PJC_H2_ECONS_P2_Q5_Suggested_Ans

1 PJC 2018 JC 2 H2 Paper 2 Question 5 Singapore's economy expanded a faster-than-expected 1.8 per cent in the last quarter of 2016. Moving ahead, growth remains uncertain. Internally, Singapore has adopted a policy of restricting foreign labour and restructuring towards productivity-driven growth. Externally, higher US interest rate may lead to higher interest rates in Singapore. Source: Adapted from Channel Newsasia, 3 January 2017 (a) Explain the possible conflicts in government macroeconomic objectives caused by a policy of restricting foreign labour and restructuring towards productivity-driven growth. [10] (b) Assess the impact of higher US interest rate on Singapore’s macroeconomic performance. [15] (a) Explain the possible conflicts in government macroeconomic objectives caused by a policy of restricting foreign labour and restructuring towards productivity-driven growth. [10] [ 1 0 ] Introduction To achieved a more sustained economic growth, Singapore has adopted a policy of restricting foreign labour and restructuring towards productivity-driven growth. However, in the short run, this might conflict with her other macroeconomic objectives such as price stability and low unemployment. Body The policy of restricting foreign labour and restructuring towards productivity-driven growth leads to a healthier BOP and higher economic growth in the long run. This is because by restricting foreign labour, this will decrease the supply of labour and increase the wage cost. Hence, firms will be incentivise to sw itch away from labour-intensive methods of production towards more capital-intensive method of production. In addition, Singapore government also encourages firms to make use of better technology in its production by giving more subsidies such as the Productivity and Innovation Credits. This will help to speed up production and increase the labour productivity of firms. With higher lab our productivity growth than wage growth, the unit labour cost of firms will fall. This will lead to lower cost of production and hence lower price of exports. Assuming demand for exports is price elasti c, the more competitive exports will bring about greater export revenue and hence Singapore’s balance of trade will improve. In addition, higher productivity with the use of better technology will increase the productive capacity of the economy shifting Singapore production possibility curve (PPC) outwards. With both higher AD and AS, Singapore ‘s will experience a more sustained economic growth. Thus, a policy of restricting foreign labour and restructuring towards productivity-driven growth aims to promote a more sustained economic growth by reducing firm’s reliance on labour and incentivizing firms to use better technology. However, while the policy of restricting foreign labour and restructuring towards productivity driven growth leads to more sustained economic growth i