RI 2026 Y6 Trade class test mark scheme (final)

2026 Y6 H2 Economics: Globalisation & the International Economy Class Test 5 – Mark Scheme Countries may experience rising Balance of Trade deficit when they suffer a loss in competitiveness in trade. a) Discuss whether the use of tariffs or supply side policy is the more appropriate measure to manage the above challenge when a country loses its competitiveness. [15] Introduction • A loss of trade competitiveness means domestic goods become relatively less attractive compared with foreign goods, causing exports to fall and imports to rise. This can worsen the Balance of Trade (BOT) and potentially reduce aggregate demand and growth. • Appropriate or not: whether it is effective and desirable to improve the BOT Body Requirement #1: Discuss how Tariffs is an appropriate measure in managing the challenges arising from the loss in competitiveness Thesis: Explain how tariffs can help address BOT concerns. Key idea: Tariff → import prices rise → imports fall → M decreases → (X − M) rises → BOT improves Define tariff: Import tax on foreign goods/services entering the country. Explain how tariff works using a tariff diagram: • The import tariff raises the price of imports from Pw to Pw+tariff. The higher price reduces overall consumption of the good in the domestic market from Q 4 to Q3. Local consumers find goods/services expensive and choose to cut down consumption of these products. • Concurrently, the increase in import prices causes an increase in quantity of domestically produced substitutes from Q1 to Q2. • Due to the fall in quantity demanded of imports from Q 4Q1 to Q3Q2, import volume and expenditure would decrease. Import expenditure in the balance of trade falls from Q1EFQ4 to Q2HJQ3. This is cos even though import expenditure paid by consumers Q2BCQ3, part of it goes to the govt as tax revenue so doesn’t flow out of the country – thus reducing the BOT deficit (holding exports unchanged). Pw Pe Pw + Tariff Price F J H E B C A World Price + Tariff World Price S D Q Q1 Q2 Qe Q3 Q4

• Domestic industries would also now be more capable of competing with the higher priced imported goods and services. • Desirability: To produce this increased level of output, firms which previously were under threat from imports would now hire more domestic factors of production – reduction in unemployment • Desirability: The tax revenue gained from implementing the tariff can also be used to support export industries via grants and thus boost export competitiveness. Anti-thesis: Tariffs is not an appropriate measure to reduce BOT deficit from the loss in competitiveness (Choose 1 of the 3) – why it is undesirable/ineffective 1. Allocative inefficiency (undesirability): Protectionism merely perpetuates domestic inefficiency as it prolongs the inefficient use of the economy’s resources and leads to allocative inefficiency. Identification of dead weight loss EBH and CJF as the gains from protectionist measures is less than the cost to society. 2. Unintended consequences (undesirable): Tariffs on imports raise cost of production and leads to import cost-push inflation. This is because many other related industries might use these goods as factor inputs. For example, an import tariff on Chinese steel might will increase cost of production for domestic U.S car manufacturers. If the raw material or factor input is used in many industries, it will lead to cost push inflation for the country. 3. Retaliation (ineffective): Should imposition of tariffs result in retaliation from trading partners, there will be a reduction in the country’s exports. Thus, while import expenditure will fall, the fall in exports revenue may be greater than the fall in M and thus BOT deficit is not reduced. Evaluation R#1 (1 insightful point) • Protectionism is generally less appropriate for a small open economy such as Singapore because imports are a major source of production inputs, not just consumer goods. Tariffs therefore raise costs for downstream export industries, reduce international competitiveness and may offset any improvement in the balance of trade. The resulting allocative inefficiency is also more significant because the small domestic market provides limited scope for firms to achieve economies of scale under protection. • In contrast, large, less open economies may be better able to use temporary protectionism to support infant or strategic industries, as they have a larger domestic market and are less dependent on imported inputs. Hence, protectionism is more likely to undermine long-term trade competitiveness in small open economies, making supply -side policies the more appropriate measure for correcting a worsening balance of trade Requirement #2: Discuss how supply side policy is an appropriate measure in reducing the BOT deficit arising from the loss in competitiveness. Thesis: Explain how ss-side policies can help address some of these challenges Supply-side economic policies are designed to improve the productive capacity of an economy by increasing the quantity, quality and mobility of factors of production in an economy. One example of interventionist supply -side policies is that of grants to encourage r esearch and development. R&D refers to innovative activities undertaken by firms or the government aimed at developing new products, improve existing ones or lower the unit cost of production. Application of policy: Firms may choose not to engage in R&D as they are high risk and uncertain in its outcomes. On top of that, the high costs in terms of investment needed for manpower, equipment, and

technology can be substantial . Hence, the government may sponsor R&D in certain industries like aerospace or life sciences to spur more R&D efforts in such areas where there is increasing demand from global markets. Examples: In Singapore, the Research Innovation Enterprise (RIE) 2020 Plan commits $19 billion over five years to support R&D efforts. Additionally, we aim to sustain R&D spending at about 1% - 2% of GDP. Link to BOT challenge: Encouraging R&D can have positive outcomes in both cost and revenue aspects. This improves competitiveness in both export-oriented industries and import-competing industries. [Revenue]: Product innovation can lead to better quality products (such as development of more advanced memory chips) which differentiates the local products from foreign competitors. This makes our goods more desirable, leading to rise in demand for our exports. [Cost]: Due to process innovation (shorter production time, less use of factor inputs) , lowering of the c ost of production of our exports can lead to increase in supply of exports and thus price of exports to fall . Assuming PEDx>1, the rise in quantity demanded of our exports will increase more than proportionate to the fall in price, causing overall total revenue (exports) to increase. The benefits of process innovation can also be seen in the increase in the productive capacity of the economy- shift of the vertical portion of the AS curve right from as well as a fall in unit cost of production due to better production processes which is illustrated by a downward shift of the AS curve. Overall, supply side policy via encouraging R&D may reduce unit costs as well as improv e the quality of the products of domestic industries, thus reducing import penetration as well as boosting export demand - overall improving the balance of trade position. Anti-thesis: Supply side policy is not an appropriate measure to manage loss in competitiveness (Ineffective/Undesirable) • [Ineffective]: Despite government support, the high start-up costs, operational effort, and the inherent risks of new ventures remain deterrents to potential entrepreneurs – limiting the likelihood of domestic industries engaging in R&D. • [Undesirable]: Governments may need to bo