GCE A'Level CSQ 2020 Question 2 - Suggested Answers
(a) With reference to Table 4, state the two components of Singapore's current account, other than the goods and services balance. [2m]
Primary Income Balance
Secondary Income Balance
(b) Using a production possibility curve diagram(s), explain the likely impact of the change in the labour force described in Extract 6 upon China's economic growth. [2m]
China's one-child policy has affected the replacement rate of its population and is currently ageing. With a shrinking labour force in both quantity and quality, it would increase the cost of production in China as labour wages rise and a fall in private consumption levels as the domestic sector shrinks. Both results in a fall in actual growth where the output level in China falls from a point closer to PPC (Point A) to a point closer to the axis (Point B). There will also be a fall in productive capacity, holding everything else constant, which will cause the PPC curve to shift inwards from PPC0 to PPC1, resulting in negative potential growth.
(c) With reference to Extract 7, explain why it might be claimed that a floating exchange rate means that the Chinese economy was well placed to withstand external shocks. [4m]
A floating exchange rate regime allows the exchange rate to fluctuate based on market forces of demand and supply for the Yuan freely. In times of external shocks, like a fall in China's trading partners' economic growth, there will be a fall in demand for her exports (assuming normal/luxury goods) and thus a fall in derived demand for her currency. Under the floating exchange rate regime, the fall in demand will result in a surplus of Yuan at the prevailing rate with respect to another currency and cause the exchange rate to depreciate. Depreciation of the Yuan would cause the price of exports to fall in terms of foreign currencies while the price of imports to rise in terms of the domestic currency. Assuming that Marshall-Lerner condition holds, the quantity demanded of exports will rise more than proportionately while the quantity demanded of imports will fall more than proportionately, ceteris paribus. This will cause net exports to be positive. While there are non-price determinants that affect net exports and hence AD of China, the floating exchange rate regime allows China to increase price competitiveness of her exports to reduce the extent of fall in net exports and hence AD, thus allowing the Chinese economy to withstand external shocks.
(d) Explain two factors that will determine the impact upon the US balance of trade if China raises tariffs on imports from the US. [4m]
Factor 1: The extent of the increase in tariffs on imports from the US.
Suppose tariffs were increased by a large amount (e.g. 200%). In that case, this will cause the price of US imports to increase by a large extent, which will cause the quantity demanded of US imports to fall more than proportionately (assuming PED of US exports is price elastic), ceteris paribus. This would cause US export revenues to decline significantly which would hurt the US balance of trade greatly.
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Factor 2: The proportion of US exports to China relative to the rest of the world.
If China and the US are close trading partners and China is a major importer of US goods and services relative to other nations, imposing tariffs would hurt a significant proportion of US export revenue, impacting the overall US balance of trade negatively, ceteris paribus.
(e) Explain how supply-side policies aimed at Singapore's labour market could 'make the economy more resilient' and consider how likely they are to be successful. [8m]
Resilience is the quality of being able to recover from downturns or failures. Supply-side policies are enacted to smoothen inefficiencies in the labour market, such as improving occupational immobilities and overall loosening the labour market.
Supply-side policies that aid in retooling its workers can help Singapore transform into a more resilient economy. Policies such as the CET (Continuing Education and Training) and Skills future provide subsidies and initiatives for it's workers to take on newer skills that are in line with the future needs of employers. Singapore aims to a global financial hub. With such initiatives, workers with less relevant skillsets can enter the finance industry because they possess desirable skillsets that workers are looking for. This reduces occupational immobility and helps solve structural unemployment in Singapore as the job landscape shifts dynamically towards technology-driven, knowledge-based industries. This fosters resilience in the economy as Singapore continues to open its borders to benefit from free trade while reducing the consequence of labour displacement based on the theory of comparative advantage.
However, there are certainly drawbacks to such policies. One would be the cost to the government to fund such policies continuously. This incurs opportunity cost on the government as they would have to spend fewer resources on other areas such as healthcare and the provision of public goods. Furthermore, the success of this policy depends on the receptiveness of its people. The aptitude for learning is different for each individual and while some may be able to switch their careers in high value sectors successfully, we cannot say the same for everyone. Individuals that do not complete their training programs funded by the government results in wastage of her resources.
The government also takes on a liberal stance in welcoming productive foreign workers to fill in Singapore's productive job opportunities. The influx of foreign workers can help increase the labour supply in Singapore and contribute to higher GDP levels in Singapore, while the rest of the labour force adjusts and catch-up in terms of upgrading their skillsets which requires more time. This aids in Singapore's resilience to weather shocks.
However, this stance may result in much discontentment amongst Singaporeans; many claimed foreigners have taken away their job opportunities. This is more evident in the lower-paying jobs where the massive influx of cheap labour has depressed wages. This would cause greater income inequality and inequity for the lower-income group.
One must also note that both policies described improve the quantity and quality of labor in the country, helping boost Singapore's productive capacity and aid in potential growth. The LRAS of Singapore would shift rightwards overtime to allow capacity for more growth opportunities and also achieve other goals such as sustained economic growth where AD rises in tandem with AS. This helps the economy be more resilient as lower prices, higher competitiveness, and higher growth boost business confidence, thereby drawing more investments and capital. This creates a virtuous cycle of growth that can help cushion the Singapore economy if other external factors create a cyclical downturn.
In conclusion, Singapore's supply-side policies are likely to be considered successful given that we have remained resilient through tough times. However, there is a need for the government to continuously provide opportunities for its workers to up-skill and move up the value chain that is in line with her comparative advantage. This may be a costly burden on the government but the long-term benefits of supply-side policies would certainly outweigh the short-term costs.
(f) Discuss whether an open economy such as that of Singapore would gain or lose from an ongoing US-China trade war. [10m]
Singapore is an export-oriented economy, relying heavily on the growth of its export sector. The ongoing US-China trade war does provide both opportunities and risks for Singapore. In this essay, we will weigh the benefits and costs of this external event. Singapore may lose from the ongoing US-China trade war, hurting her macroeconomic goals.
Based on Extract 6, China "has also long relied on heavy government infrastructure spending to prop up its growth rates" but it is certainly not sustainable as the Chinese government accumulated "persistent budget deficits and rising public sector debt." The higher tariffs imposed on Chinese exports will cause the price of exports to be more expensive in terms of US currency and as a result, quantity demanded would fall more than proportionately (assuming PED of exports is more than 1), this will cause export revenues and thus AD to fall, ceteris paribus. With a slowdown in government expenditure and falling net exports, the net result may be an overall fall in AD. When AD falls, China may experience a fall in real national income via the reverse multiplier effect. This would translate into a fall in demand for Singapore's exports, resulting in Singapore's AD to fall. The fall in AD may be magnified as the one going trade war would dampen global economic sentiments, reducing the overall spending on consumption and investments as individuals and investors expect their future income levels to fall as a direct or indirect impact of the trade war. When the AD curve shifts leftwards from AD0 to AD1, there would be a fall in unplanned inventories which causes firms to cut back on production, thereby reducing their derived demand on labour, resulting in higher demand deficient unemployment. A fall in output would also translate to a fall in real national income via the reverse multiplier effect. This would cause actual growth to be negative. Singapore's balance of payments may worsen from the necessary high import expenditure while export revenue continues to fall and slowdown in long-term capital inflows. This would draw down on her foreign reserves, which may implicate her ability to manage her exchange rate regime.
However, based on Extract 7, the extent of the fall in demand of Singapore's exports may be subdued given that China's economy may be resilient to external shocks. China's goods and services may be re-routed to other countries and combined with a floating exchange rate would cushion the fall in AD and thus her economic growth. If the impact of the trade war on China's GDP will be less than 0.5% of GDP, real national income might not fall drastically, which would negatively impact Singapore's AD and thus growth by a large extent.
Furthermore, Singapore is still supported by her strong economic fundamentals which would not hurt consumer and investor confidence by a large extent in the short term. Having said that, Singapore has to gear up to be ready for longer-term structural shifts as large economies like China & the US shift towards a more protectionist stance and rely on other growth models such as consumption-led growth. Singapore would be able to prepare itself by prioritizing its policies to address this changing trade pattern. For example, Singapore would double-down on supply-side policies to align her workforce to move up the higher value-chain and thus serve the needs of the future global economy. Furthermore, Singapore can also increase the signing and partnering with other nations to maintain open trade channels. In the long-run, with such policies in place, it will help Singapore achieve higher sustained growth as export demand and productive capacity continue to expand due to her current policies.
In conclusion, an open economy like Singapore would most likely lose from an ongoing trade war. Given that Singapore relies on her external demand for growth and China and the US being her top export destinations (10% and 5%, respectively), the overall impact on Singapore's AD might be significant, thus impacting her macroeconomic goals. However, Singapore is still supported by strong economic foundations. Also, the trade war incident allows Singapore to position herself better to changing patterns of trade which would benefit the economy in the long term.
