RVHS_H2_ECONS_P2_Essay_Q6_Soln

Discuss how far government policies adopted in Singapore affect the economy’s pattern of trade. (25) Pattern of trade of an economy refers to the compos ition, direction and volume of trade. Specifically, what goods an economy exports and imp orts, whom the economy trade with as well as the level of exports and imports. Governmen t policies, primarily supply-side policies, trade policy and exchange rate policy, affect the e conomy’s pattern of trade. However, there are other determinants for pattern of trade. Policies Supply-side policies Refer to policies that attempt to increase the productive capacity of the economy. E.g. keeping the economy’s corporate tax competitive can increase firms’ incentive and ability to invest in new capital goods. The use of these new capital goods might either bring about lower production costs or better products, thereby changing the composition and volume of trade. Singapore’s trade policy Signing of FTAs Lower trade barriers for Singapore exports, thereby changes the direction and volume of trade. The increase in volume will boost price competitiveness, due to firms better able to reap further economies of scale, which can further alter the pattern of trade. Exchange rate policy a managed float exchange rate regime whereby the Singapore dollar (S$) is managed against a trade-weighted basket of the currencies of its major trading partners The policy helps to maintain price competitiveness of exports. E.g. specifically, a gradual appreciation of the Sing dollar is adopted in good times to keep out imported inflation This managing of exchange rate does alter the volume of trade. Limitations The examples above suggest government policies adop ted in Singapore do affect the economy’s pattern of trade. However, its impact dep ends very much on the effectiveness of these policies. For instance, it may be increasingly difficult to maintain a competitive corporate tax rate given rising expenditure due to ageing population. For trade policies, as Singapore has already signed FTA with most major trading partners, the room to exploit economies of scale in this aspect m ight be limited. Although, new trade relations can be established with countries further away, the higher transport costs might reduce the benefits of such an agreement.

Other factors Besides the effectiveness of government policies, t here exists other factors that determine Singapore’s pattern of trade. These include factor endowments, income of our trading partners and any other factor that might promote greater ease of movement of goods and services. First, the pattern of trade, specifically the compo sition and direction of trade, is primarily determined by the comparative advantage of the econ omy, which is largely attributed to the country’s factor endowment. (Explain briefly the theory of CA) Second, the economic performance of her export mark et. Singapore top export economies are Ch