RVHS_H2_ECONS_Essay_Q6

Question 6 “Higher oil costs, rising housing rents, more expensive private transportation and unemployment near a three-year low have led the Monetary Au thority of Singapore to raise its 2012 inflation forecast.” Source: Bloomberg, May 23, 2012 Discuss the view that Singapore’ s ability to achieve price stabilit y is determined by her economic integration with the rest of the world. [25] Introduction:  Inflation refers to a sustained, inordinate and general increase in the prices of g+s.  Achieving low and stable rate of inflation is one of four important macroeconomic objectives  In the S’pore context, the consum er price index (CPI) tracks the changes in the average price of a basket of g+s consumed by a typical househol d with housing, transport and food given higher weights due to the higher proportion of household income spent on these g+s. Hence, increase in CPI is indicative of inflationary pressures in S’pore.  Globalisation refers to the incr easing integration of national ec onomies in terms of growth of international trade in g+s, greater mobility of capital and movement of labour across national boundaries.  S’pore’s small and open economy has been consist ently ranked amongst the most globalised in the world  The increased economic integr ation has brought about both positive and negative impact on S’pore’s ability to achieve price stability.  Besides economic integration, the choice and effectiveness of po licy tool to address the root cause of inflation is also an important factor determining the ability to achieve price stability. Main:  Major causes of inflation in S’pore: both inter nal and external factors due to dd-pull or cost-push reasons.  Explanation of dd-pull and cost-push inflation dd-pull inflation cost-push inflation Thesis: S’pore’s ability to achieve price stability is determined by her economic integration (i.e. economic integration/globalisation affects the ability of S’pore to achieve price stability.) Positive and negative impact of 3 aspects of economic integration on GPL Economic integrati on improves S’pore’s ability to achieve price stability Economic integration constrains S’pore’s ability to achieve price stability Increased volume of trade in g+s Sg economy: poor factor endowment, import factor i/p and fin gds, import- reliant  P of imported r.m. and fin gds from countries with CA in the prodn.  Greater trade links has allowed for diversification of the sources of  Greater vulnerability to supply shocks. Import-reliant, susceptible to imported inflation (external, cost-push inflation) when prices of basic necessities e.g. food and crude oil prices increase.  Diversification may not GPL in the event of global  in commodity prices

Anti-Thesis: S’pore’s ability to achieve price stability is determ ined by other factors (i.e. other factors affect the ability of S’pore to achieve price stability.)