JC Economics Essay Series #33 – Demand Deficient Unemployment & Exchange Rates Policy

JC Econs Demand Deficient Unemployment & Exchange Rates Policy Essay Model Answers 

In Singapore, one of the macro goals is to achieve full employment (or low unemployment, unN), particularly 2.6% to 2.8%, compared to 4-6% for the rest of the world. (Why is S’pore so much more stringent for her unemployment objective?). To achieve this goal, the S’pore gov has to reduce or eliminate Demand Deficient Unemployment , aka Cyclical unN. One of the possible macro econs policy to implement is the Exchange Rates Policy, which is the  lowering of the Singapore Dollar. Is the the best policy? Let’s find out right away.

“In a small and open economy like Singapore, a major potential source of unemployment is demand deficiency due to its inability to sell more exports. Therefore the appropriate measure is to lower exchange rate” Examine this assertion. [25m]
(Relevant source: Weaker S$)

Introduction: Define demand deficient unemployment, and Exchange Rates Policy.


JC Economics – Demand Deficient Unemployment in SG


Assertion #1: “In a small and open economy like Singapore, a major potential source of unemployment is demand deficiency due to its inability to sell exports”
Yes, agree with the above assertion

S’pore small domestic economy → hence rely heavily on trade for enlargement of markets → depend on export oriented growth strategy and status as export processing zone for high sustained growth, hence high external dd in S’pore.

Fall in AD largely due to fall in (X-M), inability to sell exports lead to fall in AD for labor → cause dd deficient unN

Challenge the above assertion: “major potential source of unemployment is demand deficiency…”

Given the nature of S’pore economy – employment is not merely in the manufacturing sector for export gds. It also includes the service industry, tourism industry, financial sector etc. Hence, structural in the form of sectoral and technological unemployment is another major potential cause for unemployment in S’pore. Stiff competition lead to prevalent outsourcing of white collared and blue collared jobs to India and China respectively in the service and manufacturing industry → mismatch of skills as workers who lose their jobs in manufacturing industry may not be skilled or trained to work in other industries → lead to structural unN and not just demand deficient unN.

(Reminder: Respond to the signpost and dissect the statements in the signpost)


JC Economics – S$ Policy in Singapore

Assertion #2: “Hence the appropriate policy is to lower exchange rate”

Given that the 1st assertion is generally true in S’pore context-than lowering exchange rate is an appropriate policy. It is appropriate in view that exchange rate can directly influence the price competitiveness of export goods hence impact the sale of exports which is the root cause of unN in the 1st assertion

Explain how expansionary exchange rate policy works to impact increase (X-M)→ increase AD increase DD for labour reduce demand deficient unN.

Evaluate the policy: Elaborate on J-curve effect in the short run for S’pore. If the underlying reason for inability to sell exports is due to fall in global national incomes and poor private sector sentiments then reducing Px in foreign currency via exchange policy may not be effective in encouraging greater sales of exports. [PEDx < 1], Also [ PEDm< 1] for S’pore due to large imports of raw materials and oil which are essentials in production activity of resource poor country like S’pore. Prospects for a recovery are predicated on the performance of USA, the eurozone, Japan and regional economies.

(Alternatively, highlight our range of high-valued added range of exports. More on this point in our Macro Econs tuition lessons.)

Given the situation of demand deficiency, demand pull inflation as a conflict of goal with the expansionary MP is not likely to happen.

Challenge the above assertion: “demand deficiency due its inability to sell the exports:
Besides a fall in (X-M), other components such as C & I can also contribute to a fall in AD in S’pore and not merely inability to sell export goods.
(Comment by Econs Tutor: this is a weak point. Why?)


JC Economics – Alternative Macro Econs Policies

However in view that there are also other major potential causes of unemployment in S’pore, exchange rate policy may not appropriately address the other root cause.

In view of structural unemployment – more appropriate to use SS side policy to address the problem of mismatch of skills Elaborate on how S’pore for example uses education & training policy to address this problem. Evaluate SS side policy.
(Do remember to explain examples of structural unN first.)

If the reason for demand deficiency is accrued to other components of AD- then exchange rate policy alone will not suffice in stimulating higher AD.

Require the use of expansionary FP to increase C & I in S’pore; Explain how cut in taxes works to increase C and I in S’pore. Also, if inability to sell exports is due to global recession than increase in government expenditure is required to keep AD buoyant. Evaluate Fiscal policy in S’pore

EV: Compare the various polices. Compare the various unN types.

Conclusion: In general, exchange rate policy in SG is designed with the intent to promote price stability given our heavily reliance on imports and hence susceptibility to imported inflation. The decision to lower the external value of S$ will conflict with cost push inflation hence reduce the appropriateness of using exchange rate policy.


Econs Tuition teacher’s Remarks: Most students did not get 20 or more marks out of 25m, cos they didn’t highlight impact of weaker S$ on our imports. More on this key point in our Econs revision lessons.)