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GCE A LEVEL 2009 EXAMINATIONS HIGHER 1 Q2 ECONOMIC SUCCESS IN SOUTHEAST ASIA (a) Using Table 1, describe the main

features of GDP growth in Singapore between 2000 and 2006. [3] GDP growth has generally been positive during this period. In 2001, growth was negative. The GDP growth rate tends to fluctuate during this period. (b) According to the data, which two components of aggregate demand were most important in contributing to the high rate of growth of Singapore in 2006? [2] Question Analysis: Aggregate Demand (AD) = C + I + G + (X-M) (Relationship) External trade (Net exports, X-M) and Investments (I) that contributed 3.2% and 2.5% to GDP growth were most important in contributing to the high rate of growth of Singapore in 2006. (c) With the help of AD/AS diagrams, explain: (i) how a budget deficit to reflate domestic demand benefited Malaysia after the 1997/98 economic crisis; [4] Question Analysis: (Effects of Policy) Key concepts: Budget deficit refers to government budget deficit (not BOT or trade deficit) Reflate expand the level of output of an economy The budget deficit refers to a government budget deficit whereby government revenue falls short of expenditure. The Malaysian government could have implemented an expansionary fiscal policy to increase aggregate demand whereby government expenditure was increased or taxes was reduced or both to the extent that the budget ran into a deficit. Government spending is a component of AD, where AD = C + I + G + (X-M). From Figure 1, by increasing government spending, G, for example through the government increasing infrastructure projects in the economy, AD is consequently increased from AD0 to AD1. The increase in aggregate demand leads to an expansion of output from Y0 to Y1. More jobs are then created and Malaysias national income rises via the multiplier effect. Likewise, the cut in taxes increases household disposable income or after-tax corporate profits which results in an increase in consumption C, and investments, I respectively when households and firms have more to spend. The increase in C & I models a similar effect on AD as the increase in G. Figure 1 JJC/8819H1Economics 1

General price level

AS

P1 P0 AD1

AD0 0 Y0 Y1

Real GDP

If the increase in government spending was mainly on building infrastructures or subsidizing training schemes for the workforce, in the long run, Malaysians can also benefit from potential growth and an increase in full employment output due to increase in labour or capital productivity. The increase in GDP or national income then enables the government to see to progress in reforming the banking and financial system, dismantle exchange controls imposed during the crisis, and also abandon having the currency fixed to the US$ in favour of a managed float. (ii) how more flexible policies on the employment of foreign labour assisted Singapore to achieve sustained above-trend growth. [4] Question Analysis: (Effects of policy) Key concepts: Sustained above-trend growth suggests that Singapore achieve long-run growth or potential growth. The more flexible policies on the employment of foreign labour refer to the Singapore governments policy of increasing the use of foreign labour and talent. This is a supply-side policy where quantity of resources, in this case labour, is increased to help Singapore achieve long-run growth or potential growth. When more foreign workers are hired, Singapores productive capacity increases. As evident in figure 2, with more labour in the economy, costs of producing each unit of output can be reduced or with the same amount of General resources, more units of output can be produced. Thus, at price P0, Price Level AS AS1 output increases from Y0 to 2 Y1, shifting the long run aggregate supply curveP2 (LRAS) rightwards from AS0 toP1 AS1. Figure 2
P0

AD1

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0

2 Y0
Y1

AD0 Real National Income

With no increase in LRAS, increases in AD near or at full employment from AD0 to AD1 will only lead to inflation i.e. rise in price levels from P0 to P2. However, with increases in LRAS, output can then be increased from Y0 to Y1 when AD increases. This ensures that Singapore is able to enjoy sustained above-trend growth because as AD increases, real national income (Y) is also increasing. (d) Explain how an appreciation in the foreign exchange value of a currency helps to maintain domestic price stability. [4] Question Analysis: (Cause and Effect) Key Concepts Appreciation in the foreign exchange value Domestic price stability refers to internal price stability i.e. low and stable inflation rates. Introduction Domestic price stability here refers to internal price stability, which is the ability of the government to maintain low and stable inflation rates. There are two types of inflation, demand-pull inflation or cost-push inflation. An appreciation in the foreign value of a currency refers to the increase in the amount of foreign currency that the domestic currency can buy and it can reduce both demand-pull and cost-push inflation. Explain how demand-pull inflation can be reduced When there is an appreciation in the foreign exchange value of a currency, the price of imports in terms of foreign currency decreases. Domestic consumers then switch from domestic goods to foreign imports, which are now relatively cheaper. Assuming demand for imports is price elastic, the increase in quantity demanded of imports will be more than proportionate compared to the fall in price of imports. Import expenditure (M) then increases.

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On the other hand, the price of domestic exports in terms of foreign currency increases when there is an appreciation of exchange rates. Foreign importers then switch to their domestic goods or goods from other countries. Assuming demand for exports is price elastic, the fall in quantity demanded of exports will be more than proportionate compared to the increase in price of exports. Export earnings (X) then falls. Since AD = C + I + G + (X-M), a fall in X and an increase in M leads to a fall in AD, thus reducing demand-pull inflation. Explain how cost-push inflation can be reduced Appreciation of exchange rates also reduces cost-push inflation by reducing imported inflation. We use Singapore as an illustration. Singapore is heavily reliant on imports for raw materials and food products or other necessities. An appreciation of exchange value will lead to a fall in costs of raw materials in terms of domestic currency. Consequently, the fall in raw materials lowers the costs of production, hence lowering the AS curve and reducing cost-push inflation. (e) (i) To what extent can it be concluded from Table 2 that Singapores economy performed better in 2005 than the other countries shown? [5] Question Analysis: (Comparison of Economic indicators) Key Concepts Economic Growth Inflation Exports and Imports Trade Surplus Other indicators of How the Macroeconomy Works Introduction Explain the key From Table 2, three macroeconomic indicators can be economic indicators identified for comparison, mainly annual real % growth for comparison in GDP, rate of inflation and trade balance. Body

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Thesis: (1) Annual real % growth in GDP measures economic Indicators from growth of the economy and Singapores 7% real Table 2 can be GDP growth rate suggests that it performed better used to conclude than all 3 other ASEAN countries, Indonesia, that Singapore s Malaysia, and Thailand. However, China registered economy performed an impressive 10% growth, surpassing Singapore in better than other terms of economic growth. countries (2) Where inflation is concerned, Singapores inflation rate of 0% suggests that Singapore enjoyed better internal price stability compared to all 4 other nations, with the exception of China. As China is experiencing high real economic growth at 10% annually, it is inevitable that she experiences some inflation. An annual inflation rate of 4% should be considered moderate and aligned with the high economic growth. (3) Judging from the exports and imports as % of GDP, Singapore enjoyed a trade surplus that is 29% of its GDP (244% - 215%) and it did better than all 4 other nations. Enjoying a huge trade surplus is likely to result in a healthy BOP unless capital account is in a huge deficit. However, it also means that Singapore is heavily reliant on external trade and shocks in the global economy is also more likely to affect Singapore. Hence, judging from the 3 economic indicators, Singapore seems to be doing relatively well compared to her 3 ASEAN counterparts. However, China is doing better in comparison since it experiences higher economic growth and maintains a stable internal price level with low inflation. Anti-thesis: However, the 3 indicators above are not entirely Indicators from reflective of a nations economic performance. Table 2 are limited to conclude that (1) Annual real GDP % growth might not be a good Singapores measure of standard of living. Instead, real GDP per economy performed capita would have been a better indicator of the better than other nations economic performance. Singapore could countries have perform better than China if real GDP per capita is taken in to account considering that China has a relatively higher population growth rate which may eventually erode the increase in real GDP. (2) Inaccuracies or inadequacy of economic statistics is likely, especially in large and populous countries like China where certain areas are inaccessible or literacy rate is low. The non-monetised sector may also be under-represented and the existence of underground economies especially in developing 5

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nations like Indonesia and Thailand may also be rife, leading to inaccurate GDP data. (3) Unemployment rate that is relevant in assessing the performance of the economy is also unavailable. (4) The qualitative aspects of a nations standard of living like level of educational attainment, mortality rates, available leisure hours etc are also unavailable. Costs incurred in terms of environmental damage are also not taken into account for comparison. (5) High economic growth may result in a widening income gap between the skilled and unskilled workers or profit-earners and salaried workers as well. Thus, improvement in real GDP need not necessarily reflect an improvement in the standard of living and consequently, serve as a reliable indicator for comparison between countries. Conclusion The quantitative indicators in Table 2 seem to suggest that Singapore outperformed its ASEAN counterparts and China outperformed Singapore. However, this comparison is only true to the extent that other measures like unemployment, real GDP per capita, and qualitative aspects of the performance of an economy are not being taken into account. (e) (ii) Discuss the view that for Singapore the problems of increasing globalization have outweighed the benefits. [8] Command Word: Discuss Examine the problems and benefits of increasing globalization that Singapore faces using a 2-sided argument and weigh with evidence if the problems outweigh the benefits Key Concepts required: Theory of comparative advantage Impact of trade How the macroeconomy works Question Analysis: The question requires candidates to be able to highlight the problems and benefits of increasing globalization and to apply it to the Singapore context, a small and open economy.

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Introduction Define globalization Globalization is defined as the increased integration of national economies into global markets in terms of financial flows, trade, movement of factors of production, ideas, and changes in information and technology. (1) Rising share of world trade Globalization allows Singapore, which has a relatively small domestic market, to expand its export market by tapping overseas markets. As external demand rises and production expands, firms in Singapore are then able to reap economies of scale and lower the costs of production.

Body Explain the benefits of increasing globalization and cite evidence from the case (1) Increase exports

In addition, as Singapore is heavily reliant on imports for in both raw materials and other necessities, greater import opportunities due to a larger availability of import partners reduce import costs, which are then translated into lower costs of production. The lower costs of production are translated into lower prices and ensure the price competitiveness of Singapores exports. More price-competitive exports then allow Singapore to increase its share of world trade subsequently.

(2) Increase in investments (2) Increased inflows of foreign capital and talent Increasing globalization through rapid advances in growth (LT) and technology i.e. interbank transfers, expedite the process of transferring funds or increasing investments, leading to an increase in foreign direct investments (longterm capital). This can then lead to a capital account surplus for Singapore thus contributing to a healthy balance of payment (BOP) should current account is not suffering (ST from a large deficit. Investments) If increased inflows of foreign capital are in the form of short-term capital, this can increase liquidity in the funds market in Singapore, allowing other domestic firms to obtain loans at lower interest rates. (Potential Furthermore, when foreign investments come in the form of growth) more setups, offices, or plants in Singapore, it brings about technology transfer and inflows of foreign talent since foreign companies or employees are highly likely to bring with them their management or marketing skills. Efficiency can be improved and labour productivity can be enhanced leading to potential growth in the long run. Influx of foreign talent with the necessary high value-added skills is extremely crucial in helping Singapore move towards a

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knowledge-intensive economy due to the lack of skilled labour domestically. Increase in AD and NY via the (3) Sustained and above-trend growth multiplier effect As a result of increasing exports due to a rise in share of global world trade and investments due to foreign capital inflows, AD is increasing and so is national income, via the multiplier effect. At the same time, LRAS is expanding due to the higher level of investments. This accounts for the sustained and above-trend growth that Singapore is able to enjoy over the years. Explain the (1) Not all citizens benefit from globalization i.e. Older problems of and less educated workers have been left behind However, globalization leads to a loss in comparative increasing advantage and this is evident in Singapore where low globalization and cite value-added manufacturing industries have relocated to evidence from China, India, Vietnam, etc. who tend to have cheaper labour and land costs. Structural unemployment results and the case workers who lost their jobs due to relocation of the (1) Loss of industries are made victims of globalization. These workers comparative are usually the older or less educated ones since they are often employed in industries, which require a lower level of advantage skills. (2) Structural unemployme nt due to In addition, globalization worsens the income inequality relocation of problem. The skilled workers in Singapore are becoming richer while unskilled workers are becoming poorer. This is industries due to the fact that unskilled workers or workers in the low (3) Income value-added manufacturing industries in Singapore often inequality face competition with the abundant supply of cheap foreign worsens labour from China, India, Vietnam, etc. as government relaxes employment policy for foreign workers. Wages of these unskilled workers and consequently, their income levels are lowered. As evident in extract 5, globalization has also led to supplyside reforms such as reduction of income tax rates on firms and individuals. This reform benefits the high-income earners or firms because with a lower tax rate, they have higher disposable income or after-tax profits. Low-income earners do not pay taxes to begin with since their annual income falls below the minimum taxable income level. Thus, tax reforms benefit the rich and can further worsen the income gap in the economy.

(4) Increased exposure to risk: (2) Increased Singapores exposure to some kind of risk Singapore is more vulnerable to external shocks as a result of globalization. For example, in the 1997 Asian financial crisis, the 2001 dot.com bubble burst, and the latest 2008 8

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global financial crisis. The origins of the financial meltdowns were from ASEAN or Asian nations and America but because of Singapores strong dependence on external demand (29% of GDP), the fall in external demand has large implications on Singapores economy. Singapore experienced an economic recession during these time periods and this is evident from Table 2 where in Year 1998 and 2001, annual real % growth in GDP turned negative. Weigh if problems actually outweigh benefits of globalization, with evidence from case Due to the nature of Singapores economy, which is small and open with free capital flows, the benefits of globalization are more likely to outweigh the problems.

The small domestic market is unlikely to influence the AD and ensure sustained economic growth. The small population size and declining birth rates also necessitate the inflow of foreign talents or workers to increase the long run potential capacity of Singapore. The lack of natural resources makes us import-reliant and globalization allows (1) Theoretical Nature of us to tap or import resources at lower prices. Singapores As evident in Table 1 between 1997-2006, increasing economy globalization seems to have brought about economic success to Singapore where we have experienced strong (2) Evidence from the positive economic growth, 8.3% on average. Thus the problems of globalization do not outweigh the benefits of case globalization. Furthermore, the problems of globalization can actually be alleviated with the right kind of government or supply-side (3) Policies to policies. For example, the government established the Workforce Development Agency to provide training and alleviate skills-upgrading courses and this serves to resolve the problems? issue of structural unemployment. To deal with the rising income inequality issue and dwindling wages for low-skilled workers, the government has also implemented Workfare Income Supplement to increase the income of low-wage earners. Conclusion In conclusion, globalization has made Singapores economy more intertwined with that of the global economy. The most detrimental effects would be the increased exposure to external shocks or risk and the widening income gap. However, Singapore is not alone when it comes to higher connectivity. Other countries are in the same circumstances. Moreover, with the right kind of government intervention or policies, the detrimental effects of globalization can be diminished.

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