International trade refers to the exchange of goods and services across international boundaries. In this essay, I will be explaining why trade occurs between Singapore and its partners such as China, the United States, and other countries of the world.
The law of comparative advantage states that a country is able to enjoy higher consumption levels if it were to specialise in goods in which it has comparative advantage in, and trade the good for other goods in which it has a comparative disadvantage in. For mutually beneficial trade to occur, the terms of trade, which is the exchange rate of the 2 goods between Singapore and its trading partners, must lie within the relative opportunity costs of producing the goods of the 2 countries involved. This theory explains that trade arises because different countries have different opportunity costs of producing different goods. This is due to differences in supply conditions which arise because of differences in factor endowments, the relative abundance of the factors of production. Factors of production such as land, labour and capital are unevenly distributed across different countries. For instance, land abundant countries like Australia and the USA can produce land intensive products such as agriculture more cheaply than land scarce countries like Singapore. Labour abundant countries like India and China can produce labour intensive products such as clothing and footwear more cheaply than developed countries with higher labour costs like Singapore and the USA. Developed countries with a strong technological and capital base like Japan, Korea and Singapore have a comparative advantage in the production of ‘high-tech’ products such as computers, electronics and transportation equipments.
It is thus clear that Singapore’s economy is heavily dependent on trade. Not only are exports the main engine of growth, Singapore also imports inputs to produce these exports and imports most of its consumer goods like food, clothing, footwear, and households appliances. However, not all of Singapore’s imports are used for domestic consumption or as inputs for domestic production. Instead, many goods are imported into Singapore only to be re-exported out to the other countries. Such trans-shipment takes place because Singapore is a main shipping hub located strategically along the major shipping routes. One of the high volume of trans-shipments going through Singapore, the trade figures show the value of both Singapore’s imports and exports to be greater than her Gross Domestic Product (GDP). One way of measuring if a country has a comparative advantage in the production of a particular good is to look at the net export figures that are specific to that good. Singapore is a net exporter for chemicals and chemical products, machinery and transport equipment, hence suggesting a comparative advantage in these goods. Given that Singapore is a developed country, the specialization in such capital and technology intensive products seems to correspond to comparative advantage theory. Conversely, Singapore is a net importer of food, crude materials, animal and vegetable oils. Being a small but developed country, Singapore has expensive land. Hence, the lack of specialization in these land intensive products also seems to correspond to comparative advantage theory.
In conclusion, due to the nature of Singapore’s small and open economy, this makes it even more important for her to trade.
JC Economics Essays - This essay is a H1 A levels Economics essay on why trade occurs between Singapore and its trading partners, contributed and kindly shared by HH in April 2015. Special thanks to HH for her kind contribution.
In this essay, the author's writing is clear, to the point, and explains economic theory alongside real world examples and the context that is required to answer the question. This paper is well crafted and thought through carefully, and deserves a high mark, especially if it is written under examination conditions in a real economics examination.
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