PJC H2 ECONS P2 Q6 Suggested Ans

1 PJC 2018 H2 P2 Question 6 “If Singapore is to continue to benefit from international trade, the government needs to continue to use trade-related economic policies, such as free trade agreements (FTAs) and policies to stimulate export industries.” a) Explain the determinants of the pattern of trade between Singapore and the rest of the w o r l d . [ 1 0 ] b) Discuss the options available to the government to ensure that it would continue to benefit from free trade. [15] Pattern of trader refers to the type and quantity of exports and imports that a country trades with her trade partners. Some of Singapore major imports include labour intensive, lower value consumable products such as food and clothing . Singapore also import electronics, petroleum and chemical products and re-export some of these products as higher value added products to its trading partners. The main determinants of the pattern of trade between Singapore and the rest of the world include resource endowment which would determine its comparative advantage in the type of goods being produced. Singapore with its small physical size with no natural resources, it does not possess any comparative advantage in the production of l abour intensive goods such as textile and agricultural products. According to the theory of comparative advantage states that a country would be able to benefit from trade by specializing in the production of goods and services in which it can produce at a lower opportunity cost. Singapore with its small physical si ze and small population size, it does not have any com parative advantage in the production of labour intensive goods and services such as textiles, clothing, food or agricultural products. As such, Singapore does not produce and almost import entirely all its consumable products from countries such as China, Malaysia and the rest of its trading partners which enjoy a comparative advantage in the production of these goods at a lower cost than Singapore. On the other hand, with its highly educated and skilled labour force, Singapore have a comparative advantage in the production of higher value, knowledge intensive goods and services and traded these goods and servces with its trading partners. These include goods and services such as high end electronic products, petrol chemical products, pharmaceutical products as well as medical and financial services to its trading partners. Hence, leveraging on its resource endowmen t, Singapore imports mainly goods and services which it does not have a comparative advantag e in producing and export goods and services which it has a comparative advantage in producing.

2 Other than its natural resource endowment, government policies are also one of the determinants of the pattern of trade. Given the limitation of a small physical size wi th a small population and no natural resources, and hence its inability to compete with its much better endowed and resources rich countries, the Singapore government has deliberately adopted policies to develop its niches of comparative advantage in the higher value, knowledge based industries. The government has adopted various policies such as tax incentives as well as education policies to ensure a highly educated workforce for the knowledge based industries. Through these policies, the government is able to make Singapore an attractive place for investment and determined the exports of Singapore. For example, although Singapore does not produce any oil, with the appropriate government policies, it was able to develop into one of the world’s largest oil refinery centre and an exporter of all oil related and petrol chemical products. Singapore has housed all oil refinery and oil and chemical related industries in the same location some of the offshore islands which has allowed the development of the external economies of scale for these industries being located in the same location. This has helped to lower the cost of production for these industries and increased its productivity and hence allowing t hese industries to producing and exporting competitive priced products to the world. Hence, even without the comparative advanta ge deriving from the endowment of natural resource, Singapore is able to develop its own niches of comparative advantage via appropriate government policies which has determined type of goods and services it export to the rest of the world. Another factor which has also determined Singapore’s pattern of trade is the location and proximity of its trading partners. Most countries in the world tend to trade a lot more with its neighbouring countries and Singapore is no exception. Singapore largest trading partners tend to be those countries which are in close proximity such as Malaysia and Indonesia, although these countries may not possess the comparative advantage in the production of goods and services that Singapore imports from them. The likely reason is due to the lower transportation costs and lesser time taken for the delivery of the goods. Lower transportation costs and shorter delivery time taken would lower price of the goods and ensure the freshness of the perishable goods. All these would translate into lower prices and better quality products. Examples of such imports are water and agricultural products from Malaysia and natural gas from Indonesia. And due to higher transportation costs, Singapore imports of agricultural products from further apart countries such as Japan and USA tends to be of a higher quality and of a higher price range. Hence, proximity of its trading partners would determine the type goods imported and exported by Singapore. In conclusion, there are many factors which determine the pattern of trade with the rest of the world. Other than the 3 factors explained above, other factors which can influence the pattern of trade include trade policies of the government such as free trade agreement with other countries, protectionist measures, taste and preference of the consumers and even the changes in technology can affect the pattern of trade between countries. For Singapore, with its exports of mainly knowledge based or capital intensive products and import of lower value, labour intensive produc ts which it does not have any comparative advantage in producing, the total value of its exports is higher than its total value of imports, and as such Singapore is still able to achieve a balance of trade surplus (M>X).

3 a) Discuss the options available to the government to ensure that it would continue to benefit from free trade. [15] Given the nature of Singapore economy – small physical size with no natural resources. Trade, inevitably has become the main engine of growth for the country. It is thus, not surprising that the total value of trade is more than 3 times the real GDP of Singapore. But trade by itself would not guarantee economic growth and development for the country unless it is able to benefit from trade. In order to ensure that it is able to be able to continue to benefit from trade, Singapore needs to ensure that the exports of its goods a nd services are relevant and competitive to its trading partners. And there are several options which the government can adopt to achieve this aim. Some of these policies such as fiscal and supply side policies required continual and substantial amount of commitment bare continual while some of the policies such as exchange rate policies may be situational in nature. As stated by the theory of comparative advantage, each country should specialize in the production of goods and services in which it has a comparative advantage and consequently to enable a greater production and consumption of goods and services via trade. But comparative advantage is a dynamic