MJC_H2_ECON_EQ5

MJC Preliminary Examination 2011_H2_Essay Qn 5a[Type text] Question 5 (a) Some economies have balance of payments deficits while others have balance of payments surpluses. (a) Explain the importance of a sound balance of payments to Singapore. [10] Answer Model 5 (a) E1 The balance of payments is a record of transactions that take place between Singapore and the rest of the world in a year. A balance of payments is sound when it is in a surplus. A balance of payments surplus occurs when the total value of receipts from international transactions exceed the total value of payments for international transactions i.e. the balance of payments is positive. A balance of payments surplus is due to a surplus in the current, capital or financial accounts or all of them. The BOP is an indication of the economic health of Singapore - reflecting the competitiveness of the country’s goods and services in the global economy - its competitiveness and attractiveness as a investment destinations (for DFI from MNCs) Balance of Payments Higher exports More Direct Foreign Investment Higher injections Higher net exports and DFI shifts the AD curve from AD1 to AD2.  New equilibrium, prices  from P1 to P2, output  from Y1 to Yf. The extent of the increase in income and GPL depends on the slope of the AS curve which indicates the responsiveness of aggregate supply. GPL AD1 AD2 AS1 Real Output P2 P1 Y1 Y2 a E2

MJC Preliminary Examination 2011_H2_Essay Qn 5a[Type text] CONTENT Part (a) The BOP is an outcome of a country’s international transactions. It is an indication of the economic health of a country; reflecting the competitiveness of the country’s goods and services in the global economy; its competitiveness and attractiveness as a investment destinations (for DFI from MNCs). Competitiveness leads to higher net exports and DFI which in turn will channel through to employment, growth and inflation. A persistent, large and unplanned BOP deficit lowers confidence and generates uncertainty. It may deter foreign investment. This makes long term planning difficult and the standard of living may suffer. May also cause speculation against the S$. Knowledge, Application, Analysis and Evaluation Level Descriptors Marks L3 For an explanation of the importance of a sound BOP for Singapore 7 – 10 L2 For application of knowledge and critical understanding of the outcomes of sound BOP 4 - 6 L1 For knowledge and understanding of the outcomes of sound BOP 1 - 3 Thus, we see sound BOP indicates competitiveness which leads to higher net exports and DFI. This in turn will channel through to higher employment, actual growth. It can also leads to inflation. On contrary, a persistent, large and unplanned BO P deficit lowers confidence and gen