View: What's Wrong With Obamacare?

This economics perspectives essay is contributed by a loyal reader (MSc Economics)

I would like to share some simple views and perspectives about the debates about Obamacare, and its possible repeal by Donald Trump and the Republicans (afternote: President Trump after 20th Jan 2017). This economics essay is an opinion piece, and just takes a fluid and flowing approach, expressing my views and explaining issues as they arise, rather than making solid or theoretical economic arguments, since after all this is an emotive issue for many US citizens and for both Hilary/Obama supporters and Donald Trump supporters alike. 

First and foremost, what is Obamacare? Some people say it is "universal healthcare", and others say that it is "compulsory insurance mandate", and some don't even know it is. 

Here are some basics. 

Basically, Obamacare is an informal term for a law in the USA intended to improve access to health insurance for US citizens. And the official name of the law is the Affordable Care Act or the Patient Protection and Affordable Care Act in full. Basically, it requires that all US citizens purchase a Private Health Care plan, get an exemption, or pay a tax penalty on their federal income taxes. US citizens who cannot afford health insurance will either qualify for Medicare, Medicaid, CHIP (the Children’s Health Insurance Programme) or get social assistance in tax credits or economic assistance with up-front costs through their state’s Health Insurance Exchanges. If health insurance is still not affordable after financial assistance, or if it costs more than 8% of a family’s income for self-only coverage, an individual can be exempted from getting individual insurance.

And the Affordable Care Act does lots of important things, including offering US citizens a number of benefits, rights, and protections: for example, setting up an online Health Insurance Marketplace where Americans can purchase federally regulated and subsidised Health Insurance; expanding Medicaid to all US citizens in many states; improving Medicare for seniors and those with long-term disabilities; expanding employer coverage to millions of employees; and requiring most people to have coverage each month in order to get an exemption, or pay a fee. 

In my view, some of its provisions are simple common sense healthcare reforms. For example, in the past, there was no uniform system for showing benefits included in insurance plans, but under the Act, a simple, standardised document makes comparing insurance options easy. Reducing information asymmetry reduces market failure - a commonsense economic argument. And a common sense one too. I think there can be little serious debate against some of these clearly useful healthcare reforms. 

Some interesting provisions are that, among other provisions, the law eliminates lifetime and unreasonable annual limits on benefits completely by 2014; prevents individuals from being dropped from coverage for any reason, aside from fraud, which means that insurers are stopped from dropping patients when the cost of care gets too great; and provides assistance for those who are uninsured because of a pre-existing condition. Under this law, no one can be charged more or dropped from coverage due to having a pre-existing condition and cannot be charged more due to health status either. This wonderful idea only works when there is compulsory insurance, which is what Obamacare basically is. 

To return the question posed at the start - What's wrong with Obamacare? I think there's nothing wrong with Obamacare, from the perspective of those who are insured by it. (There are of course some problems with Obamacare, such as tax issues, which we can deal with later in a future discussion.)

In response, this is what Donald Trump has to say – most notably in what some have termed “a post truth world”, an age of misinformation, mistruths, rumours, and misrepresentation – “Obamacare collapses under its own weight if we don't repeal”. Any other points?

“One thing we have to do: Repeal and replace the disaster known as Obamacare. It's destroying our country. It's destroying our businesses. You take a look at the kind of numbers that that will cost us in the year '17, it is a disaster. It's probably going to die of its own weight. But Obamacare has to go. The premiums are going up 60 , 70 , 80 percent. Bad health care at the most expensive price. We have to repeal and replace Obamacare.”

Putting aside the questions of sanity and rationality, can Trump really do it? While rolling back Obamacare, as Donald Trump has promised to do in his first few days in the White House, could be accomplished easily, enacting the legislation necessary to replace the law while protecting millions of US citizens who depend on Obamacare may prove challenging. Such a major step to roll back benefits, a step unprecedented in modern US history, would destroy state healthcare markets in the US. 

The Republicans could roll back Obamacare… as they have done before. Using Senate rules that exempt some budget-related laws from filibuster, the Republicans have passed a bill before that eliminated hundreds of billions of dollars provided by the health law to expand Medicaid coverage for poor US citizens and subsidise health insurance for low and moderate income US citizens on marketplaces created by the law. The bill, which also scrapped the unpopular insurance mandate (which essentially penalises US citizens who do not have health insurance, because effectively the only way to pay for Obamacare is to ensure universal insurance), envisioned a phasing out of the current law, giving Republicans time to develop an alternative policy proposal.

The Republican plan would transform Medicaid, the government health programme for the poor, by eliminating federal rules that establish who should be covered, such as poor children and pregnant women, and which benefits should be offered, leaving those decisions to states. It should be pointed out that currently Medicaid and its related CHIP provide coverage to more than 70 million Americans. Another Republican approach may be that US citizens who don’t get coverage through an employer or through Medicare or Medicaid would qualify for a tax subsidy they could use to help offset the cost of a commercial insurance plan, similar to the system set up by the Affordable Care Act. Republicans argue these health plans would be more affordable than current plans available through Obamacare marketplaces because they would not be subject to as many federal regulations.

To conclude, while it looks like Donald Trump will get his way, we should think of this final point: before Obamacare was passed, an American citizen could be denied coverage or treatment because they had a pre-existing condition, be charged more because of their gender, or be dropped mid-treatment for making a simple mistake on his or her insurance application. Under Obamacare, all US citizens have access to a large number of unprecedented new benefits, rights, and protections. Think about losing that – and hopefully loss aversion will stop the US from repealing this law. 

JC Economics Essays. An economics blog with opinions. Special thanks to SS for his personal contribution to this economics blog. The opinions and views expressed are the author’s own views and are all made in his own private capacity. And his economic research came from articles written about Obamacare and the US healthcare system. Thank you for reading and cheers. 

What is the economic impact of Brexit on Asian economies?

This economics post explains and analyses the possible economic consequences of Brexit on Asian economies and was created through synthesising a few economics essays. 

On 23 June 2016, in a historical moment that will be a discussion topic that would stand the test of time, citizens of the United Kingdom (the UK) voted in a national referendum on their continued membership in the European Union (the EU), ultimately choosing to leave. 

This huge event is called “Brexit”. 

What is the economic impact of Brexit on Asian economies? 

Brexit has negatively impacted global financial markets, causing economic volatility and huge losses of trillions of dollars in equity value. 

Meanwhile, the UK pound has seen the largest drop by any major world currency in recent history, and its largest drop since 1985.

On the surface, the UK leaving the EU would not matter that much economically to Asia’s economies. 

Although the UK is prima facie the world’s fifth-largest economy (now that is not the case any more, apparently as an immediate economic impact of  Brexit, because it has been overtaken by France), the UK is not actually one of Asia’s biggest economic customers. 

Except for Cambodia, Vietnam, and Hong Kong, most exports from most economies in Asia to the UK are relatively small as a percentage of total economic output. 

For Singapore, a small and open economy located in Southeast Asia, the UK is a relatively small customer. Singapore’s exports to the UK totalled S$7 billion in 2015, out of S$530 billion in total exports. 

Quite simply put, in the immediate or short term, the economic impact has been rapid and direct so far. In the immediate term - it's the economic impact on markets and currencies that matter currently. 

But the real and longer term impact of a “Brexit” – for Asia and the rest of the world – is much bigger than just merely market or economic volatility. 

The real economic impact of Brexit would be more subtle than any immediate effect on trade or markets. 

It would represent an economic slowdown – and maybe the first steps of a economic reversal – of the globalisation that has defined markets in recent decades. 

There are many definitions of globalisation, but in this case, globalisation refers to the increasing integration and interdependence of the world’s economies arising from increased international trade and greater international mobility of factors of production like capital, labour, and enterprise across international borders. 

Asia has a lot to lose from this rollback of international trade or decline in economic globalisation. 

Many Asian countries rely heavily on international trade. 

For instance, Singapore’s international trade stands at 351 percent of its GDP, and it amounts to 439 percent of Hong Kong’s GDP. Growth in international trade has been slowing in recent years, and Brexit could slow trade and growth down further. 

For example, the UK takes fully three-quarters of Singapore's investments in the EU with big companies like Comfort DelGro and Frasers having an international presence in that country. The UK out of EU could lead to significant fall in Singapore's exports to the EU, and Singapore international businesses could suffer write-downs in economic value on their balance sheets.

If there is a rise in protectionist sentiment in the UK, this might spread to other countries as well. 

Protectionism refers to economic policies aimed at restricting international trade between countries, designed to protect domestic businesses and workers from international competition, while free international trade refers to the exchange of goods and services across international boundaries. 

Recently, other than just the UK government, many governments (and a famous US Presidential candidate from "across the pond") have been adopting or promoting protectionist measures in the belief that this would offset the impacts on their economies from international trade and globalisation.

China would likely have some major economic concerns. The EU is an even bigger destination for Chinese goods than the United States.

The EU is China’s largest trading partner, and as China enters an era of slower economic growth, the timing of the breakup of the European Union couldn’t be worse.

For China, the UK's decision to eventually extricate itself from the European Union’s common market will be a disappointing move. Chinese Premier Li Keqiang has taken a particular economic interest in the UK, reciprocated in recent years by Chancellor of the Exchequer George Osborne. Last fall, London became the first international financial hub to issue renminbi-denominated debt after Xi Jinping’s visit there. Brexit will be an economic setback for the ongoing internationalization of renminbi as London’s international relevance as a global financial hub is diminished as a result of Brexit. 

Brexit could also challenge some of the international trade deals focused on further opening the rest of the world to ASEAN economies. The Trans Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP), for example, are aimed at cutting international tariff barriers and promoting international trade with some of the world’s largest economies. 

Brexit could also mark an economic setback for China’s long-term economic goal of a free trade agreement with the EU. London had emerged as one of the most eager advocates for a China-EU FTA. 

With the UK now exiting the economic bloc, none of the other major EU states seem keen to ink an economic deal with Beijing. An FTA with the UK alone might be politically simpler to negotiate, but will not have nearly the same economic benefits for China. 

Remember that a Free Trade Area (FTA) refers to a trade bloc where more than two countries agree to engage in free trade with one another while maintaining members’ own individual levels of external barriers against non-member nations.

In the longer term, no one really knows what the economic impact will be - but it certainly will not be a walk in the park for UK or Asia, or Singapore, and only time will tell if Brexit really was a good economic decision ... 

or if the economic experts were right in saying that this was one of the worst economic decisions of all time. 

JC Economics Essays is an economics website which has a wide and useful range of economics resources and free lesson materials for students' own use, such as economics essays at the A level standard (H1, H2, H3, and A level standards), and undergraduate and masters economics essays. The main focus is on A level economics essays, but GCE, GCSE, AS, AO, and H1/2/3 economics essays are in this site too. In particular, JC Economics Essays has model A level economics essays and responses that students could use as an easy and relevant reference for learning, as well as relevant tips and techniques for writing strong and well-argued essays. A whole range of useful case study tips, essay writing techniques, and relevant opinion pieces on a relevant range of economic topics will help you learn economics effectively. 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!

To what extent does "traditional" or "standard" economic theory explain Singapore's FTAs? [15]

A Free Trade Area (FTA) refers to a trade bloc where more than two countries agree to engage in free trade with one another while maintaining members’ own individual levels of external barriers against non-member nations; for instance, the North American Free Trade Area (NAFTA) and the ASEAN Free Trade Area (AFTA). This economics paper discusses the extent to which economic theory, in particular trade creation and trade diversion, explains Singapore’s FTAs, while arguing that non-traditional and other non-economic considerations also play a role in explaining Singapore’s FTAs. 

First, how do the standard economic theories of trade creation and trade diversion explain FTAs in theory? Trade creation arises when entry into a FTA causes the production of a good to be shifted from a less efficient to a more efficient producer, while trade diversion arises when entry into a FTA causes the production of a good to be shifted from a more efficient to a less efficient producer. A country joins a FTA if it expects to benefit from overall trade creation; economic theory suggests that a country chooses whether or not to enter a FTA based on whether trade creation outweighs trade diversion. When countries join a FTA, the country gains from a rise in export demand and export prices, resulting in an improvement in the terms of trade. When there is trade creation, the country benefits from importing a good at a cost that is lower that what it could produce domestically. Hence when there is trade creation, the country benefits from joining a FTA. Conversely, when there is trade diversion, the country ends up paying more for its imports as it is now importing from a relatively more inefficient foreign producer and this worsens its terms of trade. If the rise in import prices exceed the rise in export prices, the terms of trade worsens, hence the country should not join the FTA. 

However, despite standard economic analysis, since Singapore has no initial trade barriers for almost all goods and services, it experiences neither trade creation nor trade diversion, so Singapore’s decision to join an FTA must be based on other considerations other than trade creation and trade diversion, such as gaining new export markets, creating more transhipment business, attracting FDI, enhancing bilateral relations with its neighbours, and improving cooperation on security issues. 

This economics paper now discusses other possible reasons that could suggest why countries choose whether or not to enter an FTA with Singapore. The first alternative reason could be that the signing of an FTA with Singapore enables the country’s exports to bypass trade barriers and gain access to a third party market that also has an FTA with Singapore. For example, China may get to enjoy tariff-free access (or at least tariff reductions) to the USA if they were to export their goods through Singapore rather than exporting their goods directly to the USA. 

Secondly, Singapore may also be offering some other benefits to a FTA partner. For example, Singapore could offer to transfer knowledge and technology to the other country, and this would result in the signing of FTAs despite the fact that other countries already know that Singapore has little or no trade barriers on their goods. 

Thirdly, extradition treaties and cooperation in security issues could also be part of the agreement. For instance, countries could sign FTAs in Singapore in order to ensure that wealthy tax evaders do not escape the law in their country by bringing their wealth to Singapore, and these tax evaders can be extradited back home to face trial in their home countries. Hence, political considerations also come into play alongside economic ones.

Fourth, and arguably most importantly, by negotiating a vast network of FTAs, Singapore enhances its position as a shipping hub because Singapore’s transhipment is an important aspect of the Singapore economy. Transhipment refers to the shipping of goods to an intermediate destination, on their way to their final destination, and this is a major aspect of Singapore’s maritime trade. Transhipment increases Singapore’s earnings from port and shipping related services as more ships stop at Singapore to offload the goods that are meant for re-export. The FTAs also draw in foreign investments because foreign firms need to set up processing operations here in order to meet the requirements stipulated by the Rules of Origin. Hence, transhipment operations could explain why Singapore has signed so many FTAs.

In conclusion, trade creation and trade diversion go a small way to explain why Singapore enters FTAs, and it can be argued that non-economic reasons go a longer way in explaining why Singapore enters FTAs with other countries, because Singapore’s lack of tariffs does not permit her to have trade creation, which suggests that other considerations are more important. Thus, standard economic theory based on trade creation and diversion only explains at best a small part of Singapore's FTA networks, whereas practical real world considerations like third parties bypassing trade barriers, technological transfer, political considerations, and transhipment explain why Singapore signs FTAs to a very large extent. In my view, the most important explanation for Singapore’s FTAs is the rise of globalisation, which has led to the need for third parties to bypass trade barriers, increased international mobility, and led to the rise of the importance of non-economic, political reasons for such agreements.

JC Economics Essays - H2 Economics essay on trade creation and trade diversion, and Singapore's Free Trade Agreements. This economics essay was crafted by two co-authors to explain the economics ideas and concepts of trade creation and trade diversion for an economics tutorial on economic integration (a topic closely related to international trade and globalisation). Remember to reflect on the essay as you read it. Focus on the evaluative conclusion for a moment. What is good about the evaluation, and what can be made even better? What would be a better way to craft the evaluative conclusion? Thank you for reading and cheers! 

Discuss whether the use of protectionist policies can ever be justified during a period of worldwide recession or whether governments should follow Chinese Premier Wen Jiabao’s advice to adopt a policy of greater free trade. [N2013 25]

Protectionism refers to the imposition of economic policies aimed at restricting trade between countries, designed to protect domestic businesses and workers from foreign competition, while free trade refers to the exchange of goods and services across international boundaries. Recently, governments have been adopting protectionist measures in the belief that this would offset the impacts on their economies from the worldwide recession. Fundamentally, the question is: during a period of worldwide recession, can protectionism be justified, or should governments adopt a policy of free trade, to address the macroeconomic problems of rising unemployment and lack of economic growth? This economics paper argues that, while some would argue that protectionist policies can be justified during a worldwide recession, governments should still follow Premier Wen’s economic advice to pursue a policy of greater international free trade.  

There are many methods used by various countries to protect their economies, but fundamentally these methods either discourage imports or encourage a country’s own exports.  For example, a tariff is a tax levied on imports, where a specific tariff is levied as a fixed charge per unit while an ad valorem tariff is levied as a fraction of the value of a unit. A tariff raises import prices, hence causing consumers to switch from imports to locally produced goods. An import quota is a direct restriction on the quantity of imports. The quota is typically enforced by issuing licenses to a group of individuals or firms. The quota directly reduces the availability of imports, hence pushing up prices of imported goods. Per unit output subsidies can be given to help local producers lower their production costs, which enable them to better compete with more efficient foreign producers. These methods, among others, arguably can protect the domestic economy during a period of recession. 

On the one hand, it can be strongly argued that protectionism can be justified on grounds of employment protection. Protectionism arguably helps the economy against both demand-deficient and structural unemployment. First, during a period of recession, protection may be used to reduce demand-deficient unemployment, where there is insufficient AD to fully utilise the unemployed resources in the economy, because imports are discouraged while exports are encouraged, which theoretically boosts AD, shifting it to the right. Furthermore, trade restrictions are sometimes imposed during an economic downturn to reduce cyclical unemployment. For example, under trade union pressure, governments may decide to curb imports that are in direct competition with domestically-produced goods in order to preserve the jobs in these industries. 

Second, protectionism can also be given to declining sunset industries to slow down their contraction, thus allowing more time for labour to be retrained and re-channelled to other growing sunrise industries. This reduces the degree of structural unemployment, which can be defined as the unemployment arising from the mismatch of skills in the industry as the structure of the economy changes. Many developing countries, especially China, and developed economies, such as Singapore, face structural unemployment as the production structure of the economy as well as demand conditions change and mature. Hence, protectionism can be justified through employment protection. 

However, there are many limitations of protectionism in addressing a situation of worldwide recession. First, protectionism creates a “beggar-thy-neighbour” effect whereby the exports, output, and employment of its trading partners are reduced, which in turn curbs the exports, output, and employment of the country initiating the protectionist measures. Secondly, with protectionism, trading partners are likely to “retaliate” and impose their own import restrictions, again further causing the initiating country’s exports, output, and employment to subsequently suffer even more. For instance, China may face countermeasures if it were to implement protectionist measures on the USA, which would not benefit both countries. 

Furthermore, although the initial intention may only be to offer temporary protection to help smoothen the adjustment and reallocation of resources, protection is politically difficult to remove, once it has been put in place. Vested interests are created and the industries concerned will inevitably resist any removal of trade barriers. In the long run, the country might end up having resources being locked in inefficient ‘sunset’ industries, hence depriving its expanding ‘sunrise’ industries of precious economic resources. For instance, this occurred in Latin America after WWII under the system of Import Substitution Industrialisation, as contrasted with the success of the East Asian countries which pursued Export Oriented Industrialisation. All these limitations reduce the usefulness of protectionism in addressing a situation of worldwide recession. 

On the other hand, other than the limitations of protectionism, international trade might in fact help a country tide a recession. First, developing economies sometimes lack sufficient domestic demand to enable full utilisation of resources. Trade allows such countries to overcome domestic demand constraints by giving them access to larger world markets. With additional demand coming from exports, greater utilisation of otherwise unemployed resources raises output, income, and employment. For instance, Singapore, a small and open economy, depends upon trade as an engine of growth for her national income and employment. Furthermore, rising export demand further stimulates investments, causing the AS to shift outwards faster. These investments, for example in infrastructure facilities like ports and storage warehouses and export industries, in fact allowed Singapore to expand its export sector. Seen from these perspectives, trade arguably acts as an engine of growth as it enables both AD and AS to increase faster than under autarky, and therefore possibly contributes to a country’s long run sustained economic growth.

Second, accompanying the development of merchandise trade would be the development of services like shipping and airfreight, air travel, banking and finance, and tourism. With time, a developing economy experiences structural change and becomes less dependent on merchandise trade and manufacturing, instead diversifying into services, thus becoming more like a developed economy. For instance, countries like Singapore have developed from a third world to a first world country by experiencing structural change from international trade. Therefore, governments like China should also pursue a policy of free trade to benefit from economic diversification, maturation, and structural change, which could arguably ameliorate the impacts of recession. 

In conclusion, while protectionism can be politically expedient and may even ameliorate unemployment – both demand-deficient and structural unemployment – in the short run, it should not be used as an active policy to address recessions. This is because of the limitations of protectionism as well as the foregone benefits of international trade as an engine of growth that can also provide fundamental structural change to the economy, which would put it in good stead when the world economy recovers. Alternatively, large economies like China could also encourage local, domestic demand through the use of expansionary monetary and fiscal policies, and that could drive their economic growth during periods of recession, because they have the option to depend on domestic demand, whereas smaller and more open economies like Singapore would have to depend on international trade and globalisation to drive their economies. Thus, in the final analysis, the policy options taken to address the problems really depend on the countries involved, but to a large extent international trade is a much better policy than protectionism.

JC Economics Essays: This economics essay is a sample answer to an adapted economics question from the H2 Economics A Level paper, November 2013. The response was co-written by two economics lecturers for a tutorial class, in order to teach about protectionism and international trade for the A levels examination. However, this particular economics essay is only one possible response to the question - what could be done differently? Furthermore, how would you improve upon this answer, what real world examples could you use to buttress your arguments, and what can you do to improve this essay? Remember to think through the answers and how you can make economics arguments better. Thanks for reading and cheers. 

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. 

Without the important international institution of the WTO (World Trade Organisation), the extent of globalisation that we see all around us would have been very much different than from what it is today. Discuss.

What is the World Trade Organisation (WTO)? The WTO is an international organization dealing with globalization and rules on trade between nations. Its main economic function is to ensure that trade flows as smoothly, predictably and freely as possible. What does economic globalization mean, in the first case? Globalization refers to the increasing integration and interdependence of the world’s economies arising from not only increasing trade but also from greater mobility of factors of economic production like capital, labour and enterprise. The WTO is an international organization that aims to facilitate global trade and to promote investment liberalization. One view is that without the aid of the WTO, international trade will be more distant and unlikely. Although there are other economic causes of globalization, the WTO plays a very important role to promote globalization. This economics paper discusses the WTO and how it has impacted the spread and extent of globalization. 

First, what does the WTO do? The WTO is run collaboratively by its member countries and all major decisions are made collectively by the countries respective representative, either by ministers who usually meet at least once every two years or by their delegates who meet regularly in Geneva. The functions of WTO include administering WTO trade agreements, being an international forum for trade negotiations, handling international trade disputes, monitoring national trade policies, providing technical assistance and training to developing countries, and cooperating with other international organizations. An important fact of the WTO are the WTO agreements. These are industry or issue-specific agreements that are collectively decided by its member countries with the aim of reducing international trade barriers and limiting anti-competitive trade practices. From this perspective, globalization is well-promoted by the WTO through moving away from protectionism. This has resulted in the easing of artificial barriers to international trade and this has led to increases in factor mobility. There are great benefits generated from international trade among countries and success of those export-oriented economies like Singapore, Hong Kong, and South Korea is irrefutable evidence of the benefits of international trade in facilitating economic growth. More and more developing countries in the world have actively tried to open their economies to trade and foreign direct investment, thus setting the stage for globalization to take place. The WTO is a well-placed and well-positioned organization which can help these developing countries to join in free international trade and enjoy the benefits of globalization.

Although WTO aims to promote international free trade, which according to standard economic theory is mutually beneficial for the countries involved in international trade, studies on how successful the WTO has actually been in achieving these benefits for its member countries have shown mixed results. According to research, studies by the General Agreement on Tariffs and Trade (GATT, the forerunner and predecessor of WTO) and Organisation of Economic Cooperation and Development (OECD) both estimate a gain to the international world economy from the WTO as more than $200 billion annually once its agreements are fully in force and would raise global real incomes by about 1%. Some international trade economists even argue that these estimates are much too low, as they do not account for the dynamic effects of the agreements.

However, on the other hand, economic studies done by the World Bank (using 1997-1998 economic data) reported that effective tariffs faced by low-income groups are still much higher than those faced by high-income economic groups in that economic study. Those living on less than US$1 a day and those living on between US$1 and US$2 per day faced effective tariffs rate of well over 14% while those from higher income groups (higher than US$2 per day) faced tariffs at only just over 6% on average. This is a fairly strong criticism of WTO agreements because the economic outcome seems to have favoured the richer countries at the expense of the poorer ones. Therefore, the WTO is not always economically good. It may sometimes benefit the developed and richer countries more which might cause certain countries to refuse to join WTO. Without WTO, those developing countries might cooperate more actively with other countries to promote economic growth. 

The other main reason explaining the trend towards globalization is that advances in technology has resulted in significant improvements in international transportation and international telecommunications, thus enabling goods and factors of economic production to flow more easily across international boundaries.

In the area of international transportation, the proliferation of international commercial air travel arising from improving aircraft technology has enabled people to fly more cheaply and to move to places at a moment's notice. This has made it easier and cheaper for international business travel and also for people to relocate to work in other countries. Foreign direct investment is thus facilitated because businesses find it increasingly easier to break their supply chain up to locate different parts of their operations in different countries. For example, instead having all the stages of production being located in one country, a firm can now station its headquarters and research and development operations in a developed country where capital, technology and skills are easily available, but locate its manufacturing and assembly facilities in a developing country where land and labour are cheaper.

Another major development in international transportation is the development of container shipping, which has greatly increased the efficiency in which goods and raw materials can be transported. Compared to non-container shipping, where goods have to be individually loaded and unloaded from a ship’s cargo holding area, containers (with the goods already stored in them) can easily stacked and moved from ship to ship or from a ship to container trucks using large container cranes. Containers can also be individually refrigerated, which significantly increase the ease in which perishable products can be shipped. 

In the area of international telecommunications, the greatest economic impact undoubtedly came from the development of the Internet, which has enabled massive amounts of information transferred quickly, cheaply and securely over long distances internationally. New modes of international communication such as email and video-conferencing have allowed businesses to effectively coordinate their operations across different countries. This has enabled international firms to break their economic supply chain into parts and locate different parts of their operations in different countries, hence facilitating the flow of foreign direct investments between countries. 

Hence, it can be argued that globalization is the inevitable outcome of the advance in technology, especially in improvements in transportation and telecommunications, rather than due to the WTO's efforts per se. International integration and interdependence among different countries are more and more crucial to countries’ economic growth and development in this world today. Without the aid of WTO, economic globalization will still be promoted by world economies themselves. However, WTO provides a great forum for countries to build economic and trade relationships with more and more countries. Maybe, just perhaps, the pace of liberalization via WTO is very slow because consensus is difficult with so many countries involved. Regional trade groupings were thus formed as an alternative way to integrate markets. Although forming bilateral free trade agreement and the formation of a trade bloc can be seen as being second best compared to global multilateral of free trade, members can at least enjoy ‘freer’ trade given that complete global free trade seems distant and unlikely. Hence, without the WTO, the extent of globalisation will still be promoted as people expected. There may be no major difference when globalization is without WTO, but multilateral at free trade may be reduced as a result.

JC Economics Essays - 'H2, H3 standards for an economics essay' - tutor's comments: Clear, interesting, and well-written, this economics paper will achieve a very high grade for the range of ideas, arguments, and examples presented on the institution of the WTO. Logical, reasonable, and well targeted to answering the requirements of the economics question, and with very solid, good background knowledge of the WTO and relevant and economic theories. Empirical economic data is present, to a relevant and large extent, to buttress arguments, advance and develop the paragraphs presented, and thus overall this is an excellent Economics paper. 

International Trade Essay: Should America utilise protectionist measures to manage the costs of international free trade?

A globalized world economy opening up markets for US exports refers to international trade which is defined as the exchange of goods and services across international boundaries. This brings about good benefits to the US economy such as higher consumption possibilities and reaping economies of scale. However, US companies and workers also face unfair foreign competition in the form of dumping and the cheap labour argument. 

Increased exports have led to the US economy gaining benefits. One such benefit is higher consumption possibilities. It allows USA to specialize and export goods in which it has a comparative advantage in and import goods in which it has a comparative disadvantage in, whereby comparative advantage refers to the situation where a country has a lower opportunity cost of producing a good as compared to another country. USA is then able to increase the overall consumption of all goods and services as compared to an autarky situation which refers to a situation of no trade but self-sufficiency instead. Hence, increased exports allow USA to enjoy higher consumption possibilities. 

Moreover, economies of scale can be reaped. With greater export demand, US firms are able to expand their capacity, enabling them to reap economies of scale which causes long run average cost to fall in the long run. As firms pass on some of these cost savings to consumers, material living standards increase as consumers get to consumer more goods at lower prices. Lower prices for domestic consumers and higher profits for domestic producers benefits the US economy.

On the other hand, American companies and workforce face 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. In such situations, protectionism in the form of import tariffs is justified to be imposed in order to raise import prices so that they are more in line with prices of locally produced goods. However, lower prices could be due to lower demand or lower distribution costs, which indicates that claims of dumping are most of the time merely a disguise to elicit protection for inefficient domestic producer.

In the cheap labour argument, labour unions in developed economies such as America, commonly argue that imports from developing countries are cheap because they artificially keep costs down by exploiting their workers and hence lobby for restrictions against the imports from these developing countries. The fact that being labour abundant, developing countries have a comparative advantage in producing labour intensive goods, resulting in them having cheaper imports, is ignored. In this case, it is not justifiable for America to impose protectionism in the affected industries. 

Conversely, there are costs of increased exports and not simply just benefits. Terms of trade is defined as the ratio of export prices to import prices. With increased exports, the decrease in export prices relative to import prices would result in the revenue earned from each unit of exports to decrease, causing USA to be able to buy fewer imports than before. In addition, if USA’s inflation is lower than its trading partners, its exports become relatively cheaper than its imports especially with an increase in exports, worsening USA’s terms of trade.

Trade also brings about benefits of competition from imports which is in the case of healthy competition and not an unfair one. Competition from foreign imports forces US producers to innovate and cut costs and improve product quality. Local US consumers thus enjoy lower prices and higher product quality from both imports and domestically produced goods. Besides enabling these US companies to be more productively efficient, market power is also kept in check, reducing the extent of monopoly power in economy and ensures that domestic products which are US exports are comparable to foreign imports. Allocative efficiency is increased as well. 

Protectionism refers to the act of imposing economic policies aimed at restricting trade between countries, designed primarily to protect the domestic producers and workers from foreign competition. While imposing protection in the affected US industries might seem ideal, there are costs involved.

Firstly, USA would suffer from lower consumption possibilities. This is due to the fact that protectionism inhibits specialization according to comparative advantage. Protecting domestic firms against imports causes America to produce more of a good in which it has a comparative disadvantage in. 

[Insert diagram on impact of protectionism on consumption possibilities]

With protectionism of its domestic sector from imports, USA would produce some Good X and specialize only partially than completely in Good Y. The consumption possibilities curve thus shift down. USA then consumes at a point that is worse than the free trade outcome. Hence, protectionism limits the extent of specialization, reducing the gains from specialization and trade according to comparative advantage. 

Secondly, protectionism leads to greater allocative inefficiency as it raises the market power of US firms. They also become productively inefficient as the incentive to minimize costs is generally reduced with the monopoly profits. 

Thirdly, engaging in protectionism by America companies creates a ‘beggar thy neighbour’ effect and retaliation from trading partners. Falling import expenditure reduces the export earnings of USA’s trading partners which consequently suffer from reduced output and income, curbing the exports, output and employment of America companies. These trading partners may retaliate and impose their own import restrictions, causing USA’s exports, output and employment to suffer subsequently.

Lastly, it is politically difficult to remove protectionism once it is given. Vested interests are created and the beneficiaries, which in this case, are USA’s affected industries, would inevitably lobby against removal of protectionism. In the long run, there would be over-allocation of resources to declining sectors at the expense of expanding sectors. 

In conclusion, protectionism for the affected American industries is justifiable only in the short run to manage the cost of free trade. However, it is not justified in the long run as more consequences would have to be dealt with, suggesting that supply-side policies might be a better option in dealing with the problem instead.

JC Economics Essays (on globalisation, protectionism, international trade, and the US Economy): Economics tutor's comments - While this economics essay is generally well written, wide ranging, and covers a lot of good, solid, theoretical economic concepts and ideas, it could be further developed by use of relevant real world examples that are specific and targeted to the requirements of the question. Remember that relevant, real world, realistic, and specific examples can get students a higher grade in writing economics essays. Examiners and tutors love it when students can apply broad theories to specific contexts, with real world examples. What can you learn of the art writing from this economics paper? (Also, what can you learn about what not to write in an economics paper from this essay, in a similar vein? Think about this "counterfactual question".) How could you have tackled the question differently, or what approaches could have been taken to address this question? What other economics diagrams, concepts, or theoretical economics models could have been used, and what else could have been to develop this response further? Reflection and the reading of many different economics answers should build up a mental model which would be useful in answering economics essay questions.Thanks for reading, and cheers. Special thanks to NT for her kind and interesting contribution. 

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!

Discuss the extent to which globalisation has helped Singapore achieve its macroeconomic objectives. [25]

Discuss the extent to which globalisation has helped Singapore achieve its macroeconomic objectives. [25]

This paper discusses the extent to which globalisation has helped Singapore achieve its macroeconomic objectives. Globalisation refers to the integration of economies through greater flows of trade, capital, labour, and technology across international borders. Singapore’s four main macroeconomic objectives are high and stable economic growth, a low inflation rate, low unemployment, and a favourable balance of payments (BOP). To a large extent, globalisation has helped Singapore achieve its macroeconomic objectives; however, globalisation brings with it downsides which have to be properly mitigated.

Economic Growth

First, globalisation has helped Singapore attain actual economic growth through increased international trade. Actual growth means an actual increase in real Gross Domestic Product (GDP), a shift in Aggregate Demand (AD) to the right. An increase in net exports (X-M) to the rest of the world raises AD, which in turn leads to a more than proportionate increase in GDP via the multiplier effect. Singapore has relied heavily on exports for economic growth. In fact, net exports make up the largest component of Singapore’s GDP. Increasing actual growth also helps Singapore achieve full employment, or alternatively low unemployment.

Second, large amounts of foreign direct investment (FDI) have helped Singapore achieve potential economic growth. Potential growth is the increase in the economy’s potential capability to produce output. Transfers of physical capital, human capital, and technology from Multi-National Corporations (MNCs) have helped increase the Singapore economy’s productive capacity, and thus shifts Singapore’s long-run Aggregate Supply (LRAS) curve to the right, increasing her potential economic growth.

Third, Singapore has also benefited from increased labour flows across international borders. Importing foreign labour leads to an increase in Singapore’s labour which raises the economy’s productive capacity. This is a relatively efficient and cost-effective way of increasing potential growth.

Low Inflation

Fourth, globalisation has helped Singapore keep inflation low. Inflation is defined as a persistent and sustained increase in the general price level, and it is generally seen as a problem. By importing raw materials from other countries at low prices, Singapore has been able to lower her costs of production which translates to lower prices for final products. Importing necessities and other finished products helps keep the general price level down. Also, globalisation increases the Singapore economy’s productive capacity which lowers prices. This is reflected by a rightward shift of the Long Run Aggregate Supply (LRAS) curve, which increases Singapore’s productive capacity in the long run, and concomitantly lowers prices and prevents cost-push inflation.

Low Unemployment

Fifth, globalisation helps to keep Singapore’s unemployment low. Increased export levels shifts AD to the right which in turn leads to higher equilibrium national output. This means that actual growth occurs, which shifts AD towards the full employment level, which lowers unemployment.

BOP

Finally, Singapore is able to have a positive net-export position by importing cheaper raw materials from abroad and exporting high value-added products. For example, Singapore imports crude oil from abroad, refines the oil, and then exports it to different countries. Because the value of Singapore’s exports exceeds the value of her imports, she has a current account surplus, which could translate into a BOP surplus, assuming the deficit in the financial or current accounts are not huge.

Downsides of Globalisation

Yet, despite all its apparent benefits, globalisation has some downsides which could possibly derail Singapore’s macroeconomic aims.

First, Singapore’s dependence on exports makes her vulnerable to negative economic conditions in other countries. If one of Singapore’s trading partners were to experience a recession, demand for her exports would fall. This reduces AD which leads to lower equilibrium national output. Thus, the Singapore economy is susceptible to demand shocks. For example, Singapore’s GDP decreased during the financial crisis of 2007/2008. Thus, while globalisation might confer growth, it also means that same growth could potentially be more volatile.

Second, while globalisation gives Singapore a bigger market for her exports, it also means that she could face more competition. Developing countries, like China, are catching up quickly. Singapore has already lost her comparative advantage in low- to medium-end manufacturing to rapidly industrialising countries. If exports decrease due to competition from low-cost countries, it will result in a fall in AD, which would lead to a drop in output. Over the years, Singapore has had to move up to higher value-added goods and services like biomedical or financial services in order to remain competitive.

Third, increases in Singapore’s productive capacity brought about by globalisation might not be permanent because she is highly reliant on MNCs which are by nature internationally mobile. They could shift operations to a lower-cost location, taking capital with them. There is also no guarantee that Singapore’s “foreign talent” will stay in the country for the long term. Furthermore, importing foreigners to increase Singapore’s labour is also unsustainable in the long term given Singapore’s small land size because the influx of foreigners, perceived to be competing with Singaporeans for jobs and space, has become a major source of political and social discontentment and political acceptability is a major issue. Thus, potential growth might be illusory and fraught with many potential political perils.

Fourth, if the Singapore economy is already operating at or near full employment, then a rise in AD due to increased exports could possibly and realistically lead to demand-pull inflation. Singapore’s persistently low unemployment rate suggests that her economy is operating at close to full employment already. Thus, inflation could be a potential problem.

Fifth, importing raw materials from abroad also leaves Singapore vulnerable to cost-push inflation, more specially imported inflation. For example, Singapore was affected by the rise in oil prices due to political uprisings in the Middle East. Hence, Singapore is vulnerable to supply shocks.   

Sixth, should Singapore lose export competitiveness, (X-M) will become negative which would mean a current account deficit and a likely BOP deficit. Weak demand for exports would result in a depreciation of the Singapore dollar which would increase the price of imports. A depreciation of the Singapore dollar is likely to be inflationary given Singapore’s dependence on imported raw materials, and because it becomes more expensive to buy imported inputs which Singapore needs to produce goods. A deficit in the BOP also means a decline in the country’s foreign reserves which means that if Singapore has few foreign reserves, her currency will be vulnerable to speculative attacks.

Seventh, globalisation could also potentially be harmful for employment. Singapore’s heavy reliance on exports means that she will experience high cyclical unemployment should her major trading partners enter recessions. Perhaps, even more worrying is the increase in structural unemployment because lower-skilled workers could find their jobs being outsourced. Even if their work cannot be easily shifted abroad, they face competition from foreign workers willing to work longer hours and at lower wages. Concomitantly, there is a shortage of workers able to take on high-skilled jobs created by the global economy. As such, Singapore has had to import “foreign talent” to fill this gap. Therefore there are many negative implications for the labour market.

Conclusions

In the final analysis, despite many drawbacks, globalisation has been largely beneficial for Singapore. This is mainly due to the way in which the government has managed to tap into opportunities offered by a globalised world. For example, by providing necessary infrastructure, low tax rates, and a highly-skilled workforce, the government created conditions conducive for international trade and economic growth. At the same time, the government has been able to mitigate some of globalisation’s downsides through her economic policies. Singapore could and does use exchange rate policy. The Monetary Authority of Singapore (MAS) has the discretion to allow the Singapore dollar to appreciate in order to mitigate the inflationary effect of rising prices. Hence, to a large extent, globalisation has helped Singapore achieve its macroeconomic objectives; however, globalisation also brings with it several downsides which have to be properly managed.

JC Economics Essays: Tutor's Comments - This paper was modified and amended from one of the Economics essays written by my friend and classmate from NIE (National Institute of Education). After NIE, he became an Economics tutor at Raffles Institution (the JC section). [Special thanks and acknowledgements to my classmate's contribution.] This Economics essay is about globalisation and the impacts on Singapore's macroeconomic goals and aims; it also discussed policy options and methods to tackle impacts. There are many other globalisation and Singapore economy Economics questions and answers on my site here; do take your time here to explore and read, review, and study the other questions and answers. Compare and contrast them; think through them as well. Alright, here it is time to do the usual tutor's exercise once again: imagining that you are an Economics tutor, examining and marking this paper, what would you look out for? What would you consider a valid, reasonable, nuanced, and balanced argument or point? As an Economics tutor, how would you grade this paper, and why? Thinking through these processes will help you in writing better and better Economics essays, and improve your understanding and knowledge of this interesting and exciting subject. Thanks for reading and cheers!