoginising the benefits from specialisation and trade, countries such as Singapore have actively signed more from Free Trade Agreements which allow for free trade to take place without tariffs being imposed. As shown in the diagram below, compared to when tariffs are imposed, free trade requires domestic producers to sell at a lower price, Pworld, which brings about a larger quantity demanded at Q 4. Domestic consumers benefit from their ability to enjoy imported goods priced at a lower price (Pworld compared to Ptariff), hence raising their consumer surplus.

2 The increase in Foreign Direct Investment facilitated by globalization also raises capital flow into Singapore. Singapore’s Aggregate Demand (AD) thus increases. Assuming that spare productive capacity is available, producers are prompted to increase production when faced with an unplanned fall in their inventory of stocks, in turn increasing the employment of workers, given that labour is a derived demand. This triggers the onset of the multiplier process where households earning higher income will consume more goods and services, raising AD further, and firms again experience an unplanned fall in their inventory of stocks. All in all, Singapore’s real national income increases by a multiplied extent, coupled with an increase in employment. R2: Costs – Contagion Effect The contagion effect in globalization refers to the transmission or spread of economic shocks or crises across different countries or regions due to their interconnectedness and interdependence in trade, investment, and financial activities. In terms of export revenue, the contagion effect can have negative impacts on Singapore’s economy. If Singapore’s training partners experiences an economic crisis or downturn, it can lead to a decline in its domestic demand for goods and services, including imports from other countries. This decrease in import demand can result in a decrease in export revenue for Singapore. This is because the economic turmoil reduces the consumer purchasing power and reduces overall demand for imported goods. Assuming no change in imports, Singapore’s aggregate demand would fall as net export revenue is a component of AD where AD = C + I + G + (X-M). A fall in AD, represented by a leftward shift of the AD curve, leads to an unplanned rise in inventory; thus, firms reduce production. The fall in production results in a fall in derived demand for labour thus giving rise to demand- deficient unemployment. Real national income decreases by a multiplied extent. In sum, an economic shock in other countries could result in negative economic growth and rising unemployment in Singapore. Note to students: R2 can also be about Singapore experiencing cost -push inflation when global commodity prices increase.

3 Marking Scheme: Level Knowledge, Application, Understanding and Analysis Marks L3 • Well-developed analysis on both requirements: - Good use of relevant economic concepts in analysis. - No major conceptual inaccuracies. - Start and end point are clearly explained with no missing links in elaboration. Annotation Level Mark out of 10 A+A L3 10 A+C or C+A L3 8-9 A+K or K+A L2 7 C+C L2 6-7 A+0 L2 6 K+C or C+K L2 5-6 C+0 L1 4 K+K L1 2-4 K+0 L1 1-2 8-10 L2 • Lacking in any one of the L3 criterions. 5-7 L1 • Descriptive answer without any or with minimal economic reasoning. • Largely irrelevant answer. • Major conceptual errors. 1-4

4 Cambridge report (FOR TEACHER’S REFERENCE ONLY) This was the least popular question in Section B. There were a small number of good responses to the question, but a large proportion of candidates gave generalised responses that were poorly focused on globalisation, which was the main context of the question. A large proportion of responses were limited to a discussion of how, in an export dependent economy such as Singapore, a growth in exports leads to economic growth. Many gave a generalised explanation of the benefits and costs of trade, which lacked an explanation of the underlying economic reasons that might support the discussion. There were relatively few strong responses that made good and clear use of underlying economic analysis to support their discussion of both the benefits and costs of globalisation. (a) Stronger responses showed a good understanding of the underlying economic reasons that supported an explanation of the benefits and costs of globalisation. For example, some candidates explained how exploitation of comparative advantage leads to clear benefits to support the economic integration of two economies. Other stronger responses explained how the signing of free trade agreements, FTAs, through the removal of tariffs has led to benefits for both the economies involved. These explanations were supported by appropriate diagrams. ‘Contagion effect’ in which economies were seen as being vulnerable to economic problems in their trading partners (e.g., recession, inflation) was the most commonly identified ‘cost of globalisation’. Mid- range responses were more generalised in approach and gave several potential benefits and costs of trade but were not supported by reference to the underlying economic analysis. Weaker responses were brief and made generalised assertions which largely consisted of statemen ts such as economies would benefit or incur costs as a result of the free movement of goods, labour and capital.

5 b) Discuss the most appropriate policy measures that the Singapore government should take to increase the benefits and reduce the cost of globalisation. [15] Question analysis: Command Discuss = Explain + Evaluation • Start point – government policy measures • End point – increase benefits and reduce costs of globalisation Note to students: A second policy must be included in your analysis (inferred by the words “the most appropriate”) Context Singapore Concepts • DD/SS analysis • PED and PES concepts (if relevant) Introduction: Given that globalization brings both benefits and costs, it is important that the Singapore government implements appropriate policies that can help the country reap maximum benefits and minimize potential costs. R1: