According to economic theory, the price mechanism in a free market will always allocate scarce resources efficiently for all goods and services. Evaluate the validity of this statement. [25]

This essay question was adapted from an actual H2 A level economics examination question

This economics essay evaluates whether the price mechanism in a market economy will always allocate scarce resources efficiently for all goods and services. This essay argues that, on the one hand, the price mechanism working in a free market economy will indeed allocate scarce resources efficiently, according to standard economic theory, because of the price mechanism can achieve productive and allocative efficiency. On the other hand, the allocation of scarce resources may not always be efficient, especially when there are market failures and resources are not allocated efficiently, leading to a situation of allocative inefficiency, which distort the workings of the free market.

First, we need to deal with the central problem of economics. Human wants are unlimited, while the earth's factors of production of land, labour, capital, and entrepreneurship are limited. Land refers to gifts of nature such as physical land, natural resources, and oil and gas, among other examples. Labour refers to human ingenuity, effort, time, and talent in the form of “human capital”. Capital in economics often refers to goods that are used to produce yet other goods. And entrepreneurship is the risk-taking, decision-making element that coordinates the other factors of production in an economy. This situation of limited factors of production that could potentially be allocated to different outputs, and the context of unlimited human wants, results in a situation of scarcity. It is important to note that economic scarcity necessitates choice, usually made between competing uses. 

Tutor’s Question: What economics diagram do you think should be drawn here? And how would this diagram back up your arguments?

The price mechanism, through the intersection of demand and supply, determines the optimal price and output and it is from the rational choices of millions of suppliers, producers, and firms meeting the requirements of millions of consumers, individuals, and households that eventually leads to the free market determining what to produce, how to produce, and for whom to produce. Demand is defined as the willingness and ability to purchase a good or service, ceteris paribus, while supply is defined as the willingness and ability to produce a good or service, also ceteris paribus. Oftentimes, one major assumption for this economic theory to work is the situation of perfect competition, where there are many buyers and sellers in a market, selling a homogeneous and non-differentiated good or service, and there are no (or very low) barriers to entry into the market.

Under the market price, consumers seek to maximise utility, and will therefore only consume if they are able to have a positive net benefit from the consumption of these goods and services. Those who are willing and able to pay will obtain the good and service. And the resources used to produce these goods and services will also be efficiently allocated, as producers maximise their profits. As a result, there is productive efficiency, since goods will be produced at the lowest cost combination to ensure profits are maximised, and price will be equal to marginal cost. On the whole, there is also allocative efficiency, since society’s welfare is maximised, and the Pareto efficient situation is reached, where we can only make some people better off by making others worse off in such an economic situation.

On the other hand, there are market failures in the real world, which may impede the efficient allocation of scarce resources. Market failure is the situation where the free market fails to allocate resources efficiently, and there is allocative inefficiency and deadweight loss to society. There are many types of market failure, such as the lack of provision of non-rival and non-excludable public goods, under-consumption of merit goods but over-consumption of demerit goods, externalities both positive and negative and also in consumption and production, imperfect competition leading to excessive market power in a market, imperfect information, factor immobility, and income and wealth inequality in a free market.

One major example is the under-consumption of merit goods. Because rational consumers seek to maximise their own welfare, they do not account for the positive externalities associated with the consumption of their good or service, which could be a merit good. There are many definitions of a merit good, but one definition is that a merit good is a good defined by society or the government to be beneficial to society, often because they bestow positive externalities on society when they are consumed. Externalities are defined as spillover effects to third parties not involved in the production or consumption of the good. Vaccinations provided by the National Health Service (NHS) are examples of merit goods, because they confer positive externalities on society, as when people who are vaccinated help by not infecting others and by making UK society healthier as a whole. However, an individual consumer only considers his marginal private benefit from getting vaccinated, and does not consider the positive externalities his vaccination confers on society – he would not take the positive externalities into account when making his economic decision. This decision results in an under-consumption of the merit good of vaccination, if the decision is left to the workings of the free market, and there is therefore dead-weight loss, as society’s welfare has yet to be maximised due to this under-consumption.

Tutor’s Question: What economics diagram do you think should be drawn here to support the merit good argument, which shows that markets do not always work efficiently?

Another example is the failure of the free market to produce public goods if there is no government intervention. A public good is one that is non-rival and non-excludable. Non-rival in consumption means that one person’s consumption of the good will not result in less of the good being available to others – or the consumption of the good does nothing to reduce the quality or quantity of the good for others, such as public lighting in the streets, where the amount of light cannot be “used up”. As a result, the marginal cost of the next user is theoretically zero, and if allocative efficiency means to produce where price equals to the marginal cost, and the marginal cost of producing the good is zero, then it follows that no private firm would produce the good only to  charge zero dollars (at the allocative efficiency level). And non-excludable means that non-payers cannot be excluded from consuming the good, for example national defence – it defends everyone in the country, including those who have not paid for it, such as foreigners or travellers, such as tourists. Therefore a rational firm would not produce this good because of the problem of free riders, where one who has not paid for the good has the ability to consume it. The government is the only decision-making body that has the willingness and ability to produce a public good, like street lighting and defence, as it has the mandate to do so for the welfare of its citizens (and therefore the willingness) and can raise the revenues to do so from compulsory taxes (and therefore the ability to do so).

In conclusion, while the price mechanism allocates scarce resources efficiently according to economic theory, this may not always be the case in reality, as there are market failures that challenge the assumptions upon which the efficiency of the price mechanism is predicated. Some government intervention is required in the free market to make it genuinely “free”, and to let the price mechanism work as it should. In the real world, with market failures such as the failure of the free market to produce public goods or the underconsumption of merit goods, or imperfect competition in the market, there is a strong need for government intervention in the free market to reduce or eliminate market failures so that the free market can go a long way to produce the optimal outcomes that the free market economists promise.

Economics Tutor's Comment - This is a top-quality, excellently-argued, and very strong economics essay which covers quite a few important points and arguments. The candidate's use of economic theory for market failure is quite strong in this economics essay and the anti-thesis arguments have been well-explained. Could more real-life examples have been used to demonstrate the arguments or the strength of the points? What else would make this economics essay even better than it is currently? Thank you for reading, and cheers! 

JC Economics Essays - This economics essays blog helps economics students with the A-Levels Economics examinations (Cambridge, A1/S, A2, H1/H2 A levels), and the international AS level economics examinations. IB students can also benefit from the economics materials and content in JC Economics Essays. This economics blog provides a range of useful and relevant economics essays, learning materials, study tips and techniques, and model economics essays that students in the United Kingdom, Malaysia, and Singapore, as well as worldwide, can use to excel in their studies and economics examinations.

This model economics essay was contributed by WT, our resident expert who helps students understand the beauty of Economics. She has wide-ranging academic interests in Econometrics, Economic History, International Trade, and Game Theory. And as always, SS, the editor of JC Economics Essays, edited this economics essay and also provided comments and pointers. Several editions and versions of this economics essay have been very popular, but do not accept them at face value and always think about how you would approach this economics question instead. Thank you for reading and cheers. 

Generally, individuals and firms are assumed to be motivated by self-interest. Explain the central economic problem of limited resources and unlimited wants. [10]

This essay question is adapted from an actual A level economics essay examination

This economics essay is about the central problem of economics, and explains that the pursuit of self-interest by individuals and firms results in an efficient allocation of earth’s resources through the price mechanism, which solves the problem of scarcity and the central economic questions of what to produce, how to produce, and for whom to produce. Any society, whether capitalistic, socialist, or a command economy, needs to answer these three important economic questions. 

Human wants are unlimited, while the factors of production used to produce goods and services to meet human wants, which are land, labour, capital, and entrepreneurship are limited. Land refers to gifts of nature and natural resources, like physical land, oil, and natural gas. Labour refers to manpower and man’s efforts and “human capital”. Capital in economics often refers to goods that produce other goods, for example, machinery. And entrepreneurship refers to human risk taking and decision making to coordinate the limited resources available, and as Schumpeter once said, entrepreneurs use “creative destruction” to keep the economy humming with new goods and services that displace older goods and services. These four resources are limited, but are most importantly required to produce goods and services. 

However, human wants are unlimited; for example, people need food, clothing, housing, transportation, leisure and entertainment, education, and many other goods and services to meet their material standard of living. This situation of limited factors of production of land, labour, capital, and entrepreneurship, but unlimited human wants, results in scarcity. 

Scarcity necessitates choice, which means that rational economic choices have to be made to allocate the resources to competing uses. One related important economic concept here is the idea of opportunity cost, which is the cost of the next best alternative – rationally, as resources are scarce, allocating resources to one purpose means forgoing the next best alternative. In other words, there are trade-offs that arise from the allocation of the factors of production to competing uses. 

However, there is a solution that addresses the central problem of economics. 

This solution is the free market, with the price mechanism, which as Adam Smith once said, acts like "an invisible hand" that coordinates the matching of limited resources to competing uses. According to economic theory, this is the intersection of demand and supply that determines the optimal price and the quantity eventually produced, ceteris paribus. Ceteris paribus is the condition that all other factors remain constant; one example here is that, for the price mechanism to allocate resources efficiently, there should be no market failures resulting in allocative inefficiency. Demand is defined as the willingness and ability to purchase a good or service, ceteris paribus, while supply is defined as the willingness and ability to produce a good or service, also ceteris paribus. In economic theory, the optimal price and economic output of goods and services are the outcome of rational choices of millions, if not billions, of suppliers, producers, and firms meeting the requirements of millions of consumers, individuals, and households. 

In conclusion, the pursuit of self-interest by individuals and firms utilises the price mechanism to address the economic problem of scarcity, and it is the intersection of demand and supply that leads to an efficient allocation of scarce economic resources.

Economics Tutor's Comment - This is an excellent effort for the A levels and covers a few important economic concepts and arguments. However, it takes a slightly different approach compared to other economics essays on the central problem of economics that, for example, talk about signalling, rationing, incentivising effects of prices. What is the limitation of using that kind of approach? Also, it could be improved with the use of an economics diagram, and explaining the diagram could also add higher order reasoning to this paper. Nonetheless, it is still quite clear that this student’s economic theory is quite strong. Always think about what you could do to make your economics essays even better. Thank you for reading. Cheers!  

JC Economics Essays - This economics essays blog helps economics students with the A-Levels (Cambridge, A1/S, A2, A H1/H2/H3 levels), and even the international AS level economics examinations. IB students can also benefit from the economics content in JC Economics Essays. This top-quality economics essays website provides a range of relevant and useful economics content, materials, tips and techniques, and model economics essays that students in the United Kingdom and Singapore, and all around the world, can use to excel in their studies and economics examinations.

This model essay with economics tutor’s comments was contributed by WT, our Economics expert who helps students understand the beauty of Economics and its applications. WT has a strong interest in Econometrics, Economic History, International Trade, and Game Theory. This economics post was edited by SS, the editor of JC Economics Essays.

Explain why trade occurs between Singapore and its trading partners. [10]

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. 

How can you write clearly, accurately, and relevantly, addressing the requirements of the essay question? Thank you for reading and cheers! 

Discuss if Singapore is among the economies worldwide that have the most to gain from globalisation. [25]

Globalisation refers to the increasing integration and interdependence of the world’s economies arising from increased trade and greater international mobility of factors of production like capital, labour, and enterprise. In other words, globalisation is an extension of international trade, where in addition to increasing trade in goods and services, it also involves rising mobility of resources like labour and capital. Generally, the forces driving globalisation can be linked to improvements in technology resulting in the significant lowering of transport costs and communication costs, and the historical movement away from protectionism after the Second World War. To discuss to what extent a country gains from globalisation, there is a need to analyse the economic benefits and costs of increased trade in products as well as the benefits and costs of increased geographical mobility of labour and capital. This paper argues that, on the one hand, Singapore benefits from international trade and increased labour and capital mobility, but on the other hand these benefits come at a cost, with their limitations and negative impacts.

First, there are benefits from international trade, which many countries can enjoy, but Singapore can arguably enjoy to a greater degree given her small size and openness to free trade. First, Singapore, just like most other countries, can benefit from higher consumption possibilities arising from specialisation and trade according to comparative advantage, which would increase her material living standard. A country is said to have comparative advantage in the production of a good when it can produce the good at lower opportunity cost compared to another country. In this context, the opportunity cost of a good is the amount of another good forgone to produce an additional unit of the good. It can be argued that a rise in the consumption possibilities allows Singaporeans to enjoy a higher material living standard, by having a larger bundle of goods and services to consume, and hence, Singapore stands to benefit economically from globalisation.

Second, trade can be an “engine of growth” – trade enables small or developing economies to overcome the lack of domestic demand in order to achieve fuller utilisation of its resources, and Singapore in its early days was one of the main beneficiaries of this situation. For example, Singapore pursued a policy of Export Oriented Industrialisation (EOI) and reaped economies of scale for producing exports for the world market, which led to low unemployment and high economic growth for many decades in Singapore. In addition, increased efficiency of domestic producers arising from greater competition from imports and also the exploitation of economies of scale are also other benefits of trade. This increase in both AD and AS, leading to long run sustained, and non-inflationary economic growth, was possible because of trade. Conversely, it can be argued that countries such as Latin America after WWII which were inward-looking and focused on Import Substitution Industrialisation (ISI) were amongst economies which did not benefit from globalisation.

However, there are costs of increased free trade which Singapore has to deal with, which may not affect much larger economies. First, there is the danger of potential over-reliance on external demand resulting in greater macroeconomic instability. Singapore’s macroeconomic goals of low and stable inflation rates, economic growth, and low unemployment may easily be adversely affected or suddenly impacted by worldwide recessions or worldwide booms. This, however, is inevitable given that Singapore is a small and open economy which is highly dependent on trade as an engine of growth, and therefore when incomes fall in other countries, Singapore can be rapidly and adversely affected by falling export revenue, which lowers AD and results in unemployment and falling growth, while conversely booms in other countries may lead to rising demand-pull inflation in Singapore. Larger economies, conversely, may not be as affected as Singapore.

Furthermore, rising structural unemployment is another cost of international trade, as trade causes less competitive sectors to decline and more competitive sectors to expand. Structural unemployment refers to the situation of a mismatch of skills in the economy, where workers in the declining sunset industries are unable to find jobs in the new, rising sunrise industries due to a lack of requisite skills and training. For example, due to rapid structural changes in Singapore’s economy as a result of trade, there are many older and relatively unskilled workers who are unable or unwilling to upgrade their skills, and therefore cannot take up many of the new jobs that are available. Hence, there are real and pressing costs to the benefits of greater free trade arising from globalisation.

In addition to more global free trade, globalisation also impacts factor mobility – it can benefit Singapore in terms of the increased flows of labour and increased capital mobility, all of which help Singapore’s long run potential growth. Let us first address labour. First and foremost, labour shortages in Singapore can easily be made up through increasing the numbers of Foreign Talent or foreign workers. For example, in fields such as construction and nursing in healthcare, local domestic shortages are easily made up through imports of foreign labour. Hence, it would seem that increased labour mobility benefits Singaporeans.

Second, with respect to capital, Singapore benefits from increased capital accumulation, arising from increased Foreign Direct Investment as well as short term financial capital inflows. Capital accumulation enhances long-run growth as it enables a country to increase the quantity and quality of capital, and countries like Singapore can increase their levels of capital, technology and skilled labour. For instance, MNCs investing in Singapore bring about capital investments, technology, and skilled labour to Singapore, increasing her potential capacity and thus raising her potential growth. Furthermore, capital owners in Singapore can earn higher returns through investing in developing countries, especially in neighbouring ASEAN countries, and lower skilled labour from developing countries could earn higher wages from working in Singapore. Therefore it would seem that while foreigners benefit from globalisation’s impact on Singapore, Singaporeans benefit much more.

However, there are also costs of increased labour mobility. First, it can be argued that there would arise a greater degree of structural unemployment in Singapore as domestic workers may be unable to compete with cheaper foreign workers. This applies to both skilled and unskilled labour in Singapore. For instance, the lower-skilled elderly workers would be hardest hit by the influx of cheaper foreign labour, who would depress wages.

This leads to greater income inequality in Singapore, and by extension to developed economies worldwide: while developed economies’ lower-skilled workers are often internationally immobile, poorly trained, and uneducated, and thus would face depressed wages due to a rapid influx of cheap low skilled foreign labour, most developed economies’ higher-skilled labour is internationally mobile, often headhunted and recruited worldwide, and hence face rising wages rise due to increase global competition for such labour. For instance, in Singapore, the lower-skilled elderly workers are often facing structural unemployment or employment in lower-end jobs, whereas affluent Singaporeans are able to accept jobs worldwide due to globalisation. The resultant consequence is that the Gini Coefficient in Singapore is consistently above 0.4, which suggests rather high income inequality. This inequality may be a major cost of globalisation.

Furthermore, compounding the issue of income inequality is the real and pervasive social cost of Singapore adapting to the influx of foreign labour, which could for example strain Singapore’s social amenities. For instance, housing, schools, hospitals, and recreational facilities are often overcrowded due to rising population growth; there has often been social discontent due to erosion of local culture, values, and way of life. Therefore labour mobility brings about costs and benefits to Singapore.

There are also real and pervasive costs of increased capital mobility. First, allowing free movement of short to medium term capital can result in exchange rate fluctuations, and, second, stock and property market bubbles which causes increased macroeconomic instability. For instance, because Singapore is a financial hub with free capital mobility, there are often rapid capital inflows leading to asset bubbles in the stock and property markets, especially due to the USA’s Quantitative Easing and expansionary monetary policy. In terms of exchange rate fluctuations, these are often smoothed out through the use of Singapore’s managed float policy which limits the volatility of free, flexible exchange rates. Therefore capital mobility brings out benefits and costs to Singapore.

In conclusion, Singapore has more to gain from globalisation compared to larger economies, because first and foremost, without trade, Singapore’s small yet open domestic market will be insufficient or inadequate to generate much national income, reap much economies of scale, and experience much product differentiation. Singapore therefore attains most of the benefits of trade while possessing the policy tools and strategies to minimise the costs of freer trade. Being geographically small, highly urbanised, having good transportation infrastructure, minimal social security support, and a relatively well educated workforce, it is comparatively easier for Singapore to retrain and re-skill its workers to counter structural unemployment arising from increased globalisation. Due to strong economic growth in the past, a prudent and efficient government and a high savings rate, Singapore arguably has more than sufficient resources to invest in social amenities in order to cope with the rising population caused by immigration. While unrestricted flow of short-term capital is necessary for Singapore to function as a financial centre, its substantial foreign currency reserves allow Singapore to be relatively safe from potentially destabilising speculative attacks on its currency. The downside is that being a developed economy, it is more likely to experience worsening income distribution than a developing economy and Singapore finds it hard to significantly improve income redistribution without negatively affecting the incentive to work and invest. Therefore it seems clear that Singapore has the correct, specifically targeted policy tools to ensure that it ameliorates the negative impacts of globalisation while maximising the gains. Overall, it seems Singapore has significantly much more to gain than lose from globalisation and thus could arguably be one of the countries which can gain most out of globalisation.

JC Economics Essays - This economics question is adapted from an actual H2 Economics A level examination question, and this is a specially crafted response to the question co-written by two economics tutors for an economics tutorial on international trade and globalisation. The main topic in this economics essay is globalisation. Looking at the essay response, what are good economics arguments that can be used for examinations? What is good about this economics paper that can be adapted and used in economics assignments and tests? What are areas that need to be explained further or further explicated clearly? Remember to always answer the question that is posed, and think of ways in which the question can be approached. Thank you for reading and cheers!

Explain with relevant examples why imperfect information and the immobility of the economic factors of production lead to market failure.

Market failure refers to the situation where the free market fails to achieve an outcome that maximizes society’s welfare, of which imperfect information and the immobility of the factors of production, which refers to the inability of resources to move perfectly from one market to another in response to changing market conditions, would lead to market failure as well. In my essay, I explain how the above two factors cause market failure.

Imperfect information is the situation where people engage in economic transactions without having perfect information of what they are buying, due to a discrepancy between the perceived benefit or cost and the actual benefit or cost. Due to the lack of perfect information, consumers end up buying something that is not what they really want or need. This is because consumers are often swayed by persuasive advertising and sales staff pushing products based on commission. As a lot of time and effort is required for one to acquire all the necessary information as they lacked the time and expertise to learn about the many products in the market, this principal-agent problem is likely to persist. Hence, when a consumer buys a good that is not what they really want or is less suitable, his welfare is below the socially optimum level and this gives rise to market failure. 

Imperfect information also contributes to market failure that arises from negative externalities and the presence of demerit goods. This is because adverse effects are imposed on third parties when these goods are produced or consumed. Externalities are defined as third party spillover effects, where third parties are affected when goods are produced or consumed, and demerit goods are goods which the government deems undesirable in the light of consumers lack of information or due to the negative externalities imposed on third parties.

In this case of demerit goods, individuals are unaware of the social cost incurred during their consumption of the good. Both negative externalities of production as seen in the figures below. Without government intervention, MPB = MPC and output is at Qp. The social equilibrium Qs is at MSB = MSC. Since MSC > MSB, a deadweight loss is generated. Since Qp > Qs, the good is over-produced. 

[Insert diagrams on negative externalities from production and consumption]

As for demerit goods, when MPB = MPC, the output is at Qp. However, the social outcome Qs is where MSB = MSC. Between Qp and Qs there is a loss of potential welfare (deadweight loss). Since Qp > Qs, the good is said to be over-consumed. 

As for factor immobility, there are two major types – occupational and geographical immobility. Occupational immobility of labour arises because workers lack the required education or skills to take on new jobs in another industry. For instance, people working in fields with low technology will find it hard to work in Silicon Valley due to their lack of knowledge, thus making them occupationally immobile. On the other hand, geographical labour immobility exists in large countries when there are barriers to people moving from one region to another in search of jobs. This barriers include family and social ties and cost involved in moving to another area to settle down. Large countries like the USA and the UK will face these sorts of geographical immobility problems and issues. 

Market failure arises as resources are unemployed due to factor immobility and hence the economy is producing inside its PPC. Hence, the outcome is productive inefficient and also allocatively inefficient.

[Insert a diagram on production possibilities curve]

The diagram shows that there are unexploited resources untapped, and therefore there is productive inefficiency. Also, there could be market failure due to allocative inefficiency. This is because resources are unable to flow from contracting to expanding markets. Hence, society’s welfare is not fully maximized and it can be argued that market failure results. 

In conclusion, imperfect information is often present in market dominant firms such as oligopolistic and monopolistic firms as they are price setters with large market power, often arising from possession of asymmetric information. Imperfect information prevents consumers from knowing all the prices and the product production processes also. Therefore, it is difficult to remove the presence of imperfect information as it is so prevalent. Factor immobility is also another common cause of market and it is difficult to be eradicated. Hence, market failure would tend to persist.

JC Economics Essay - H1, H2, H3 economics essays - tutor's comments: There are a lot of small problems with this economics paper that can be easily remedied, and therefore the question is: what are the areas that need to be worked on for this essay? Having said that, there are many salient strengths to this economics essay answer as well: think, what are the strengths and good points of the material presented in this economics essay? While fairly strong in economic theory, and covering most of the relevant ground to address the question posed, and having lots of interesting angles and possible areas of discussion, this economics essay answer could have more relevant examples and be more vivid, clearer, and better by giving specific real world examples for each model, theory, or economics concept mentioned. This economics essay could have pushed the envelope, but did not go too far nor did not stretch the point to emphasise, highlight, showcase certain good economics material, which would have vastly improved it. What other areas of improvement do you see and notice, and how would you have approached this essay question? Think about how to improve on this economics essay - how you can value add to this suggested, possible answer. Special thanks to A G and S S for their contribution. 

Evaluate economic policies currently used by the Singapore government to correct imperfect information and immobility of the economic factors of production, to correct market failure. [25]

This economics paper is about economic policies in Singapore that target market failures, in particular imperfect information and immobility of the factors of production, which hamper the workings of the invisible hand through the price mechanism. The Singapore government has been active in combating market failure through the use of taxes, subsidies and laws. These policy methods have shown to be useful in reducing imperfect information and factor immobility. However, these policies are not foolproof and they do have their limitations. Therefore, in this policy essay, I would discuss if the policies adapted by the Singapore government have achieved their policy aims.

           

One of the laws implemented by the government is mandatory pricing. This policy requires all retail stores in Singapore to display their prices, which then allows consumers to obtain the pricing information more easily than before. This policy in general therefore reduces imperfect information and also allows price discrimination since it reduces the chance for shop owners to charge some consumers more than others.

           

Another of such laws implemented by the government would be the implementation of the ‘Lemon Law’. This law allows consumers to return the products within a stipulated period and it is usually within six months of purchase. This policy protects consumer rights as they are allowed to return the goods that they deem unsuitable for themselves. This reduces the impact of having imperfect information since goods are made refundable.

           

Also, the government has made it mandatory for hospitals to display their average hospital bills on their respective websites. This is because many people do not know the cost of seeing a doctor and this would affect the ability to make decisions and to seek the most suitable medical treatment. The publishing of prices also serve to reduce the extent of principle-agent problems since consumers are now able to obtain more information than before.

           

In addition, the government heavily subsidized primary and secondary education as education is deemed as both a positive externality, which refers to the positive spillover effects it can have on third parties, and a merit good, which refers to a good which the state feels will be underconsumed if it is left to the free market. Since children may not attend schools as they do not know what is best for them and their parents may be short-sighted and hence do not let their children attend school, subsidizing education will incentivize parents to send their children to school. To complement this, the government has established a law which makes attending primary and secondary school compulsory so locals can receive at least a basic education.

           

As for factor immobility, geographical immobility is arguably not directly applicable to Singapore since Singapore is a small country and has well-established transport networks. Hence, it will be unlikely that people will experience geographical immobility.

However, occupational immobility is a problem in Singapore and the government has done much to deal with it. Some examples will be subsidizing upgrading and computer courses for people so that these people can upgrade their skills and remain competitive and relevant in today’s society. Educating locals such as having English courses would also help them to find a better job. Hence, occupational immobility is corrected.

           

Going on to discuss the benefits of these policies, the use of laws is rather effective in reducing the problem of imperfect information. Mandatory pricing is useful as customers no longer has to ask about the prices before purchasing it and more price transparency allows consumers to compare prices between shops and choose the best and most suitable product for themselves. Shop owners and retailers are also unable to exploit consumers.

           

As for Lemon’s Law, it reduces the incentive of the sales person to boast about the functions of the product so as to get customers to purchase them. This is because customers now have the right to refund the goods if they are not satisfied with them. Hence reduces the chance of firms withholding information from customers in order to push up their sales.

           

Also, getting hospitals to display prices is a good move since pricing is definitely more transparent now and patients are able to make better choices for themselves in terms of deciding on their own preferred medical treatment. They would also not be taken aback when they see the amount they have to pay at the end of the treatment since they already do have the information.

           

Furthermore, the government has successfully prevented education from being under-consumed due to imperfect information. This is because Singapore’s literacy rates are one of the highest in the world and many enjoy the privilege of going to school despite their family background.

           

Lastly, education and training programmes implemented by the government has been useful in helping the retrenched get new jobs. It has also allowed many to obtain new skills and obtain better paying jobs than before and therefore improving their standard of living. Occupational immobility can be overcome through these policy measures.

In conclusion, the policies implemented by the Singapore government to correct market failure caused by imperfect information and factor immobility have largely been successful. However, there are some drawbacks. For instance, since hospitals want to remain competitive and to reduce their prices, they may sacrifice on their quality of service in order to cut costs. Also, as for the Lemon’s Law, a lot of administrative costs could be incurred as the products can be returned and it may be troublesome for firms to keep track of these requests. This law may also be misused by consumers as consumers may purchase the good and use it for a while and then return it later on when they no longer have use for it or grown sick of it. This puts firms at the losing end and they might not be able to profit from their businesses. In addition, it is very difficult to get adults to go for skills upgrading and training as they may have lost touch with it. Some may lack basic training as well and it would be difficult to undergo training and education. Hence, not all government policies are foolproof.

JC Economics Essays - H1, H2, H3 economics questions and suggested answers - Economics tutor's comments: This economics essay on market failure in the context of Singapore is very good in the sense that it provides a lot of economics application, and real life examples and answers. Examples are very good and should be used to provide a beautiful, well rounded answer to economics questions. However, it does not define many key terms and does not explain many of the economic theories that are relevant. Always remember to define key economic concepts and key economic terms because the examiner would want to see if the candidate knows his or her economics material well. Also, there is the need to use clear, well explained, economics diagrams to illustrate key concepts and arguments, which is sorely lacking in this economics paper. However, having said that, overall this paper can do quite well because of its strengths as well as the interesting evaluative comments and analysis made towards the end of the paper. What are the other strengths of this economics essay? Special thanks to S S, A G and S H for their contributions to this economics paper. 

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. 

Evaluate the economic policies currently used by the Singapore government to correct imperfect information and the immobility of the factors of production, two major causes of market failure. [15]

Adapted from an actual H2 'A' Level Economics examination paper

Just like many other countries, Singapore has also been experiencing problems of imperfect information and immobility of factors of production thus leading to market failure. The Singapore government has come up with some policies in hope to improve the situation. This paper discusses the economic policies used by the Singapore government to correct imperfect information and the immobility of the factors of production. 

               

First, to reduce imperfect information, the Singapore government has tried to improve the flow of information through the use of the Internet. As more people do their research on the Internet to find out more about what they really want or need, putting more information on the Internet can help to improve information flow, though it may be more helpful to only the younger generation.

               

The Singapore Government also implements rules and regulations of compulsory food labels on all packaged food. They also introduced the healthier choice and safety labels  on food and appliances respectively to help consumers to make better decisions when consuming a product. As for the insurance company, there is a certain guideline where consumers have to report their medical condition or the company will not cover for them. Although it is easy to implement these regulations, there is a high regulatory cost to it.

               

The Singapore Government also set up many job agencies like Recruit Express and JobsCentral to improve the flow of information so that workers and employers can find a job or worker more easily and efficiently.

               

The Singapore Government can also initiate campaigns to raise awareness among consumers to read up on the product and look for labels on them before consuming a product in order to make a better decision. However, this might have time lag and it is difficult to for them to start making it a habit instantly.

              

As for occupational mobility, since workers do not have the right skills to work, government can provide tax cuts for employers who send their employees for courses to upgrade themselves or learn a new skill so that they will be more efficient and have better ability to handle their tasks better. Nonetheless, this may not be a popular policy among employers as they are making a loss by sending their employees for courses as it will result in a smaller workforce working thus lesser production while having higher cost incurred due to the course fees. Although, the firm will most likely benefit in the long run, employers cannot be certain that the employees will stay with them for a long time, therefore losing the long term benefit.

               

The Singapore Government has also set up the Workforce Development Agency (WDA) where they work with the unique tripartite trade union that Singapore has to subsidise firms that send their employees for courses to upgrade themselves or individuals to pick up a new skills so as to increase job opportunities for especially the unemployed. WDA will also try to link up the unemployed with a job during the training sessions so as to reduce the amount of lag time. Furthermore, government has set aside a Skills Development Fund to aid these people since Singapore is a small and open economy that often experiences structural unemployment due to an ageing population with many older workers. However, this may not be effective as it is difficult for older workers or less educated individuals to pick up a new skill especially since they have no basics to build on. Also, many workers will only see these courses as a waste of their time since they can be using the time to earn more money in order to cover their living expenses.

               

In addition, the Singapore government has implemented compulsory primary education for all citizens. Being educated will help them to take up new skills in future since Singapore’s small and open economy forces us to adapt to changes quickly by developing new comparative advantages to catch up with time. However, this requires a large amount of budget to be placed into education in order to make education affordable for all.

               

Lastly, the Singapore government has come up with urban planning to solve the problem of geographical immobility. We started to have small regional business areas like Tampines rather than all firms to concentrate at City Business District (CBD). This will not only help individuals to travel less since most housing estates are in the East, it also helps to divert traffic away from CBD.

                

In conclusion, the Singapore government should use a combination of market-based and non-market based solutions, as well as consider their long term and short term effects, in order to better achieve pareto optimality and reduce market failure.

JC ECONOMICS ESSAYS - Economics Tutor's Comments: This economics essay has a lot of good material on the Singapore government, economic policies, and the Singapore context, which is excellent - always address your material to the context of the question. Answering the essay question with reference to real world, relevant, and specific examples is an incredibly effective exam strategy in economics examinations. Remember always to have good examples alongside excellent understanding of economic theory and models. However, the usual questions apply - how would you improve upon the essay introduction? What is good or what is not so good about the body of the paper? What is good about the essay conclusion? Take note of the excellent use of signposting in the conclusion. However, how could the conclusion be buttressed and developed? What else could the student have written, or how could the student have written the evaluative conclusion better? Think about how you would write a better conclusion to make this economics essay the best that it can be. 

Explain carefully why imperfect information and the immobility of the factors of production might lead to market failure. [10]

Adapted from an actual H2 A levels Economics examination

Usually, a market is left to market forces to work in a free market system. However, if the market fails to achieve Pareto optimality, where society’s welfare is not maximized, the government should intervene to reduce the welfare loss. Imperfect information and immobility of factors of production are examples of market failure.

 

Imperfect information happens when there is no perfect information flow, where either the buyer or seller made a decision before understanding the goods and services or the consumer needs due to the lack of time or expertise in it. It also happens between sellers especially when one has more market power over the other. Imperfect information is seen when consumers are left to choose a variety of similar products at supermarkets, not knowing which is best for them. Therefore, they may make the wrong decision and not consume the good that they exactly want or need, reducing their utility and resulting in welfare loss.

   

Another example of imperfect information is asymmetric information. Asymmetric information happens when one party, either the buyer or seller, knows more than the other party. An example of a case where buyer knows more than seller is consumers of insurance know more about their health and may choose not to let the insurance company know. Consumers that are more prone to illnesses usually buy insurance to cover them, causing the insurance company to make a loss. An example of a case where seller knows more than buyer is a promoter knowing his product well but he will only choose to tell the advantages of the product using persuasive talking, resulting in the consumer making the wrong decision as her cost-benefit analysis is biased. This will thus lead to welfare loss, causing the market to fail.

              

Immobility of factors of production causes market failure when there is a geographical or occupational immobility. These are forms of labour immobility as with the help of international trade, capital and enterprise are more mobile while factors of endowments like oils and minerals can be traded from one another.

               

Geographical immobility happens when one does not want to move to another country or state to work even if there is a more suitable job available. This is caused by the difference in culture, cost of living, family relations and many other reasons. These will lead to the worker having to choose a less suitable job that he may not be as skilled in, resulting in welfare loss since he does not use his skills fully and efficiently, therefore the market fails.

               

Occupational immobility happens when there is structural unemployment and people cannot find themselves a new job as they only have skills for the sunset industry which is not in demand for workers. There is a mismatch in the jobs available and skills of workers causing the labour force to be not fully employed while having shortages in firms especially from sunrise industries, thus output is reduced and there is a welfare loss, causing market to fail.

               

In conclusion, imperfect information and immobility of factors of production are common causes of market failure in reality. Government should therefore step in to use a range of interventionist policies to reduce these welfare losses and aim to achieve Pareto optimality through a combination of policies.

JC ECONOMICS ESSAYS: Economics tutor's comments - This economics paper is direct, clear cut, and to the point, and tries to address the requirements of the economics question posed as clearly as possible. The conclusion to this essay is simple but well thought through, and does not need to be long, analytical, and evaluative simply because this is an "explain" question (that is the command word) and also because this is not a 13, 15, or 25 mark paper, which would require a more developed, evaluative, and judgmental conclusion to get the highest possible marks in an examination. This economics paper has all the relevant economics material, theories, and ideas, but could profit more perhaps from more direct examples and specific real world examples that are applied to the context, which could develop the essay further. However, the usual questions also apply here - how could this essay be further improved? Special thanks to A G and other contributors who contributed this economics material. Thanks for reading and cheers!

Discuss the likely causes of inflation in Singapore. [15]

Introduction: Causes of Inflation in Singapore

This Economics paper discusses the likely causes of  inflation in Singapore. First, a few definitions are in order. 

What is inflation? Inflation occurs when there is a persistent and sustained rise in the general price level of goods and services, and is a macroeconomic problem when the rise in general price level is persistent and inordinate. With inflation, a given amount of nominal income buys fewer goods and services than before, which poses socio-political problems in countries that suffer from inflation. 

Inflation caused by the demand-side is known as demand-pull inflation while inflation caused by the supply-side is known as cost-push inflation. This paper argues that both demand-pull and cost-push inflation are present in Singapore, but cost-push is far more important to the Singapore economy, especially when it comes to imported inflation in Singapore's case. 

Demand Pull Inflation in Singapore 

What is demand pull inflation? Firstly, demand-pull inflation occurs in Singapore when Aggregate Demand (AD) rises as the economy is at or near the full employment level of national income. 

Why would AD rise, or what are the factors causing AD to rise? There are many reasons why AD will rise, but they can all be attributed to the components forming AD, which are C, I, G, and (X-M), as AD = C + I + G + (X-M). 

[Tutor's Note: Draw and explain the correct AD/AS diagrams. Think also - where do the diagrams fit in, have I labelled them correctly, and what do these economics diagrams show the reader?]

First, it can be argued that AD will rise if there is a decrease in interest rate as when there is a decrease in interest rate, it becomes cheaper and easier for people to consume and invest causing consumption and investment to increase. However, this is not that likely in Singapore's case, given her unique context. 

Secondly, AD will also rise when there is a decrease in personal income tax as people will tend to have more disposable income and this increases their purchasing power and will cause consumption to increase. Since AD comprises C + I + G + (X-M), which are consumer spending, investment spending, government spending, and net exports, a rise in consumption and investment spending will cause AD to rise. This is slightly more likely in Singapore's case. 

Lastly, factors like increases in government spending (G), for instance on the Singapore Armed Forces or Singapore Police Force, and increases in net exports (X-M), due to foreigners buying more of our domestically produced exports, will also cause AD to rise, leading to demand-pull inflation in Singapore as the GPL increases. This is also quite likely in Singapore, but there are also supply side factors to inflation to consider. 

Cost Push Inflation in Singapore

On the other hand, demand is not the full picture when it comes to inflation. 

What is cost push inflation? Cost-push inflation occurs when Aggregate Supply (AS) rises due to economy-wide rises in production costs. As labour cost is often the largest component of total costs in Singapore, a sudden rise in wages can cause significant cost-push inflation in Singapore. 

However, having said that, rising food, fuel, property prices, exchange rates and the foreign sector are also factors that cause AS to rise, leading to cost-push inflation as the general price level increases when the AS curve shifts upwards. 

[Tutor's Note: Draw and explain the correct AD/AS diagrams. Think also - where do the diagrams fit in, have I labelled them correctly, and what do these economics diagrams show the reader?]

Imported Inflation in Singapore

Imported inflation can lead also lead to cost push inflation. As Singapore is a small and open economy with limited natural resources (factors of production), she has to depend heavily on imports from other countries for both her consumption goods and factor inputs. In fact, Singapore's exports are made from imported inputs. Thus, the biggest threat to inflation in Singapore would be the depreciation of the Singapore Dollar (SGD). This could be due to lack of export competitiveness which lowers the demand for Singapore's currency, or this could also be due to Singapore dollars flooding the foreign exchange market. 

If the Singapore dollar depreciates too quickly, it causes severe imported inflation which impacts households directly through rising goods, food, and energy prices. Imported inputs also become more costly, thus raising production costs and product prices, and since Singapore's exports depend on imported inputs this has a massive knock on effect on Singapore's exports.

With small domestic market, highly export-oriented Singapore is dependent on external rather than domestic demand. If the Singapore dollar were to appreciate too quickly, her exports and hence AD would plummet and this potentially could trigger a recession. Hence, Singapore’s central bank, the Monetary Authority of Singapore (MAS) has a primary objective to promote price stability through Singapore's version of monetary policy, which is a kind of exchange rate policy. 

[NOTE: In order to effectively manage Singapore’s exchange rate, the MAS could potentially buy back its own currency from the foreign exchange market which reduces the money supply to raise the Singapore exchange rate. Conversely, the MAS also could sell domestic currency on the foreign exchange market which raises the money supply to lower the Singapore exchange rate.]

Conclusion

Hence, imported inflation is the most important factor affecting Singapore's economy and is the most likely cause of inflation in Singapore, along with cost push inflation, and with demand pull inflation being the least likely form of inflation in Singapore. 

JC Economics Essays: Tutor's Comments - This Economics essay is approached in a rather different way from this other essay, also here on this site, on inflation in Singapore's case: Singapore's Inflation: Explain the causes of inflation in Singapore. Compare and contrast. Why is this the case, which economics essay approach is better, and how could you improve on either of these papers? Do also think about why the approaches from different students can vary considerably when answering or responding to the same question. Which approach or angle is more useful and relevant in crafting an excellent economics essay, especially when under time pressure? Also, there are a few small problems with this economics essay - can you spot these small errors or mistakes, and improve on these flaws or inadequacies? Think about it for a moment. If you can identify the mistakes or the small inadequacies, plus suggest improvements upon them, then clearly you are in a good position and have really understood the material. This economics essay is a contribution from my companion website and has been adapted and amended a bit. Thanks for reading and cheers! 

Explain the concept of comparative advantage and, using relevant examples from the USA, explain the likely factors that determine the comparative advantage of the United States. (15 marks)

Introduction - International Trade

This Economics essay is about international trade, and discusses the likely factors that determine the comparative advantage in trade for the USA. 

Comparative Advantage

What is "comparative advantage"? Comparative advantage is the idea that a country should trade in a good in which it has the lowest opportunity costs in producing that good. Even if a country has absolute advantage in the production of all goods than another country, the idea of comparative advantage is that the opportunity costs matter and that hence both countries can still trade, and gain from trade.

Generally, trade models built upon the theory of comparative advantage have the following assumptions: Perfect mobility of the FOP (factors of production), which means that resources used in one industry can be substituted for another perfectly; constant returns to scale, which means that doubling the inputs in each country leads to a doubling of total output; there are no externalities arising from production and/or consumption (and by extension there are no other associated market failures); and transportation and other transaction costs are negligible.

Factors Affecting Comparative Advantage

What determines comparative advantage, and in this particular context the comparative advantage of the USA?

Dynamic Concept - Dynamic Comparative Advantage

First, it should be noted that comparative advantage is a dynamic concept, which means that it can and does change over time. Some companies enjoy a comparative advantage in a product they have produced for several years, only to find that eventually they face increasing competition as rival producers from other countries enter the market. For instance, Ford used to be able to sell their cars competitively overseas, but with the rise of Korean cars and Japanese cars - predominantly Japanese cars - now, many people worldwide perceive Japanese and Korean cars as good as, if not better, than American cars.

Factors of Production - Quality and Quantity

Also, the quantity and quality of the factors of production available would definitely affect the comparative advantage of the USA (in particular, the natural resources that a country possesses, the size and efficiency of the available labour force, the productivity of the existing stock of capital inputs, and the skill and organisational talent of its entrepreneurs and risk-taking businessmen). Focusing narrowly instead on labour and capital, to focus this Economics paper, any economy can improve the quality of its labour force and increase the stock of capital available to therefore expand the productive potential in industries in which it has a comparative advantage. In the case of the USA, this means that the US government can focus on improving the productivity of its labour force and raising employment, as well as focusing on their current capital-intensive approach to production.

Industrial Policy and R&D?

In Singapore, in contradistinction to the USA, there has been industrial policy that aims to direct comparative advantage, since after all comparative advantage is indeed a dynamic concept. Investment in research and development can lead to dominance in certain industries, and industrial policy helps to keep this keen and targeted (R&D is very important in industries where patents give some firms significant market advantage, and hence market dominance). In the case of the USA, military firms (once termed the military-industrial complex) can be seen as an area in which R&D served to keep the comparative advantage of the USA in military weaponry and high technological areas.

Yet Other Factors - Inflation, Protectionism, and Non-price Competitiveness

There are also other factors affecting the comparative advantage of countries, which may be important or relevant in the case of the USA. These other factors are inflation rates, protectionist measures, and nonprice competitiveness of producers in terms of product design and other such preference-related measures.

First, long-term rates of inflation compared to other countries would worsen competitiveness and hence cause a decline in the comparative advantage of that particular good. This would affect all producers not just the USA per se.

Secondly, in terms of protectionism, import controls such as tariffs and quotas can be used to create an artificial comparative advantage for domestic producers. In the case of the USA, protectionist measures are sometimes used (as Ha Joon Chang once mockingly said, this was akin to "kicking away the ladder").

Lastly, the nonprice competitiveness of producers, such as the product design, reliability, and the quality of after-sales support also affects comparative advantage. In this area, the USA has a lot of fans and some of its products are quite popular worldwide, for instance the infamous or for that matter famous iPhone and other Apple products.

JC Economics Essays: Economics Tutor's comments - This Economics essay on international trade in the context of the USA is short, sharp, and to the point - and it does make an attempt at addressing the requirements of the Economics question. There are many good elements in this writing and analysis that are worthy of learning and study. However, the usual tutor's questions are: how can this paper be made better? For instance, think about the conclusion - this Economics paper does not have a conclusion that brings in the relevant real world context of the USA. How would you craft an evaluative, nuanced, and clear conclusion for this Economics paper? Also, what other economic ideas or real-world arguments can you think of? Finally, think about the alternative approaches and methods in which you could approach this Economics question. Think through the process of writing, especially for examinations, tests, and term projects. Thanks for reading and cheers!