Discuss whether fiscal policy is the most effective way for Singapore to sustain a successful economy, with low unemployment, low inflation, and economic growth. [25]

Discuss whether fiscal policy is the most effective way for Singapore to sustain a successful economy, with low unemployment, low inflation, and economic growth. [25]

Introduction

This paper discusses if fiscal policy is the most effective way for Singapore to sustain a successful economy, where the idea of a “successful economy” is based on attaining the macroeconomic goals of generally low unemployment, low inflation, and economic growth. The means of attaining each of these desirable macroeconomic objectives may sometimes be at odds with other macroeconomic goals because of trade-offs. The most effective way for Singapore to sustain a successful economy is not to depend on one single macroeconomic policy; in particular, due to Singapore’s small and open economy, fiscal policy would go only a little way to help Singapore attain her macroeconomic goals, and a combination of exchange rate policy and supply-side policies would work more effectively instead.

Fiscal Policy Can Be Effective

First and foremost, it can be argued that fiscal policy could theoretically achieve the macroeconomic goals of low unemployment, low inflation, and economic growth. First, low unemployment can be achieved through the use of expansionary fiscal policy. What does expansionary fiscal policy mean? It  means increasing government spending (G) or lowering taxes (T), in times of high unemployment or recession. The discretionary expenditure by the government, for instance on the military or on education, would raise aggregate demand (AD) and drive up employment, due to the multiplier effect, thus resulting in a higher level of employment. AD shifts to the right and causes unemployment to fall. What is unemployment? Unemployment is defined as the situation in which people who are willing and able to work are unable to find employment. Secondly, likewise, stable actual economic growth can attained the same way, because expansionary fiscal policy can ensure that growth is maintained during recessions. Actual growth can be thought of as an increase in real national output. These implications are reflected in the diagram below.

Likewise, fiscal policy can be used to reduce inflation by contracting AD in times of high inflation in order to reduce inflationary pressures and control prices. This is the reverse of expansionary fiscal policy; contractionary fiscal policy can reduce AD in times of inflation. Inflation is defined as a persistent and inordinate increase in the general price level, and if it is demand-pull, contractionary fiscal policy reduces AD accordingly.

Limitations of Fiscal Policy

On the other hand, the way fiscal policy works in reality is different from theory because policymakers may not know exactly where the full employment level is in reality, and time lags, recognition lags, and implementation lags are all real. All the theoretical effects of fiscal policy also assume that the economy has a sufficiently large multiplier for the injections by the government to make large impacts on national income and employment. It also presupposes that the government’s budget does not suffer from massive deficits, and that fiscal policy would not result in the “crowding out effect”, when the government drives up interest rates, negatively affecting the private sector, when it attempts to finance policies through borrowing.

However, more importantly, while the Singapore government’s finances is such that it can potentially deliver a fiscal stimulus without financial or political problems, the fact that Singapore’s national multiplier is small implies that this would not have a great impact on growth or employment. The high level of imports and high proportion of savings in Singapore means that the multiplier effect would be small. Furthermore, fiscal policy seems most effective in reducing cyclical unemployment, associated with falling AD during a recession, and does not go a long way in relieving structural or frictional unemployment; as for inflation fiscal policy helps reduce demand-pull inflation and does not go a long way in alleviating cost-push inflation. Even if fiscal policy could generate employment, it is only in the short run, and unemployment will eventually return if it was actually due to structural unemployment, the mismatch of skills and knowledge in an economy due to structural changes in the methods of production, and hence such reductions in unemployment and the concomitant growth would not be sustainable.

Exchange Rate Policy

In order to sustain a successful economy, arguably a combination of fiscal, monetary and supply-side policies is required instead. In particular, monetary policy – in Singapore’s context, an exchange rate policy – would be able to affect AD during short-term economic fluctuations. It should be noted that interest rates-based monetary policy cannot be applied in Singapore as a result of Singapore’s vulnerability to short-term capital flows and thus an exchange rate policy has to be adopted in Singapore. As Singapore is dependent on imports, low inflation can be sustained instead through a gradual appreciation of the currency, because the imports would look relatively cheap vis-à-vis other countries. However, it should be noted also that this would affect exports negatively, on the flip-side.

On the other hand, depreciation can be used to increase AD, by raising demand for Singapore’s exports, since short-term depreciations of the Singapore dollar could help to raise competitiveness of Singapore’s exports and thus drive growth and generate employment. However, it should again be noted that this would affect inflation, on the flip-side. Hence, trade-offs are inevitable, although exchange rate policy is clearly a viable alternative.

Supply-Side Policies

As for long-term economic growth and stability, supply-side policies are necessary to sustain potential growth. Education and retraining of workers has to be implemented in order to maintain flexibility of labour and allow Singapore to cope with structural changes.

Furthermore, in terms of reducing unemployment, job fairs and placement or matching agencies could also help reduce frictional unemployment. Low domestic inflation can be maintained in the long run through continuous improvements in productivity and the enhancement of cost-competitiveness. The productive capacity of the economy must grow continuously in order for increases in AD to translate into sustained, non-inflationary, real economic growth in Singapore's national output; this increase in LRAS can be encouraged through fiscal spending that has supply-side effects such as investments in infrastructure and education, which would both affect AD and LRAS, leading to economic growth both actual and potential.

Conclusions

In conclusion, the application of fiscal policy is not an effective way for Singapore to sustain a successful economy that achieves its macroeconomic aims, thanks primarily to the small and open nature of the Singapore economy that gives rise to a small multiplier resulting from the high level of leakages due to high savings from CPF and high import contents in inputs. This reduces the impact that fiscal policy can have on the economy because the famous Keynesian multiplier effect is mitigated. The current managed float exchange rate policy that Singapore adopts is more significant in achieving short-term demand-management objectives. In the long-run, the government would sustain a successful economy through a combination of both demand-management and supply-side policies that enhance the long-term productivity and productive capacity of the economy, thus providing potential growth, whilst driving AD through actual growth, which reduces unemployment and spearheads economic development. Hence, fiscal policy is clearly not the most effective way – an economic policy package is better. 

JC Economics Essays: Tutor's Comments - This Economics paper is very well written, full of Economics perspectives, theories, concepts, and arguments. It also has good content on the Singapore economy. It covers the relevant Economics materials required and has an excellent thesis- anti-thesis - synthesis approach, that uses relevant examples that are contextual, real life, and related to the question. The conclusion presented and argued is clear, relevant, and evaluative in nature - do remember the important keyword here is "evaluative". The usual Economics tutor's caveat applies, of course, that naturally to get the highest grades, students must always remember to add Economics diagrams that are well-labelled, properly and carefully explained, and relevant to the context and question. This Economics essay under examination conditions can definitely get the highest marks in an examination. As a friendly, useful tip, do think through this particular Economics paper and reflect on these educational comments presented. 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!

“Governments should focus primarily on a low and stable rate of inflation.” Discuss. [15]

(b) “Governments should focus primarily on a low and stable rate of inflation.” Discuss. [15]

This essay discusses the macroeconomic aims of governments. This essay argues that, while low inflation is an important macroeconomic aim, governments should also focus equally on other macroeconomic aims such as low unemployment, economic growth, and a stable balance of payments. There are a few types of policies that governments can use to achieve their aims. First, monetary policy is the manipulation of monetary variables such as money supply, interest rate and the exchange rate. Second, fiscal policy refers to the use of government spending and taxation to achieve macroeconomic objectives. However, other than such demand-side policies, governments can also use supply-side policies, which increase the quantity and quality of resources, and improving technology.

Targeting Inflation

First and foremost, clearly there are good reasons for governments to use demand-management or supply-side policies to tackle inflation. This is because a persistent and sustained increase in the general price level hurts fixed-income wage earners and retirees on pensions, as well as consumers of goods and services, who find that their incomes buy fewer goods and services. Inflation reduces the real value of their incomes. In addition, inflation makes it difficult for trading and exchanges within an economy, for instance due to menu costs – the costs of constantly updating prices. Furthermore, inflation makes it difficult for a country to engage in international trade. This is because cost-push inflation reduces the competitiveness of a country that depends on exports, for instance, Singapore, which might suffer from imported inflation. These culminate in a wider socio-political impact: for instance, the hyperinflation in Weimar Germany in 1923 led to socio-political unrest and the collapse of the Weimar government.

Targeting Unemployment

Yet, inflation is not the main goal or the only focus of government policies. Another important goal of government can be to increase employment, or lower unemployment. Unemployment refers to the situation where people able and willing to work are unable to find jobs, and can be structural, demand-deficient, frictional, or seasonal. Being unemployed causes financial hardships for citizens, therefore governments have to ensure that there is job creation for citizens. For example, during 2008-2010, in the depths of the financial crisis and economic recession, there was massive unemployment in many developed economies, especially in the West. Governments can also tackle structural, frictional, and seasonal unemployment by focusing on these problems rather than concentrating their efforts on inflation.

In fact, reducing inflation sometimes leads to increased unemployment. This is because if the inflation comes from demand pressures, policies that lower AD might inadvertently cause demand-deficient unemployment. In a similar vein, focusing on solving unemployment might lead to higher inflation. This is because of government failure – governments do not always know where the AD and AS curves of the economy are, and their actions suffer from time lags and delays, due to imperfect information. If governments use demand side policies such as Keynesian fiscal policy, and the economy is near the full employment level, then an overshooting AD might lead to inflation. Therefore, there is a trade-off between inflation and unemployment.

Targeting Economic Growth

Another goal of government can be to raise economic growth, which leads to a rise of the standards of living in a country, which will generally make citizens better off. Economic growth is measured by percentage increases in real Gross Domestic Product (GDP), which measures the production of an economy. Generally, a higher real GDP per capita means a higher standard of living for the people of that country. There are two aspects to growth: actual growth measures the rate of change in the volume of output produced within the country in a year, and increases mean increased employment, another of the government’s goals. Potential growth is the percentage annual increase in the economy’s capacity to produce. Economic growth can be increased via increasing aggregate demand and increasing aggregate supply. Thus, the government may introduce demand management policies, such as monetary and fiscal policy, as well as supply-side policies in order to aid actual and potential economic growth respectively. Supply-side policies generally lower inflation by shifting LRAS to the right, and therefore it would seem that there is no trade-off.

However, increasing actual economic growth sometimes results in more inflation, because the AD shifts rightwards, and there might be a trade-off to be made between economic growth and a low rate of inflation; higher rates of economic growth are generally accompanied by higher rates of inflation, ceteris paribus.

Targeting the BOP

Another possible macroeconomic aim of government is to maintain a balance of payments (BOP) surplus. Generally, some governments like Singapore run BOP surpluses for most years, where export values exceed import values. For example, Asian countries such as China have been running huge BOP surpluses, vis-à-vis their trading counterparts, mainly western countries; they have been selling more exports than imports they buy, and this provides a net inflow of capital into their countries rather than an outflow.

However, running a current account surplus might lead to demand-pull inflation because exports (X) exceed imports (M), if the economy is already near or at the full employment level. Therefore there is a trade-off decision to be made between a current account surplus and demand-pull inflation.

Conclusions

In conclusion, one disagrees with the statement posed. All the macroeconomic aims of government are important and the government has to maintain a balancing act, considering various trade-offs. Also, governments may have to tackle different problems at different time periods, and thus inflation should not be the primary focus. In the final analysis, governments should use a combination of demand-management and supply-side policies to manage society’s macroeconomic aims, and not merely focus primarily on inflation, because it is one problem among many.

JC Economics Essay - Tutor's Comments: This is the second part to a question on inflation. There are many relevant real life examples in this essay, and this "A" grade essay also tackles a wide range of macroeconomic aims and  policies, which makes it a balanced, sound, and well-written Economics paper. In addition, the conclusion is considered, evaluative, and generally quite interesting to read. Overall, it is very well done! However, the usual question applies: if you were an Economics tutor, what would you do to make this Economics paper better? How would you improve on it? To take a specific case: if you were going to edit or correct the conclusion, what better conclusion, or what alternative conclusion to this Economics essay could you come up with? Think, think, think; thanks for reading and cheers!

(a) Explain the main types of unemployment in Singapore. [10]

Singapore’s unemployment rate could surge to a 20-year high of 5 percent next year. This would be the highest level of unemployment since 1986.

Adapted from The Straits Times, February 2009 (adapted from an examination question)

(a) Explain the main types of unemployment in Singapore. [10]

Unemployment is commonly defined as the situation in which people who are willing and able to work are unable to find work at the prevailing wage rate, and there are a few main types of unemployment such as cyclical (sometimes called demand-deficient unemployment), structural, seasonal, and frictional unemployment. In Singapore, the three most common and main types are cyclical, structural, and frictional unemployment, given Singapore's context. This paper explains these three main types of unemployment. 

Cyclical Unemployment

Demand-deficient unemployment or cyclical unemployment is a major cause of unemployment in Singapore because Singapore has a large external sector and is largely dependent on external demand for economic growth. For instance, in the contract manufacturing of electronics, Singapore exports heavily to the rest of the world. If international demand for Singapore’s electronics exports falls, then firms producing those goods will face a lower demand. Hence, firms that face decreased demand for their goods and services might reduce the cost of production by reducing their output and employment.  Another way of looking at this same issue is - since Singapore is a small and open economy, heavily dependent upon exports, when exports fall, Singapore's AD will fall, and shift to the left, thus lowering national output and income, while increasing demand-deficient unemployment. 

Structural Unemployment

As a result of globalisation, there is a lot of restructuring in Singapore and in the process structural unemployment might result in Singapore. First, Singapore has changed from a labour intensive to capital intensive economy, and thus different skills are required. Workers who do not have the appropriate training and expertise to move into a different industry are laid off, thus contributing to unemployment. For instance, Singapore has recently moved into the biomedical and R&D (Research and Development) industries and thus workers who can only work in the lower end manufacturing industries might find themselves unemployed since mass production work can be outsourced to India and China.

Frictional Unemployment

Frictional unemployment happens because it takes time for people to find new jobs when they change jobs or look for suitable jobs. Job creation and destruction creates the need for people to look for jobs and for firms to look for employees, and as such there is a time lag. Also students who have finished studying and are looking for a job also tend to be frictionally unemployed.

Conclusions

In conclusion, on balance, the dominant cause of unemployment in Singapore is likely to be cyclical unemployment because the economy is dependent heavily on external markets and thus the effects of global recession would impact unemployment in Singapore heavily. With a global recession (especially during 2008-2010), a fall in global income results leading to lower purchasing power, with a fall in consumption and net exports assuming that demand for exports and important are both price elastic. The concomitant poor business sentiment would result in falling investment, and AD would fall further. Fewer goods and services are demanded and as a result firms would then retrench workers thus causing cyclical unemployment.

JC Economics Essays - Tutor's Commentary: This H2 Economics essay on Singapore's unemployment is very well written and addresses the economics question pertinently, and would get rather high marks. It is clearly written, direct, and answers the question posed. Always remember to answer what the question is asking for, and not what you imagine the question to be asking you. This tip can prove very valuable in examinations. Ask yourself a few questions: how can this economics essay be improved, and made even better? What would I have done differently or similarly? Thanks for reading, and cheers!

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

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

Economics Tutor's Note: This Economics A level examination question has been modified; it was attempted in 2009 by one of my MJC students. 

Globalisation refers to the rising volume of economic activities taking place across countries worldwide, which includes the exchange of goods and services through trade, capital through capital flows, labour as well as technology. These impacts are most often than not far reaching which means that the spatial extent to which these exchange occur is fairly wide and dense. This paper discusses whether Singapore is among the countries worldwide that have the most to gain from globalisation. 

Looking at Singapore’s economy, its nature is small and open – Singapore’s resources are scarce, therefore she depends heavily upon the trade of goods and services, and the international flow of labour and capital. Since the 1980s, Singapore has been faced with strong economic growth, low unemployment with some structural unemployment and generally low inflation rates accompanied by a healthy balance of payment surpluses. Such attributes allow Singapore to gain from globalization.

Firstly, Singapore gains from globalization due to its increase in the market reach as market size increases. With an increase in market size, exports will also increase as more goods are traded to more countries, leading to an increase in the net exports. Using the AD-AS analysis, with an increase in the net exports, the AD will increase because AD = C + I + G + (X-M). This will lead to actual growth, as AD shifts to the right.

Insert the AD-AS diagram. Think: how would it look like, and what lines, labels, and other details would you need to draw this? 

Therefore, as such, the increase in the AD from AD1 to AD2 results in economic growth through actual growth and also resulting in a decrease in unemployment rates. In addition, balance of payments improves, assuming that the Marshall-Lerner condition holds. However, due to Singapore’s small multiplier, because of her high savings rate due to the compulsory savings scheme leading to a high MPS (Central Provident Fund) and because of her lack of natural resources resulting in a high MPM, the increase in economic growth or national income may not be that significant and thus its gains are arguably small.

Via globalization, Singapore also gains as firms here can now find cheaper factors of production overseas, for example, China is set upon as a good premise for investments as it has comparative advantage in land, which is abundant and labour, which are cheap. This will therefore reduce the cost of production resulting in the savings achieved by the producers to pass on the savings to the consumers. In addition, firms can also import cheap foreign labour as well as import foreign machinery to boost the levels of factors of production in Singapore. The improvement in the quality and the quantity of factors of production allow the inflation to be kept at a low level as cost push inflation is prevented.

Cheaper production costs which results in cheaper domestic products improves Singapore’s export competitiveness and therefore encourages economic growth. Also the balance of payment position may also improve from globalization due to increased investments, which would likely boost the capital account. With foreign investment overseas, this could improve Singapore's current account. Furthermore, with globalization, investment levels in export-oriented industries could increase, attributed to an increase in the inflow of foreign direct investment. As such, both the quality and quantity of exports is affected. Quality is improved due to more advanced technology, which increases the quality of capital together with more capable human resources which improves the quality of labour. This will increase Singapore's long run productive capacity, resulting in possible potential growth. This is especially important seeing that FDI has been the main engine of long run potential economic growth in Singapore.

However, while Singapore gains from globalization, it also experience some losses or costs. Firstly, Singapore can potentially face demand-pull inflation because of an increase in export numbers, heavily accentuated with over increase in investment and consumption levels. This leads to an increase in the levels of aggregate demand and demand pull inflation could occur shortly after. This will lead to detrimental effects in Singapore, for example, the housing prices could soar. With increases in capital inflows, there could be possible asset bubbles from loose monetary policies in other countries. Hence, inflation could be a possible issue. 

Besides demand pull inflation, Singapore might experience a loss in comparative advantage. Comparative advantage is when a country produces and trades a good which it produces at a lower opportunity cost than another country. This might be seen in the sunset industries where there is low value added-ness, and low skilled and low waged jobs. The closing down of these industries, together with labour immobility, causes structural unemployment, leading to income inequity.

Lastly, Singapore may also face volatile external shocks. If our main trading partners experiences recession, Singapore’s macroeconomic goals may be affected, particularly economic growth, employment and balance of payment as trade may decrease and result in decreased exports. Also, the imposing of protectionism and establishment of barriers of trade due to political turmoil may also result in the aforementioned effects. Hence, it can be seen that Singapore may be made more vulnerable to external events.  

Therefore, while Singapore gains from international trade and global factor mobility in the long run, there may be limitations. This highlights the need for policies to be established, such as Singapore's focus on the managed exchange rate and supply side policies in general, to come up with strategies so that Singapore can gain most from globalization while reducing losses. Singapore's use of exchange-rate focused monetary policy ameliorates inflation because of its gradual appreciation, whilst Singapore's supply side policies effectively address retraining and skills-upgrading to target structural unemployment and maintaining flexibility in the face of a volatile external environment. 

JC ECONOMICS ESSAYS - Economics Tutor's Comments: There are many aspects of this economics essay that can be improved on, but overall this is a very well written economics paper, interesting and well-thought out; overall, this is a really good effort in Economics! NOTE: This economics question is an amended version of the H2 A level Economics paper. This economics response written by my student was recently edited for flow and made more relevant to the 2014, 2015 context, as it was written in 2009. Grammatical and spelling errors were also changed, from the original submission. Most importantly, the initial original conclusion has been made and modified into the evaluative conclusion required for the highest evaluation grade in the current 2014 economics A level essay paper section. Thanks for reading and cheers. 

(a) What can the government do to reduce unemployment? (10)

(a) What can the government do to reduce unemployment? (10)

The unemployed refers to the people in the working population who are available for work and are actively looking for a job but cannot fid a job. The unemployment rate can be measured via this formula: Unemployment Rate (%) = {[unemployed ÷ (employed + unemployed)] × 100%}. The types of unemployment include demand-deficient unemployment, frictional unemployment, structural unemployment and seasonal unemployment. Thus, in order to reduce demand-deficient unemployment, demand management policies are implemented by the government. To reduce frictional, structural and seasonal unemployment, supply-side policies can be utilised by the government.

An expansionary monetary policy aids in increasing Aggregate Demand (AD) in order for the economy to reach full employment level. With reference to Figure 1, the economy initially operates at A, which is below full employment level Yf. The Central Bank can adopt an expansionary monetary policy. An increase in money supply will lead to a decrease in interest rates. Since, the cost of borrowing is now lower, households and firms will borrow more for consumption and investment. This increase in consumption (C) and investment (I) expenditure will cause an increase in aggregate demand from AE0 to Ae1 as shown in Figure 1 as AE=C+I+G+(X-M). This raises national output form OY1 to OYf and employment via the multiplier process. Hence, expansionary monetary policy brings the economy to full employment.An expansionary fiscal policy also aids in increasing Aggregate Demand (AD). With reference to Figure 2, the economy initially operates at A which is below the full employment level Yf. The government could adopt an expansionary fiscal policy. The government can increase government expenditure (G) or reduce taxes. An increase in G will cause an increase in aggregate demand directly since AD= C + I + G + (X-M). Alternatively, the government can also reduce taxes. For example, if the government can also reduce taxes. For example, if the government reduces corporate tax rates, investment (I) would increase and thus cause an increase in AD. The increase in AD as shown from AD0 to AD1 in Figure 2 will raise national output from Y0 to Yf. Hence, employment will also increase and the economy is at full employment.

However, expansionary monetary policy and fiscal policy may be ineffective due to certain reasons. Expansionary monetary policy may be ineffective if consumption (C) and investment (I) are interest elastic. In times of severe recession, even though interest rates are attractive, businessmen may not invest due to the gloomy business outlook. Inflation may also result in both cases when the increase in AD overshoots.

Supply-side policies that the government can adopt to reduce unemployment include reducing labour market rigidities as well as establishing pro-business policies. With reference to Figure 3, the economy initially operates at the level of Y0, which is at the full employment level. There is equilibrium unemployment. The supply-side policy aids to increase the labour market flexibility. The increase in aggregate supply from AS0 to AS1 as shown in Figure 3 will raise the national output from 0Y0 to 0Y1 without an increase in GPL. Hence, employment will also increase.

To solve search unemployment, better job information can be provided via mass media and job agencies. This would thus enable unemployment to decrease as the unemployed workers will be matched to jobs that suit their capabilities effectively. By also providing more education and opportunities to upgrade the skills of workers, it increases the employability of workers by equipping workers with the relevant skills to switch between jobs. Moreover, pro-business policies such as tax holidays for companies and having a good infrastructure would reduce unemployment as other firms would find the host country attractive and thus increases employment. However, supply-side policies are costly, have large time-lags and have unpredictable outcomes.

Thus, in conclusion, a combination of demand and supply-side policies can be used in order to reduce unemployment. Thus, when aggregate demand rises by too much, aggregate supply can also be increased to effectively curb the onset of inflation. And, also, when AS increases by too much, AD can also be increased to curb unemployment.

JC Economics Essays: Tutors/ Examiner's Comments: Good! Well-written paper that addresses the question requirements. 9/10