TMJC 2022 A Level H2 EQ6

2022 A Level H2 Economics Suggested answer to Paper 2 EQ6 © TAMPINES MERIDIAN JUNIOR COLLEGE Essay 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 generations, to tap resources, to bring skills and talents and experiences together, and then serve markets all around the world.’ Source: pmo.gov.sg/Newsroom/PM-interview-with-BBC-for-Talking-Business- Asia, 2 March 2021 (a) Explain the benefits and costs of globalisation to Singapore. [10] (b) Discuss the most appropriate policy measures that the Singapore government should take to increase the benefits and reduce the costs of globalisation. [15] Suggested answers: Part (a): Introduction: Globalisation is the process through which an increasingly free flow of goods and services, capital, labour, and technology leads to the integration of economies and societies. It is brought about by improvements in information and communication technology, lower transportation costs and economic liberali sation, allowing countries to enhance their comparative advantage. Development #1: Explain at least two benefits of globalisation to Singapore Due to the nature of its economy, Singapore is likely to benefit significantly in terms of her macroeconomic aims. Benefit 1: Actual and potential growth Firstly, globalisation brings about an increase in trade volumes. As a small economy, Singapore lacks natural resources . However, she has the factor endowments such as capital goods and a skilled workforce compared to other countries. Since she has a lower opportunity cost in producing higher value-added goods such as petrochemicals, she is therefore able to produce these goods with lower opportunity cost and export them to the rest of the world. With globalisation, she now has access to larger foreign markets and if she can maintain her comparative advantage and engage in trade, it is likely that the increase in export revenue would be more than the increase in import expenditure. An increase in (X -M) will lead to an increase in AD. With reference to Figure 1 below, assuming that the Singapore economy is operating below full employment . The rise in income from the initial rise in AD causes a rise in income-induced consumption resulting in a further increase in AD. As one’s sp ending becomes another’s income there will be multiple increases in AD until a new equilibrium is reached whereby there will be a multiple increase in real national income from Y1 to Yf1, bringing about actual growth.

2022 A Level H2 Economics Suggested answer to Paper 2 EQ6 © TAMPINES MERIDIAN JUNIOR COLLEGE Figure 1: Secondly, globalisation means freer mobility of capital flows. Being an open economy, Singapore would be able to benefit from globalisation as FDI makes up a significant proportion of its GDP. The increase in FDI from large firms such as Google and Dyson will lead to an increase in AD bringing about actual growth. The increase in investment means an increase in the net capital stock in the economy, thus increasing the economy’s productive capacity to produce goods and services. This is depicted as an increase in AS, thus leading to potential growth. As shown in Figure 1, AS curve shifts from AS1 to AS2 increasing potential growth from Yf1 to Yf2. As the increase in AD is in tandem with the increase in AS, Singapore will benefit from this increase in economic growth, and will be able to enjoy sustained economic growth, as seen in Figure 1 where there is a further increase in real output from Yf1 to Y2, accompanied by a fall in GPL from P3 to P2. Benefit 2: Increased employment The increase in (X -M) and FDI will also lead to increased employment in the economy . The increase in AD and thus real output will mean that the firms will need to employ more factors of production. Since labour is a derived demand, there will be an increase in the aggregate demand for labour, leading to a fall in demand-deficient unemployment. With that, consumers will enjoy higher income, higher purchasing power and therefore will be able to consume more goods and services, leading to an increase in material SOL. Development #2: Explain at least two costs of globalisation to Singapore Cost 1: Increased vulnerability to external shocks (e.g. susceptible to supply shocks) As a country becomes increasingly integrated through globalisation, this increases its susceptibility to imported inflation in the case of higher price of imported raw materials

2022 A Level H2 Economics Suggested answer to Paper 2 EQ6 © TAMPINES MERIDIAN JUNIOR COLLEGE and other final goods and services → ↑unit cost of production → ↓SRAS from AS2 to AS1 as shown in Figure 2 below → ↑GPL from P2 to P1 → result in cost-push inflation in domestic country. For example, the Russia -Ukraine war has caused a surge in oil and other commodity prices to multi -year highs as Russia is the world’s third largest oil producer behind the United States and Saudi Arabia. As oil is a crucial factor input for production, the soaring oil prices will result in higher unit cost of production and lower potential profits per unit. Firms therefore are able and willing to produce fewer units of output. This affects all firms and industries resulting in a fall in SRAS. Figure 2: Increase susceptibility to inflation in other economies Economies like Singapore who is import-reliant will therefore be highly susceptible to such imported inflation, compared to relatively closed economy such as China since the former have relatively large imports. Furthermore, rising costs of imported inputs is a threat to its export competitiveness if there is high import content. Due to increased imported prices of raw materials, exporters may have to raise the prices of their exports. As a result, it causes the exporting countries to lose their export price competitiveness. Increased vulnerability to external shocks (e.g. susceptible to demand shocks) In addition, globalisation means that countries are more interconnected which means that Singapore is more vulnerable to external shocks. For example, the sub -prime mortgage crisis in the US was partly responsible for the Global Financial Crisis in 2009. When faced with a worldwide recession, a small and open economy like Singapore will be more vulnerable to external shocks as compared to other economies. Singapore was the first Asian country that suffered from the negative impact of the Global Financial Crisis. The fall in foreigners’ incomes will lead to a fall in consumption and fall in demand for Singapore’s exports. The loss of business confidence will result in a fall in FDI in Singapore which will adversely impact the Singapore economy. This is becaus e Singapore is largely dependent on (X-M) and FDI for growth and employment.

2022 A Level H2 Economics Suggested answer to Paper 2 EQ6 © TAMPINES MERIDIAN JUNIOR COLLEGE Cost 2: Loss in comparative advantage and structural unemployment Given that globalisation allows for the transfer of technology, this could lead to changes in factor endowments of different countries. This causes a small and open economy such as Singapore to gain and lose comparative advantage more frequently since CA is a dynamic concept. For instance, MNCs might shift their production line s elsewhere in search of lower costs of production. The fall in FDI in the sunset industries in Singapore results in a fall in demand for workers in these industries. Due to occupational immobility, these workers’ skills are now obsolete , and they cannot take