Globalisation and international trade have opened up new opportunities in the world. While a globalised international, world economy brings great benefits to the US economy by opening up new markets for American exports, it has subjected American companies and their workers to unfair overseas competition, which justifies protectionism for these affected industries. [25]

What is globalisation? Globalisation refers to the increasing integration and interdependence of the world’s economies arising from increased trade and greater international mobility of factors like capital, labour and enterprise. There have been a lot of benefits arising from globalisation. Globalisation has benefited the American economy vastly as it has enabled ordinary Americans to enjoy greater consumption possibilities and the engine of growth of the world's most powerful economy. However, it can be argued in a sense that the opening of new markets has also subjected American firms and workers to unfair foreign anti-competitive practices like dumping of cheap, low cost goods, and loss of jobs in the secondary sector of the American economy. 

Comparative advantage is the main theory for international trade. The law of comparative advantage states that a country is able to enjoy higher consumption levels if it was to specialize goods in which it has comparative advantage in, and trade for other goods in which it has a comparative disadvantage in. 

[Insert diagram on production possibilities of USA and Mexico]

Trade enables the USA to consume at any point along its consumption possibilities curve, which is beyond its own PPC. At the same time, Mexico also benefits from international trade. Therefore, both countries are able to consume more goods and services. Hence, it can be seen that when the opportunity costs of producing different goods differ between 2 countries, specialization and trade according to comparative advantage is beneficial to both countries. As such, increased exports to new markets would enable USA to have higher consumption possibilities as compared to a situation of autarky. 

[Insert diagram on AD and AS increasing]

Increased exports also allow full utilization of resources, which increases both AD and AS. Increased exports to new markets allow USA to overcome their domestic demand constraints by giving them access to larger world markets. With additional demand coming from exports, greater utilization of otherwise unemployed resources, output, income and employment. Since AD = C + I + G + (X – M), AD shifts out and real output increases, but price level remains unchanged. Rising export demand further stimulates investments, causing the AS to shift to the right in the long run, resulting in greater output and a lower price level, hence ensuring long run, sustained economic growth in the economy.

However, on the other hand, the globalized economy has also subjected American companies and workers to unfair foreign anti-competitive practices like dumping, which refers to the situation where foreign imports are sold below cost because foreign firms are trying to drive out domestic firms to gain market power. This is a situation that seems somewhat unfair to developed economies.

Also, labour unions in developed economies continuously argue that imports from developing countries are cheap because they artificially keep costs down by subjecting their workers to ‘sweatshop’ like work environments and by paying them depressed wages.

Thus, to curb this problem of unfair overseas competition, many in the USA lobby for countervailing duties (i.e. import tariffs) to be imposed to raise import prices so that they are more in line with prices of locally produced goods. This is known as protectionism, defined as the act of imposing economic policies aimed at restricting trade between countries, designed primarily to protect domestic producers and workers from foreign competition. Methods of protectionism include import tariffs, import quotas, subsidies, voluntary export restraints (VER), foreign exchange restrictions, physical barriers to entry, and technical barriers to entry.

However, on the other hand, protectionism results in greater allocative inefficiency as domestic firms have less drive to improve operating efficiencies and minimize costs. Also, protectionism results in a ‘beggar thy neighbour’ effect where exports, output and income of its trading partners are reduced, which then curbs exports, output and employment of the former. All these indirectly harm American consumers and the American economy in general. 

On top of the costs of protectionism, there are actually benefits to be reaped from the competition from imports. Firstly, competition from foreign imports forces local producers to innovate, cut costs and improve product quality. Local consumers thus enable enjoy lower prices and higher product quality form both imports and domestically produced goods, thus putting the majority of the Americans at an advantage, whereas protectionism only benefits the producers. Secondly, countries may be unable to produce some goods domestically because of the lack of key resources. Importing such goods will thus widen consumer choice. Product variety is also increased when intra-industry trade occurs as consumers get to enjoy not only domestic versions but also imported version of a given type of good, thus benefiting the majority of the Americans again. 

In conclusion, while one must admit that the globalized economy had brought about great benefits to the US economy by opening up new markets for US exports, the overseas competition faced by the American companies and workers may not be unfair. In view of the cheap labour argument, the fact that in developing countries, labour is in abundant and thus these countries will have a comparative advantage in producing labour intensive goods, which is why imports from these countries are cheaper. Therefore, this renders protectionism unjustified as protecting these industries would be to produce a good that it has a comparative disadvantage in. Therefore, this comprises the consumption levels of the country, and gradually greater allocative inefficiency as domestic firms become even more productively inefficient because they have less need to improve operating efficiencies. Hence, protectionism may not be justified in the USA.

JC Economics Essays - H1, H2, H3 Economics essays - tutor's comments: This economics essay on globalisation, international trade, and the US economy is quite interesting, well written, crafted under timed conditions, and seems to address the economics question posed rather well to a large extent. There are some developed economic theories and the appropriate essay techniques, such as signposting, are used. The answer is rather clear and generally well developed, and could quite possibly gain a rather good mark from the examiners. The question is: how can this economics essay be made better? The overall quality of the essay answer could be much higher, but the question is - how can that be achieved under examination conditions, when time is scarce? What should have been done, and what should have been done better? Also, what other economic theories should have been brought in to make the answer more complete? Think about how you could write this essay better, and sharpen it further, and stretch the grade with models, theories, and examples. Perhaps this economics paper could have used more examples and empirical data to show good Economics knowledge and materials. 

(a) Explain why low inflation is an important macroeconomic aim of the Singapore government. [8]

(a) Explain why low inflation is an important macroeconomic aim of the Singapore government. [8]

Inflation is defined as a sustained and persistent increase in the general price level. There are different possible causes of inflation, such as demand-pull or cost-push inflation. According to economists, a generally low inflation rate of 2 to 3% is optimal for an economy; however, hyperinflation results in adverse internal and external effects on an economy. Therefore, price stability is considered one of the important, major macroeconomic aims of any government, and Singapore is not an exception.

Internal Effects

There are adverse internal effects on an economy due to inflation. First, there could be an increase in “menu costs” as businesses would have to change price lists on their menus and catalogues often when inflation occurs, therefore incurring high transaction costs. Inflation could also result in “shoe-leather costs”, for instance, when firms frequently move money in and out of financial institutions to get the highest possible returns. Hence, high transaction costs could be an internal problem generated by inflation.

Secondly, inflation could also lead to a redistribution of income. Fixed income earners would suffer as the real value of their income would decrease due to inflation. For instance, pensioners or people on fixed wages would suffer due to inflation as their incomes would be able to buy less goods and services. Variable income earners, such as insurance agents or property agents, might not suffer that much because their incomes could increase due to inflation. Simultaneously, inflation would reduce the real value of debt. Hence, debtors would gain while creditors would lose in terms of purchasing power. The amount of the debt repaid by the borrower would have a smaller purchasing power due to inflation. Hence, a redistribution of income in favour of variable wage earners and debtors would occur.

Third, inflation damages investment. This is because the real value of savings will fall and people might be inclined to consume and spend instead of saving. This fall in savings would reduce the amount of funds available for investment, hence increasing borrowing costs (interest rates would rise as a result). Inflation also creates uncertainty as it is difficult for businesses to predict costs and revenues, profits, and losses. This would lead to a fall in investment, which would limit the future economic growth of the economy as well as the productive capacity of the country.

External Effects

When it comes to the foreign sector, inflation also has adverse effects. Inflation could negatively affect the competitiveness of a country’s exports. With higher inflation, a country’s exports would become relatively more expensive compared to goods from other countries. Assuming that the demand for Singapore’s exports is price-elastic, this would mean a larger than proportionate fall in the quantity demanded of exports when Singapore’s exports are priced higher relative to other countries due to the effects of inflation. Furthermore, with a higher relative rate of inflation as compared to other countries, this would mean that domestically-produced goods are relatively more expensive as compared to imports. Consumers would then switch from locally-produced goods to purchasing imports instead, assuming these are close substitutes. Therefore, import expenditure would also increase.

The Balance of Payments (BOP) would therefore be affected. For a small and open economy like Singapore, which depends on exports to drive economic growth, inflation could greatly worsen the country’s current account and thus worsen the BOP, assuming the capital/financial account remains unchanged. As a small economy with no natural resources, Singapore is dependent on imports of raw materials. Therefore, this makes Singapore susceptible to imported inflation, where the rising prices of such imports would lead to a higher cost of production, hence leading to a spiral of higher prices. Due to the high import content of Singapore’s exports, this could lead to a higher price of Singapore’s exports, hence adversely affecting export competitiveness.

Conclusion

In conclusion, the higher the rate of inflation, the greater the adverse effects on the country, be it internal or external effects. There are many different policies that the Singapore government can potentially use to curb inflation, such as fiscal policy, monetary policy, and supply-side policies.

JC Economics Essays: Tutor's Comments - This is part (a) of a two part Economics examination question set by an Economics tutor who was one of my classmates at NIE (National Institute of Education), where we did the PGDE (Postgrad Diploma in Education) for Economics. She kindly allowed me to modify her essay to fit this post. However, despite the fact this Economics essay was written by an Economics tutor, under simulated examination conditions, the question still remains: how can I improve on this work? Now, try a little more "feeling-based" or even "emotion-based" questions - what do I feel is correct about this Economics paper? what do I feel is right about this paper? is it just right in length? does it address the question? and so on. You can get a right gut feel about an Economics paper if you have reviewed many related Economics questions and gotten a feel of what a correct answer will or should look like. On my Economics site here, I have many other related questions - do explore them and see the comments that I have given to my students, other fellow Economics tutors, and to professional Economics paper writers. Thanks for reading and cheers! 

Discuss if an increase in inflation is more likely to impact the domestic or the external sector of Singapore’s economy. [25]

Discuss if an increase in inflation is more likely to impact the domestic or the external sector of Singapore’s economy. [25]

Inflation is defined as a continuous and sustained increase in the general price level, and can be analysed as cost push or demand pull inflation, or a combination of such effects. Inflation causes problems for both the domestic and external sector of Singapore’s economy. However, it is more likely that the external sector of the economy will be worse hit, since Singapore is small and open. Inflation hurts the domestic sector because of the redistribution of income and lower economic growth and higher unemployment, which may lead to negative social issues. Yet, inflation also hurts the external sector because it hurts Singapore's export competitiveness and worsens the current account. In addition, we can expect a depreciation in the Singapore dollar, which hurts us even more because most if not all of Singapore’s inputs are imported from overseas.

Inflation hurts the domestic sector because of the redistribution of income and the impact on economic activity leading to lower economic growth and higher unemployment. First, the redistribution of income is in favour of variable income earners and not fixed income earners, and therefore many Singaporeans will suffer as they are wage earners. Borrowers will benefit from inflation and lenders will lose from inflation, and this will lower investment lending. Finally, people who hold Singapore government bonds will lose out because their Singapore government bond income cannot buy much due to inflation. In all, inflation hurts fixed income earners who are the bulk of Singapore’s workers, hurts banks and other lenders, and hurts people who own government or corporate bonds. Hence, inflation is damaging domestically due to the redistribution of income.

Secondly, if the inflation in Singapore is due to cost push inflation, unemployment will result, which hampers economic growth.

Insert cost push inflation diagram. Why does the author do this? Why this particular diagram? Think through the process of this essay to yourself. You can also try to draw out the diagram yourself from memory rather than referring to your Economics lecture notes. 

According to the diagram above, increasing costs push the general price level upwards, while reducing employment from the full employment level. This is because consumption falls due to rising costs, and investment falls because of the uncertain market outlook. Singapore might face this problem if, for example, workers producing manufacturing goods for exports are laid off due to rising costs due to increased wage push. Furthermore, Singapore’s export oriented firms might face the need for retrenchments if there is imported inflation, since inputs used locally come from overseas. Thus, Singapore might face unemployment and dampened economic growth if there is cost push inflation, which might be likely as Singapore is a small and open economy that relies on foreign inputs to make goods.

On the flip side, inflation hurts the external sector as well because it hurts export competitiveness and hence worsens the balance of payments. In addition, we can expect the Sing dollar to depreciate, which hurts Singaporeans even more because most of inputs are imported from overseas. First, why would the current account worsen? This is because when there is inflation in Singapore, goods and services become more expensive relative to other countries’ goods and services, decreasing export competitiveness. This causes other countries to demand less of Singapore goods and hence the current account worsens, since it is (X – M), where X is falling. One can also argue that the capital account worsens, since due to worsening economic conditions, capital flight might occur and foreigners might pull capital out of Singapore. Therefore, the balance of payments worsens when inflation occurs.

Secondly, when other countries demand less of Singapore’s goods, this lowers the demand for the Singapore dollar and hence the Singapore dollar depreciates vis-à-vis other currencies. Even though the government uses a managed floating exchange rate system, the lack of demand for the Singapore currency will still lead to depreciation and a rise in the inputs that are imported. When inputs that are imported are more expensive, export competitiveness is once again further worsened in some kind of a spiraling effect and that makes the current account worsen even further. Thus, depreciation due to inflation is not a positive impact.

In conclusion, which hurts the most – the domestic or foreign? To a large extent, the external sector of the Singapore economy will be worse hit, as Singapore is a small and open economy and therefore reliant on imports and exports. The local domestic sector is also hit, but nonetheless the external sector is linked with the domestic sector, and problems with BOP and depreciation will also lead to unemployment and cost push inflation as well as lack of economic growth. Therefore, in the final analysis, the external sector is always worse hit than the domestic sector in Singapore as a general rule, but the two are actually closely and intimately allied, and eventually their impacts are almost always intertwined and interacting.

JC ECONOMICS ESSAYS Economics Tutor's Comments: An excellent and very well-written economics exam paper. This student answered the question well. Note: this Economics essay was written under model examination conditions.