Macro

N2008
N08 Q4
Discuss the most appropriate policies that a government could adopt to encourage
both actual and potential economic growth. [25]

Introduction
Clarify actual and potential growth
Clarify the type of policies that a government can adopt to achieve the 2 goals
o Expansionary FP: increase G and/or reduce direct taxes
o Expansionary MP: increase Mss and/or reduce interest rates
o Exchange rate policy
o SS side policy
o Others

Body (remember to make use of the AD/AS framework)
Fiscal policy to boost actual growth
o Explain what is FP briefly
o Explain how FP achieves actual growth and illustrate the multiplier process
(assuming idle resources are present; the economy is not operating at Yf)
Advantage of using FP useful esp when consumers and firms are
reluctant to spend due to low business confidence / pessimism
o Evaluate the limitations of using FP to achieve actual growth
Size of k might be small explain why
Burden on the govts finances
Crowding out effects might be substantial if the govt needs to borrow
from the private sector to finance its G
Longer implementation time lag eg USs tedious parliamentary
debates compared to MP or ER policy
Ricardian equivalence (taxes)

Monetary policy to boost actual growth
o Explain what MP is briefly
o Explain how MP achieves actual growth
Advantages of using MP shortest implementation time lag
compared to FP and SS side policies
o Evaluate limitations of using MP to achieve actual growth
Confidence in the economy / expectations of business confidence
Interest elasticity of MEI

Exchange rate policy to boost actual growth
o Devalue the currency / bring about a depreciation of currency (sell currency)
consider the impact this will have on the components of AD (both X and M)
Impact on X as a component of AD
Improves price competitiveness of X (Px in terms of foreign
currency falls) Qdx increases TRx increases (TRx in
terms of domestic currency increases this is because Px in
dom currency did not change, but Qdx increases)
Impact on M as a component of AD
Since Pm in terms of domestic currency rises, consumers will
switch away from the dearer imported goods and services to
the relatively cheaper domestic substitute (substitution effect)
Assuming PEDm >1 more than proportionate fall in Qdm
TEm falls
Explain how this leads to a fall in rise in net X (TRx increases, TEm
falls) ceteris paribus, AD rises more than proportionate increase
in real NY
o Limitations of weakening the ER
Limit as to how much the ER is allowed to devalue / depreciate before
other countries retaliate
Possibility of imported inflation occurring especially if M are
significantly raw materials and intermediate goods and basic
necessities COP increases increase in GPL (higher cost push
inflation) rise in COL SOL falls especially for the unemployed
and those workers whose wages do not rise as fast as costs increases
(desirability issue)
Higher cost push inflation makes it more difficult to manage wage
expectations workers fight for higher wages in order to maintain
their SOL lead to wage price spiral price instability in the
economy in future.
Economic growth cannot be sustained in the longer run price
instability makes it difficult for businesses to calculate future profits
leads to fall in I (effectiveness issue)

Note
o No need to bring in ML condition if analysing impact of a devaluation /
depreciation on X and M as components of AD. AD is plotted against GPL
and real NY. Hence holding GPL constant, so long as there is a change in
Qdx and Qdm when ER changes, AD curve will shift
o MUST bring in ML condition when analysing the impact of change in ER on X
and M as components of BOT or Current Account or BOP because
values in the BOT/Current Account/BOP are measured in nominal terms.
o Dont worry if you are confused just stick to the lecture notes!

Supply side policies to boost potential growth
o Explain what is meant by SS side policy briefly
o Explain how SS side policy achieves potential growth
Advantages of using SS side to achieve potential growth Dampens
inflationary pressures (desirability issue)
o Evaluate the limitations of using SS side to achieve potential growth
Longest operational time lag compared to FP and MP
Requires funding
Results not guaranteed
Conclusion
To encourage both actual and potential growth, the govt has to use both DD side and
SS side policies
Evaluate the economic conditions that will allow FP to be more effective than MP
vice versa
If fiscal measures with SS side effects are employed Fp can not only promote
actual growth but also potential growth
Others


N08 Q5
Discuss the relative significance of the multiplier, the price elasticities of demand for
imports and exports and crowding out in influencing macroeconomic policy
decisions. [25]

Introduction
Clarify what is meant by macroeconmic policy decisions
o Decision on which policy to take to affect the macroeconomic goals of the
country
o Policies include:
FP
MP
ER policy
SS side policy
Relative effectiveness of these policies depend on the unique characteristics of the
different countries and the economic conditions they are experiencing
The relative significance of these concepts in influencing macroeconomic policy
decisions in a country can depend on the size and openness of the country
o Compare a small and open economy like Singapore vs a large economy like
the US

Body
Relevance of the multiplier
o Define, formula and explain the k process (diagram)
o Increase G increase AD real NY increases more than proportionately
via the k process actual growth increases
o Explain why the bigger the leakages the smaller the size of k and hence the
multiplier effect
This is because the bigger the leakages, the smaller the increase in
induced consumption spending at each subsequent stages fewer
rounds of induced consumption will result multiplier process ends
faster.
o Policy implications: FP
Effectiveness of FP in different types of economies
Small and open economies expected to have smaller size of k to
achieve the same desired increase in real NY, the govt will now have to
spend more strain on th govt budget not sustainable in the LR

Relevance of crowding out
o Clarify what is meant by crowding out effect
Crowding out (financial) effect may occur if the govt borrows to finance
the increase in G
According to the loanable funds framework, if the govt borrows to
increase G increase in DD for LF c.p, i/r increases autonomous C
(opp cost of current C increases) and I falls (MEI theory) dampens the
increase in AD due to increase in G dampens the increase in real NY
and economic growth
o Policy implications: FP
Effectiveness depends on whether the govt needs to borrow from the
private sector and the extent to which they compete with the private
sector for funds and the MEI
The greater the crowding out effect the greater the dampening effects on
increase in real NY which in turn limits effectiveness of FP
Eg: Singapore does not have to borrow from the private sector cos of our
substantial reserves, hence there is minimal financial crowding out
occurring. However, she faces crowding out in terms of physical
resources (resources and talent)
Govt competes with the private sector for land and labour (talent0
Could stifle local entrepreneurship

Relevance of PED for X and M
o State the ML condition correctly
Explain the effect of a change in the exchange rate on the price of X in
terms of foreign currencies and on the price of M in terms of domestic
currencies
o Policy implications: ER policy
According to ML condition, for a devaluation/depreciation to be
successful in improving the BOT and hence CA and BOP, the sum of
price elasticities of dd for X and M must be greater than 1, regardless
of their individual PED
For Singapore for eg, to improve her BOP, she can allow her ER to
depreciate. This was done in 2008 during the global financial crisis.
(Spores X is a significant component of her CA and in turn BOP)
However, ML condition may not hold in th SR due to the rigidity of
contracts and tastes and preferences tend not to change in the SR.

Evaluation
o There are other factors influencing macroeconomic policy decisions
Other than size of k and crowding out effects influencing the use of FP
in Singapore, implementation and operational time lags and the
Ricardian equivalence also affects the choice of fiscal tools
elaborate
Other than PEDx and PEDm influencing the use of ER policy in
Singapore, the fear of imported inflation also influences its use,
Singapore does not allow her ER to depreciate most of the time.
Instead she allows her ER tp appreciate most of the time explain
why with reference to the importance of keeping out imported inflation
and hence cost push inflation price stability
The root cause of the problem also influences macroeconomic policy
decisions. Eg need for other policies such as the SS side policies to
reduce structural unemployment, improve quality and price
competitiveness of X and to achieve potential growth.

Conclusion


N08 Q6
(a) Explain the determination of the pattern of trade between Singapore and the
rest of the world [10]
(b) Discuss whether the Singapore govt should change its policies for managing
the balance of payments [15]


Part (a)
Introduction
Clarify what is meant by pattern of trade
o Shows the composition of trade or the types of goods and services we are
exporting and importing
o Shows the countries which we choose to trade with

Body
The determination of pattern of trade between Singapore and the rest of the world can
be explained by the Theory of CA
o Explain the theory of CA
State the Law of CA
Why do differences in opp cost arise between countries? due to
differences in factor endowments and technology
o Explain how CA leads to Singapores pattern of trade
Be familiar about what are Singapores main X and M
Provide specific egs to show that Singapores areas of specialisation
and main X are consistent with her factor endowments
Also provide examples to show that Singapores main M are consistent
with her lack of her factor endowments
Use tables / diagrams to illustrate differences in opp costs
Ensure tables demonstrate differences in CA and not absolute
advantage

However, the determination of pattern of trade between Singapore and the rest of the
world cannot explain Singapores pattern of trade with the ROW completely. This is
because:
o Theory of CA is a production theory or SS side theory. It can help to explain
Singapores pattern of trade but not completely there are reasons other than
the differences in opp costs (differences in factor endowments) that affect
Singapores trade pattern with the ROW. These reasons include

DD side reasons
Tastes and preferences for a variety of the same good giving
rise to intra-industry trade. Explain with egs
The inability to fulfil assumptions made under the Theory of CA
Identify these assumptions and explain how the pattern of trade
is affected using egs
No transport costs in reality transport costs can be significant
affects pattern of trade egs
No barriers to trade in reality countries may set up barriers to
trade for various reasons infnt industry arguments or sunset
industry argument or diversification, strategic industries
argument. Although Singapore does not engage in
protectionism, other countries can/do set up trade barriers
against Singapores X egs

Some useful information:
Early industrialisation phase: 1960s late 1970s
o Geographical location deep ports
o Abundant low cost labour
Industrial restructuring phase: 1980-1985; early 1990s
o Geographical location
o Well trained and skilled labour force
o Enhanced mechanisation and automation and higher technology level
Late 1990s onwards
o Geographical location world class ports, proximity to the greater Asian region
o Highly skilled professionals and knowledge workers. Hardworking, effectively
bilingual
o Excellent technology
o Excellent infrastructural support (efficient transportation, safe, punctual air and
land), telecommunications (high % of population have access to internet and are
mobile phone subscribers; hotspots available in most parts of the island can
use national Wifi service Wireless @SG for free); industrial parks like Biopolis,
Biomedical Parks, Tuas, housing systems readily available for use , wide
choice of high rise and low rise offices (J urong Town Corporation, CBD)
o Supportive business environment
o Political stability
Spores main Xs today
o Goods
High end machinery and equipment high end electronics like semi-
conductors, precision engineering and transport engineering equipment
like oil rigs and aircraft parts
Chemicals pharmaceuticals and petrochemicals
Consumer goods (processed food)
Mineral fuels
o Services
Banking and finance
Logistics services
Spores main X partners today
o Malaysia 11.8% (2010)
o HK 11.7%
o China 10.4%
o Indonesia
o US
o J apan
o South Kores
Singapores main Ms today
o Consumer goods like foodstuff, low to mid end electronics (transistor radios,
hairdryers, iPhone
o Machinery and equipment, heavy machinery
o Iron and steel
o Electronics hard disk drives
o Chemicals and mineral fuels (eg crude oil)
Singapores main M partners
o Malaysia 11.7%
o US 11.5%
o China
o J apan
o South Korea
o Indonesia
Manufacturing sector today
o Electronics industry leading
o Govt prioritising devt of chems and biotech industries
o Aviation industry aerospace maintenance and repair overhaul centre
o Third largest oil refining industry
o High value added manufacturing activities
Services
o Financial services banking and accounting
o Telecommunications
o Aviation 6
th
busiest airport; 4
th
busiest cargo hub in Asia
o Legal services
o Biomedical
o Education
o Tourism related activities and industries IRs, F1 race, entertainment, retail,
restaurants
Major exporter of cut orchids and ornamental fish to countries like J apan, Australia, US,
Greece etc
o Tropical climate, technology intensive, innovation


Part (b)
Introduction
Clarify key terms BOP (both CA and KA/Financial account
Clarify policies Singapore is currently employing to manage her BOP
o Managed float ER system
o SS side policies
o FTA



Body
Should Singapore change her current policies to manage the BOP? Are her current
policies effective managing her BOP?
o Managed float ER system
Why does Spore allow the S$ to appreciate most of the time and only
allows the ER to depreciate when there is a global recession that
adversely affects her X and in turn BOT, CA and thus BOP?
Most of the time, MAS allows S$ to appreciate modestly and in a gradual
manner to keep imported inflation out this in turn helps to manage
expectations in order to maintain price stability necessary for sustained
economic growth
ONLY during the global financial crisis, MAS allowed the S$ to depreciate
(zero appreciation) so as to boost X competitiveness. This was because
of the adverse fall in her X.
o Why should Singapore consider changing the policy?
US Financial Crisis / Euro zone debt crisis fall in dd for her X fall in
TRX worsens BOT, CA and thus BOP c.p
To improve her BOP, MAS allows S$ to depreciate:
Px in terms of foreign curr falls Qdx increases
Pm in terms of S$ rises Qdm falls
ML condition satisfied PEDx +PEDM 1 improvement in
the BOT, CA and hence BOP
Synthesis
However the ML condition may not hold in the SR due to the
rigidity of contracts and tastes and preferences tend not to
change in the SR allowing depreciation of S$ may worsen the
BOP in the SR.
Limit as to how much MAS can allow the ER to depreciate
because Singapore is highly dependent om imported raw
materials and goods as she lacks natural resources allowing
ER to depreciate results in higher imported inflation higher cost
push inflation higher COL fall in SOL for the unemployed
and those whose wages cannot keep up with cost increases
(desirability issue)
In addition, allowing S$ to depreciate can lead to price instability
which can hurt economic growth in the longer run. Higher cost
push inflation makes it more difficult to manage wage
expectations as workers fight for higher wages to maintain their
SOL wage push spiral price instability in the future
economic growth cannot be sustained in the longer run. Eg. Price
instability makes it more difficult for businesses to calculate future
profits can lead to a fall in I and hence actual growth and
growth in productive capacity (potential). (effectiveness issue)

o SS side policy
Why should Singapore employ SS side policies to manage her BOP?
To improve price and non price competitiveness (quality) of her X
provide egs (think of R&D efforts)
Why should Singapore consider changing this policy?
Synthesis: Should she change this policy? Fine tune the policy? How?
o Free Trade Agreements
Does Singapore sign FTAs to manage her BOP? If yes, why?
Eg. No tariffs on M into Singapore; no tariffs on Singapores X by member
countries; relatively free capital mobility (improves inward and outward
FDI)
Why should Singapore consider changing this policy
Synthesis: Should Singapore change this policy? Fine tune the policy?
How?

Conclusion
Make a stand on whether Singapore should change her current policies to manage her
BOP and explain why?
o Suggest what changes Singapore can make to her current policies to manage
her BOP
Suggest new policies that Singapore can implement to improve her BOP if any



N2010
N10 Q4
The recent worldwide recession caused many governments to re-assess their use of fiscal
policy in order to stimulate their stagnating economies.
(a) Explain what would reduce the effectiveness of fiscal policy as a stimulus to the
Singapore economy. [10]
(b) Assess alternative policies that might be more appropriate in managing the Singapore
economy when faced with a worldwide recession. [15]


Suggested Outline:
Part (a)
1. Identify that Singapore economy is also experiencing a slowdown in its EG- real output is
increasing at a decreasing rate. The cause is a slowdown in global economy that leads
to a decrease the demand in our exports. Since Singapore economy is export driven,
the EG slows down naturally during this period.
2. Therefore, govt is implementing an expansionary fiscal policy to stimulate EG here.
3. The increase in G or decrease in tax rates will increase AD, then will kick off the
multiplier effect on the national income. Give a short account of the multiplier process.
4. However, the effectiveness of the FP may be dampened by:
5. The decrease in X. Since X is much more significant than G in Singapore as can be
seen by X is 200% of GDP while G is only an insignificant % of GDP as compared with
X. Therefore, the net change in AD is still a decrease, leading to no increase in national
income.
6. The pessimism of the households and firms. Since the global economy is not improving,
domestic households may save more of the disposable income when income tax rate is
reduced. Firms may not invest even when profit after tax is increased after corporate tax
is reduced. These decrease in C and I may negate the increase in G, causing no or little
effect on national income.
7. The small multiplier value. In Singapore, due to the high MPS( 20%CPF rate and Asian
saving culture) and MPM( lack of resources here lead to importing of raw materials and
consumption goods), our k value is small. Therefore, any increase in G is withdrawn out
of the circular flow through savings, taxes and imports, leaving very little being re-
injected to induce further consumption. Therefore resulting limited effect in national
income.
8. Hence, govt has to be aware of the limitation of this policy and perhaps implement other
policies at the same time in order to achieve EG more effectively.


Part (b)
1. Since our economy has a relatively small domestic market and small domestic firms,
increase in C and I are not going to cause a large impact on EG. Our reliance on X is
the only hope to stimulate EG. Therefore, alternative policies will be targeting at
improving the price competitiveness of our exports.
2. Monetary policy: Since Singapore is an interest rate taker, govt can only implement
depreciating our exchange rate to improve the price competitiveness of our exports.
This means 0appreciation of S$. This means that price of our exports will be relatively
cheaper in foreign currency, demand will then increase. While imports will be now be
more expensive in S$, hence demand will fall. Assuming M-L condition, net export value
will increase, AD will increase, then stimulating multiplier effect on the national income.
Since economy is below Yf, there will be increase in real national output.
However, M-L condition may not exist in the short run due to change in taste and
preference may take time and importers may be binded by contracts. Therefore, in the
short run, net export value may still decrease, leading to a fall in AD, therefore limiting its
effect on national income. In addition, the cost of production of exports with high imports
will increase with the depreciation of S$. However, the depreciation of S$ will cushion
this increase to the extent that the lower the import content in exports, the more price
competitive is the exports.
3. Supply management policies such as income policy, manpower policy.
Income policy is to encourage firms to increase the wage rate slower than productivity
rate. NWC made forecast of productivity rate each year. Firms may actually use it as a
guideline to raise the wages of their workers. This helps to prevent an increase in the
cost of production of the firm.
However, the productivity rate is computed across industries, different firms in different
sectors may have different productivity rates. Hence firms may not follow the general
guidelines.
Manpower policy refers to govt subsidize the firms in training of their workers through
SPURS for eg. These workers productivity rate may increase after training and hence
help the firm to reduce its average cost per unit of output, improving the price
competitiveness of its goods in the long run . This will also help to attract FDI into the
country.
However, training may take a long time to complete and workers may not achieve the
desired productivity rate due to unreceptive attitude of the workers.
4. Find new markets such as emerging economies such as BRICs, Indonesia, Middle east
countries. Break into these markets by signing FTAs with them. Such emerging
economies have a rising middle income group who has rising purchasing power,
therefore will buy our exports.
However, these countries usually buy low value added goods or mass produced goods
whereas Singapore produce high value added services and goods.
5. Conclusion: There are benefits and costs to each policy, there is no one policy that is
better than the other. Govt has to be aware of the tradeoffs of the policies and try to
minimize such tradeoffs by implementing a package of policies to maximize the benefits
and minimize the cost of those policies. In addition, given the characteristics of the
Singapore economy, the global recovery is most critical. If recession continues in the
world, those policies that Singapore implement can at best dampen the fall in EG, they
are not able to increase EG.


N10Q5
When there are large increases in the price of oil and other primary products, they are
usually expected to lead to rising inflation throughout the worlds economies.

Discuss the extent to which these factors are likel y to affect the rate of inflation in
Singapore. [25]


Introduction
-Define inflation and identify types of inflation: demand-pull, cost-push
Body
-Explain how large increases in the price of oil and other primary products lead to inflation in
Sg
Sg is an importer of oil and other primary products
Increases in the price of oil and other primary products represent an increase in costs
of production AS shifts up inflation
-Explain how there may be other factors that lead to inflation
Government action: Expansionary fiscal or monetary policy, devaluation (demand-
pull +imported)
Demand pull inflation due to increased population and consumption (increase C
increase AD)
Demand pull inflation due to inflow of FDI (increase I increase AD)
Demand pull inflation due to inflow of hot money (increase MS lower i/r
increased C and I)
Other possible demand-pull factors
Imported cost-push due to currency changes (depreciation *note: not the same as
devaluation)
Cost-push due to increased labour costs
-Evaluate extent that each factor is likely to affect the inflation rate
Government action: Effect of fiscal policy is small due to small multiplier (small shift in
AS). Sg government cant affect interest rates so cannot have inflationary effects due
to fall in i/r. Devaluation may have significant effect but SGD long-term path is largely
one of mild appreciation. MAS has not had any significant devaluation since AFC in
1997.
Increases in price of oil and primary products: Effect should be significant for two
reasons. First, increases in prices were large. Also, Singapore imports close to 100%
of these products. No chance of substituting with domestic (and presumably cheaper)
products. Second, these products affect the prices of other secondary products that
Singapore imports. Increase in costs is felt at all levels.
Increased population: Only leads to inflation in the event of economy operating close
to full employment. However, increase in population largely due to inflow of foreign
labour. AS shifts out at the same time. Hence, inflationary effects moderated.
FDI inflows: Similar argument as increased population. FDI also increase productive
capacity of economy.
Hot money inflows: Extent of inflows may not be great as portfolio investments have
seen a trend of going towards developing economies. Also, C and I in Sg may be i/r
inelastic due to the general lack of borrowing to spend (for C) and high business
confidence (for I).
Currency changes: Sg did not show depreciation during this period. In fact it
appreciated and took the edge off the imported inflation.
Increased labour costs: No significant increase in wages in this period. In fact, inflow
of foreign labour increased labour supply and moderated wages. Effect especially
apparent in more labour-intensive industries (e.g. construction) where wages take up
the highest proportion of costs.
-Conclusion
Increased prices of oil and primary products must have contributed to inflationary pressures
in Singapore. However, extent of effect depends on how much the SGD appreciated too.
Additionally, although other factors were likely to individually have had weak effects, the sum
of them all may diminish the proportion that higher prices of raw materials contribute to
inflation.


N10Q6
There is a general consensus among economists that protectionism is a bad thing.
(a) Explain why protectionism exists. [8]
(b) Assess the extent to which the Singapore governments approach to international
trade may need to be adjusted in response to a growth in worldwide protectionism.[17]

Part (a)

Define Protectionism
Protectionism is a policy of sheltering domestic industries from foreign competition through
the imposition of trade barriers on imports.
Reasons for protectionism (Explain any 3 reasons)
1. To protect strategic, infant or mature industries from cheaper imports
In the case of strategic industries e.g. it is a good the government aims to reduce
dependence on foreign countries e.g. agriculture.
Infant industries will not realize potential comparative advantage if they are not
guaranteed demand from the domestic market.
Mature industries that have lost their comparative advantage may be in decline. The
government may need to slow down the decline to prevent massive structural
unemployment.

Use tariff diagram to analyze how by imposing tariffs will lead to increase in domestic
production and producers surplus (and increase employment in the case of sunset
industries).

2. Expenditure switching (especially in times of recession)
To divert consumption from foreign goods to domestically produced goods fall in M,
cet par, improve trade balance boost domestic consumption increase AD actual
economic growth
Use AD-AS model to analyze growth effects and improvements in BOP
Examples: Import substitution strategies pursued by many countries e.g. Singapore and
J apan during the early phase of industrialization; The recent global financial crisis also led
some countries to resort to protectionism as an emergency measure.
3. To protect domestic workers against competition from low wage countries
Pauper labour argument Low wages in developing countries due to weak labour laws
that allow workers there to be exploited results in low priced products. Competition from
these cheap imports will drive wages in developed countries down if domestic firms are to
survive the international competition.

4. Other possible reasons (to protect against unfair trade practices prevent dumping, to
diversify the economy, to increase government revenue).

Conclusion:
The existence of protectionism goes against the Law of Comparative Advantage and limits
the gains from trade. The existence of protectionism is difficult to justify in the long run.

Part (b)
Introduction:
Clarify world-wide recession more countries like USA, J apan, European countries
set up higher trade barriers for various reasons
Clarify Singapores current approach to trade and policies employed by the govt:
Approach to trade is seen in the countys openness to free trade and policies
undertaken to promote export growth. In view of its small domestic market and high
degree of openness, Singapore has been active as a free trade advocate and its
current trade policies include supply side policies aimed at increasing the
competitiveness of export industries, exchange rate policies, and preferential
trading (spearheading regional and bilateral free trade agreements [FTA])
Body
Thesis (1): In terms of openness, Singapore should not adjust its approach to free
trade by turning protectionist because it is detrimental to our economy.
Restricting imports will lead to imported inflation and cause a rise in our cost of production
Singapores lacks natural resources. Raw materials and intermediate goods need to
be imported.
Higher price of imported inputs leads to an increase in cost of production due to the
increase in after tax prices of imported raw materials that are used to produce goods
and services.
The aggregate supply curve will shift upwards to the left, driving prices up rise in
COL.
Ultimately higher prices would affect export competitiveness as a high percentage of
exports comprises of re-exports..

Other reasons to remain open:
Too small a domestic market, openness to trade allows Singapore to produce on a
larger scale, enjoy iEOS and export to its trading partners.
By being open to free trade, its domestic industries will be subjected to heightened
competition, impetus to raise productivity levels, to innovate in order to stay
competitive.
Impetus for Singapore to keep shifting its comparative advantage in the face of
changes global economic trends. Allows Singapore to explore and exploit niche
areas and build new areas of comparative advantage so as to avoid its exports being
subjected to protectionist measures.

Anti-thesis (1): In view of rising protectionism, the gains from trade are reduced, and
the approach to free trade should be adjusted accordingly.
The fall in dd for her X and hence export revenue when other trading partners
unilaterally impose tariffs on our exports, will result in a lower AD for Singapore. The
fall in AD in turn leads to a more than proportionate fall in real NY (via the k process
where ones spending becomes the income of another). Actual growth slows down
case for concern since Singapore is highly dependent on X for growth (X as a % of
GDP is significantly high)
Also fall in DD for X worsening in BOT and hence CA and BOP
There is thus some merit in boosting domestic consumption to act as a buffer against
a possible decline in AD caused by the trend in worldwide protectionism in light of the
global economic downturn.
The objective of protectionism is to switch expenditure away from imports to
domestic production boost domestic consumption.
The use of expenditure switching policies by Singapore may help to increase AD and
achieve growth, even though it may be seen as unfair trade. However, this is at best
a short-term measure given that the multiplier is small for Singapore.

Synthesis: Expenditure switching will not result in strong economic growth due to the
small domestic market size.
Due to the small market, the increase in domestic consumption from protectionism
may not be significant.
Moreover, possible retaliation may further dampen growth by reducing exports
Free trade is still the best approach for Singapore even if other countries are
protectionist since the benefits of restricting imports to Singapore are marginal.

In terms of current policies undertaken by the Singapore government:
Thesis (2): Exchange rate policy is effective when protectionism is rising
Current policy of MAS is to allow a gradual appreciation of the S$ most of the time
and non-appreciation (neutral stance) at some times basically to keep out
imported inflation
Should Singapore consider changing this policy to allow the S$ to depreciate when
there is world-wide protectionism?
With rising protectionism and slow growth in exports, if S$ is allowed to weaken, this
leads to increase export competitiveness and improves the balance of trade,
assuming the Marshall Lerner condition holds.

Anti-thesis (2): Use of exchange rate policy may need some reconsideration in view of
rising protectionism
Currency depreciation or non-appreciation of the S$ to boost export competitiveness
in a recession is a beggar thy neighbour policy It hurts the exports of competing
countries, and increases the trade deficits in importing countries.
In view of rising protectionism, such a policy may invite retaliation or lead to
competitive devaluation among countries.
A trade war will have an adverse outcome on the balance of trade and subsequently
AD and growth.

Thesis (3): The policy of free trade agreements should not be changed as it insulates
the exports from rising worldwide protectionism
FTAs are legally binding agreements to reduce barriers to trade.
o Singapore does not impose trade barriers on M
o Other member countries reduce trade barriers on Singapores X
Singapores X will increase AD increases more than proportionate increase
in real NY (assuming the economy is <Yf)
Singapore has already signed FTAs with its major trading partners as well as
emerging economies (BRIC; South Africa, Turkey).
Access to export markets is secured via the current policy of signing FTAs; FTAs with
emerging economies also helps to diversify Singapores X markets rise in dd for X
by emerging economies can cushion the fall in dd from her Western partners
(eg .during the Euro crisis)
Exports are likely to be unaffected by the wave of protectionism if Singapore has an
extensive network of FTAs.

Evaluation: Limitations of FTAs
Due to the numerous rules and regulations involved, FTAs may be not be fully
utilized by domestic firms (the noodle bowl problem).
The current trend in regional free trade agreements e.g. ASEAN-China FTA may help
to establish a common set of regulations for firms to comply with and therefore
lessen the problem.

Thesis (4): The use of supply-side policies should be continued as it is effective in
increasing export competitiveness when protectionism is rising.
Examples of supply-side policies include grants for R&D, provision of infrastructure,
subsidies for training / retraining, tax rebates for new start-ups etc.
The aim of these initiatives is to the increase productivity and competitiveness in high
growth sectors.
Eg retraining to improve productivity of workers more output produced per worker
lower unit cost of production result in price competitive and better quality
exports. R&D also allows movement up the value added chain and development of
new products
Export capability is enhanced in this way despite the protectionist measures imposed
by foreign countries. Any fall in AD due to a fall in X arising from world wide
protectionism can be cushioned
Supply-side policies are usually effective in the long-term, and are unaffected by
temporary episodes of protectionism.


Anti-thesis (4): Supply side policies should target the exports in the services sector
when protectionism is growing
Government must bear in mind pertinent limitations of SS side policies
o Difficulties in retraining
o Over reliance on the govt for subsidies; imperfect information regarding how much
to subsidize, costly to fund R&D (strain on govt reserves) where results are not
guaranteed
The government should provide greater incentives (subsidies, training, infrastructure)
to promote investments in the services sector e.g. education, healthcare,
logistics, financial and legal services.
This is because, unlike manufacturing, transactions in services are usually insulated
from protectionist measures e.g. tariffs or quotas. Many of these transactions involve
the use of Information, Communication and Technology (ICT), and hence it is not
feasible for foreign countries to restrict them.

Synthesis/Conclusion
While the current approach to trade will yield benefits in the long-tem, the growth in
protectionism requires some minor adjustments to be made in the short-term in order to level
the playing field.

Make a recommendation on which aspects of our trade policy should be adjusted
and a judgment on the extent of the change required.

















N2011
N11 Q4
Explain the process whereby an increase in government expenditure can lead to a bigger
change in national income. [10]
Discuss the extent to which conflicts in government macroeconomic objectives limit the
scope for the use of fiscal policy in any economy. [15]

Suggested Outline:
Part (a)
1. Identify that this is an expansionary fiscal policy by increase in G.
2. This will lead to a multiplier effect on the national income.
3. Explain the process by either the numerical approach or the Keynesian step diagram
approach.
4. Conclusion: the multiple increase in national income can result in nominal increase or real
increase in national income.
If economy is at full employment, there is only nominal increase, with no real increase in
output but increase in GPL only.
If economy is close to full employment, there is both real increase in national income and
increase in GPL.
If the economy has a lot of spare unused resources, it will result in real increase in output
with no change in GPL.

Examiners comments
Most candidates recognized that this was a question about the multiplier process. Candidates
used a range of approaches, including the use of diagrams, equations and tables, but many
responses would have benefited from giving a detailed explanation of outcomes rather than
stating them. Thus, for eg, a calculation would frequently be presented without an explanation of
the underlying process.
Several candidates explained the Keynesian multiplier using AD and AS curves, but most
showed the AD curve shifting along an upward sloping AS curve. In many of these cases there
was virtually no increase in national income. In strict economic analysis this is not the Keynesian
multiplier but rather a dampened multiplier. A minority did recognize that the full Keynesian
multiplier only occurred on the horizontal part of the AS curve.

Part (b)
1. State the govts objectives high economic growth rate (both actual and potential), low
unemployment, price stability and BOP equilibrium.
2. The expansionary effect on the national income through the use of expansionary FP is
explained in (a) already. We now look at how this may conflict with the other objectives:
3. Conflict between EG and Price stability
-If the economy is close to Yf, the increase in G may be more than the deflationary gap,
causing too much demand going after too little goods, giving rise to demand pull inflation.
Illustrate using AS/AD diag.
4. Conflict between EG and BOP equilibrium
-the increase in G resulting in higher national income will mean households will get higher
disposable income, assuming ceteris paribus. Their ability to buy imports will increase, this
will worsen BOP current account, thereby upsetting BOP equilibrium.
5. However, besides these conflicts, there are also other limitations that affect the effectiveness
of expansionary FP in achieving EG such as
- whether the increase in G is negated by the fall in exports due to global recession for eg, if
the fall in X is greater than the increase in G , there might be a fall in AD, hence there will be
no rise in national income.
- the decrease in I. When govt borrows to finance its expenditure, this increase in demand for
loanable funds will drive up interest rate. Firms will decrease its investment base on MEI
explanation, therefore this may result in a small increase in net AD, therefore may dampen
the effect on national income.
- the value of the multiplier. If the k value is small, it means that a large part of the injection is
withdrawn from the circular flow of income through S, T or M. The high value of MPS, MPT,
MPM will cause k value to be small. Therefore, the effect on national income will be
dampened.
6. Conclusion: The govt has to be aware that there may be conflicts with the objective or there
can be tradeoffs, more than 1 policy is therefore required to attain the objective effectively
and minimizing the conflicts or tradeoffs that may come along with the implementation of the
policy. Other policies that govt may also consider will be monetary policy and supply
management policies.