2025 NYJC Chp 14-15 Globalisation IE Answers

Nanyang Junior College (2023/24 H2 Economics Tutorial) © Chapters 13-14: Globalisation & the International Economy Page 1T SECTION 3: Essays 1. (a) Explain how an economy is affected by globalisation. [10] (b) Assess whether protectionism is the best approach to minimise the adverse impact of globalisation. [15] Suggested Answer for part (a) Question Analysis Command Explain how Content Impacts of globalisation Context An economy Synopsis: Students are expected to explain at least one positive and at least one negative impact of globalisation on an economy using AD/AS analysis. Note: The synopsis details the question requirements and broad approach students are required to take. Introduction: Define globalisation as characterised by greater movement of goods, capital and labour. This essay will examine the possible positive and negative impacts of globalisation on an economy, with macroeconomic impacts such as on the balance of payments, on economic growth, employment and price stability. Body: R1: Positive Impact of globalisation on economy (i) Improve BOP Increased trade flows (both exports and imports) due to globalisation can increase an economy’s net export revenue, assuming that the increase in export revenue outweighs the increase in import expenditure. (X- M) increases, improving BOT and hence BOP, ceteris paribus. For example, countries such as China and Singapore which have depended on trade for growth have maintained many years of BOP surpluses. In addition, globalisation brings about great er inflows of foreign direct investments (FDIs), which improves the capital financial account and hence BOP, ceteris paribus. The building up of BOP surplus helps the economy to accumulates foreign reserves , strengthening the economy in the event of economic uncertainty or allowing the central bank to be able to conduct exchange rate monetary policies when needed. (ii) Achieve economic growth and lower unemployment Increased net exports & FDI (assuming that FDI is invested in capital goods), leads to AD increase, [as AD = C+I+G+(X -M)], increasing RNY, leading to actual economic growth. The transfer of more advanced technology, knowledge and skills from FDIs and inflow of foreign labour enhances the economy’s productive capacity , increasing LRAS, achieving potential economic growth (Fig 1).

Nanyang Junior College (2023/24 H2 Economics Tutorial) © Chapters 13-14: Globalisation & the International Economy Page 2T Fig 1 Based on Fig 1, globalisation inflows of trade, foreign direct investment and labour increases AD from AD0 to AD1 This initial rise in AD will cause an unplanned fall in the firm’s inventory. Hence, firms will increase production and hence increase demand for resources such as labour. As more labour is hired, they receive more in wages. The purchasing power of the labour force increases . This leads to a multiple increase in induced consumption. Each subsequent rise in induced consumption will be increasingly smaller. This results in a multiple rightward shift in the AD curve, where AD is rising at a decreasing rate. The overall rise is AD has resulted in a multiple rise in real national income from Y0 to Y1. The rise in production of goods has also led to a rise in the derived demand for labour leading to a fall in demand deficient unemployment. At the same time, LRAS increases from AS0 to AS, enabling the economy to achieve potential growth from Yf0 to Yf1. The combined increase in AD and LRAS leads to both actual and potential economic growth, achieving sustained, non- inflationary growth from Y0 to Y1, and P0 to P1. R2: Negative Impact of globalisation on economy (i) Worsens BOP Globalisation could, unfortunately, lead to a loss of comparative advantage (CA) to foreign countries. For example, the United States has lost its CA in the production of labour-intensive manufacturing goods to low cost countries like China and, as a result, experience many years of trade deficit, worsening its current account of the BOP. In addition, FDIs may fall with increased outsourcing of low to mid value-added manufacturing activities to emerging low-cost countries, worsening capital financial account and hence BOP, ceteris paribus. (ii) Fall in economic growth and rise in unemployment The increasing interconnectedness between countries makes one s usceptible to external economic conditions . For example, when major trading partners experience economic recession such as during the 2008 Global Financial Crisis or Eurozone debt crisis, trading partners such as Singapore experiences a large decrease in external demand, causing net exports to fall, reducing AD. Alternatively, the loss of CA to foreign countries causes countries such as US to lose export competitiveness, leading to a fall in net exports and hence AD. This triggers a reverse multiplier process, causing a multiplied fall in AD and hence RNY, causing

Nanyang Junior College (2023/24 H2 Economics Tutorial) © Chapters 13-14: Globalisation & the International Economy Page 3T a fall in economic growth. The fall in production of goods and services reduces the derived demand for labour, leading to a rise in demand-deficient unemployment. The negative outlook of the economy, if prolonged, may trigger an outflow of local talents who seek better employment opportunities elsewhere. This leads to brain drain, and may slow down potential growth, further worsening the impact on the economy. The loss of CA due to globalisation may inevitably cause domestic firms who cannot match the competition in terms of price or quality to shut down, causing further unemployment. Workers who are retrenched from these firms may not have the necessary skillsets to shift to other (growing / sunrise) industries, leading to structural unemployment. (iii) Inflation From Fig 1 earlier, rapid increase in trade flows may boost AD beyond the productive capacity of the economy. If AD persistently increases more than AS, demand- pull inflation may occur in the short run. In addition, global interconnectedness also meant that countries are also susceptible to global supply shocks. For example, global supply shocks due to the Russian -Ukraine war caused the prices of various primary commodities to increase. As countries are dependent on such primary commodities like oil and copper, the increase in prices of imported primary commodities increases the unit cost of production. This causes SRAS to fall from AS0 to AS1 to AS2, leading to imported cost-push inflation, as shown in Fi g 2 below where the general price level increases from P0 to P1 to P2. Fig 2 Conclusion: Countries may benefit and suffer from globalization. Some countries may benefit more than others. It is important for countries to adopt appropriate policies to maximi se the benefits and minimise the costs of globalization.

Nanyang Junior College (2023/24 H2 Economics Tutorial) © Chapters 13-14: Globalisation & the International Economy Page 4T Mark Scheme: Knowledge, Application, Understanding and Analysis L3 • A clear and coherent answer that is relevant to the question requirements and applied to its context. • Answer covers sufficient scope with at least two distinct requirements (i.e. areas of analysis): o Requirement 1: Positive impact of globalistion to an economy o Requirement 2: Negative impact of globalisation to an economy • Answer is accurate and has sufficient depth: o Detailed and accurate explanation of economic concepts with analytical application to the question. o Economic analysis is supported by accurately labelled and explained diagrams (i.e. AD/AS framework) and relevant real-world examples 8–10 L2 • Answer is mostly relevant to the question requirements. • Answer lacks scope (e.g. considers only the first