JC Economics Essay Singapore Dollar & Economic Performance Model Answers
In order to achieve good economic performance, the Singapore economy has to attain a few macroeconomic objectives namely high and sustained economic growth, low inflation, low unemployment (unN) and balance of payments (a small surplus) (See data on Economic Survey of S’pore here). Often times, the SG government needs to adopt policy measures in order to achieve her macro goals.
According to the H2 Econs Syllabus (Code: 9757), the BOP and exchange rates are considered the external macro econs objectives while, growth, UnN and inflation are the internal aims.
(In some countries, exchange rate is not considered an macro goal. Why?)
The following question (with full length sample answers) demonstrates how S’pore’s exchange rate policy (ERP) (ie the Singapore dollar or S$)
may be used to achieve SG’s macro performance. Unlike other economies, this is the only Monetary Policy instrument available, as she does not use interest rate as a policy tool.
The Singapore dollar sank to a 4.5 year low after the Monetary Authority of Singapore (MAS) unexpectedly eased its monetary policy to allow for a weaker currency in the face of falling oil prices and declining growth.
Source: The Straits Times, 7th April 2015
Discuss the view that the easing of MAS’s monetary policy is the best move to improve Singapore’s economic performance. 
JC Economics Essay – Economic Performance of Singapore
Allowing for a weakening of the Sing dollar is MAS’s deliberate policy move to lower the external value of our currency under our managed float exchange rate system. This monetary policy centred on exchange rate may improve Singapore’s economic performance to some extent.
However, there is a need to also consider other policies such fiscal policy as well as supply side policy in order to improve the economic performance of Singapore. Improvement in economic performance of an economy can be measured by its macroeconomic aims such as high and sustained economic growth, low unemployment, low and stable inflation and healthy balance of payments.
Thesis: Allowing for weakening the Sing Dollar may improve the economic performance of Singapore.
Allowing our currency exchange rate to depreciate will make the exports cheaper in terms of foreign currency. This makes Singapore’s exports more competitive, hence increasing the demand for exports. Thus, export revenue in S$ increases. Exchange rate depreciation will make imports more expensive in home currency. However, In the case of Singapore, the demand for imports is relatively price inelastic given the high degree of necessity of importing goods and resources (i.e.: PEDm <1), hence the quantity demanded for imports will decrease less than proportionately and import expenditure increases in S$.
The demand for our exports is price elastic (i.e: PEDx >1) due to large number of substitutes available such as electronic component which are also produced by other countries such as South Korea, Taiwan. Hence, Singapore fulfils the Marshall Lerner condition (MLC) where sum of price elasticities of exports and imports is greater than 1 (i.e: PEDX+PEDx>1)
(Note: for the new syllabus of 9757, no longer necessary to explain the full MLC)
Stimulates Actual Economic Growth:
Hence a depreciation of the S$ will lead to an improvement in our balance of trade (BOT) (X-M) increases AD increases National Income increases by more than proportionately via the multiplier effect. The multiplier effect is based on the proposition that expenditure generates income, and income generates expenditure. This allows Singapore to experience actual economic growth. (Illustration with AD-AS diagram to show AD increasing). Since Singapore has a high dependence on trade, with exports and imports making up about 400% of our GDP, this policy is thus appropriate in increasing (X-M) to drive economic growth in Singapore as it was mentioned in the preamble that Singapore is facing declining growth.
As labour is a derived demand, an increase in national output will increase the demand for labour, hence reducing cyclical unemployment in Singapore.
Depreciation of S$ may improve the balance of trade since the price of exports in foreign currency is cheaper which means our exports are more competitive now, assuming Marshall Lerner condition holds. Hence, this may possibly improve the balance of payments for Singapore.
Depreciation of S$ makes it cheaper to invest in the country as the prices of assets in foreign currency becomes lower. This will encourage foreign investors into Singapore as it could mean higher profitability for them due to the lower cost of investing in the country. This inflow of investments (if long term capital inflow) is recorded as a credit item in the financial account which may improve the balance of payments for Singapore.
Anti-Thesis: Allowing for a weakening of the Sing Dollar may not improve the economic performance of Singapore as there are limitations of a weakened S$.
Furthermore, there are other problems that exchange rate policy can’t resolve. Hence, there is a need to consider other macroeconomic policies to improve economic performance.
JC Economics Essay – Sing Dollar & Limitations
Limitations of a weakened SS inflationary effects:
Since depreciation has caused the price of imported goods into Singapore to become more expensive in domestic currency, this could lead to imported inflation. As Singapore is heavily reliant on imports due to our lack of natural resources (MPM value is high). higher prices of imports lead to higher costs of production. This could result in cost-push inflation, thus leading to a rise in the cost of living.
(Note: A likely evaluative comment: Given that our exports have high import content; this could increase the price of our exports in domestic currency (although foreign consumers may still enjoy lower prices in terms of foreign currency), the original lower export price advantage created by depreciation would be reduced.)
However, this problem is not of a great concern for MAS due to falling oil prices as mentioned in the pre-amble. Falling oil prices will help to keep imported inflation at bay, mitigating the effects of more expensive imported goods due to the depreciation. This is because much of our production here requires the use of oil to run factories, manufacturing processes, oil refinery plants etc. Hence, falling oil prices will lower the cost of production. The falling oil prices may thus help to counter the effects of cost push inflation that could arise from the depreciation of S$. Hence, inflationary pressures resulting from the depreciation of S$ may not be significant.
Conflicts with other macroeconomic goals when AD increases-Demand pull inflation may result if the country is close to or at full employment. This is most likely to occur in Singapore given that our economy is operating near full employment. May lead to inflationary pressures in Singapore where there is no increase in actual output and/or real output.
There could be structural problems in Singapore in which using exchange rate policy is unable to address. Singapore faces problems such structural unemployment created due to the dynamic nature of comparative advantage in light of globalisation, especially with the rise of emerging economies like China and India. Structural unemployment which is essentially a skills mismatch problem poses a threat to low skilled workers in declining industries in Singapore, which a weak S$ is unable to address. Thus, the root problems of our economy have encouraged Singapore to continually restructure our economy to make skills, innovation and productivity the basis for economic growth.
Hence, appropriate supply side policies and fiscal policy with supply side effects would need to be employed to address the problems above.
(JC Economics Tutor’s Comments: Emerging Countries such as China and India have a comparative advantage in certain industries such as textile manufacturing. Hence, there is a decline of such industries in Singapore as we identify new growth industries such as pharmaceutical, biomedical industries. Workers may not possess the relevant skills to work in these industries which require highly skilled workers thus resulting in structural unemployment in in S’pore.)
JC Economics Essay – Alternative Macroeconomic Policies
Supply side policies to address structural unemployment and demand pull/cost push inflation and sustained economic growth: .
Market-oriented supply side polices (SSP)
Market-oriented SSP to encourage and reward individual enterprise and initiative and to reduce the extent of government intervention; reducing structural rigidities and putting more reliance on market forces and competition.
Pro competition policies E.g.: Pro Competition Act and Anti-Monopoly legislation:
Anti-monopoly legislation reduces the barriers to entry Allows for a more contestable market as more firms enter the industries This will encourage competition between firms→ Firms will seek to become more productively efficient and produce at the least cost possible in order to increase their profits this will reduce the cost of production→ SRAS increases SRAS shifts right/downwards. In addition, competition will also encourage firms to innovate and do R&D to make the demand of their products more price inelastic so as to differentiate their products from the competitors This will increase the productivity capacity Increasing the full employment level LRAS increase-> LRAS shifts right (Sketch the AD-AS diagram). Hence, increase in AS will reduce inflationary pressures as well as promote economic growth.
(Note: is the above policy choice a good one?)
(Any other well explained market oriented supply side will be credited)
Interventionist supply side policies
Interventionist SSP where the government plays an active or direct role in manipulating the behaviour of firms and individuals to achieve certain social or macroeconomic objective. Eg: giving incentives such as grants, subsidies and tax incentives: Specifically, SG Budget 2015 announce continuation the Corporate Income Tax rebate of 30% of tax payable to help companies cope with cost pressures as well as encouraging firms to invest in Singapore to improve our productive capacity. In addition, tax incentives were introduced to encourage innovation and R&D, so that advancements in technology can be made (2015).
Helping small and medium size enterprise grow through a vibrant SME. sector. Government works with partners to help enterprises in financing, capability management development, technology and innovation and accessing new markets. Eg: Productivity and Innovation Credit (PIC) scheme to give more support to SMEs as they restructure. The PIC scheme will help firms to defray rising business costs such as wages, rentals and to also encourage firms to undertake improvements in productivity and innovation through the cash bonuses by the government.
Great emphasis on education, retraining and upgrading of skills
Eg: Government investing in Skills and Training-Top up of $500 million to the lifelong learning endowment fund (Budget 2015) to boost quality of workers, ensuring a skilled workforce with the relevant skills to meet the changing structure of the economy-> reducing structural unemployment (1 well explained interventionist supply side policy)
These interventionist supply side policies will lower cost of production increase the SRAS. These policies will also improve the quality, quantity of resources and technology →improvement in productive capacity and LRAS→ Resulting in high and sustained economic growth and reducing inflationary pressures arising from demand pull and cost push inflation due to depreciation of our currency.
Sketch AD-AS diagram to show AS shifting right, reducing GPL, increase in output. Through increasing productivity through R&D and improvement, it will make Singapore’s exports more competitive. An increase in productivity means that more output can be produced with the same amount of inputs, thus reducing the cost per unit of the good. Quality of goods becomes better through R&D. Both a reduction in per unit cost as well as improvements in quality will make our exports more competitive, possibly increasing the demand for exports. Domestic goods will be more competitive compared to imports. This will reduce our overreliance on imports. The effect of the supply side policy could improve the current account balance improving the BOP account as well as increase net exports → AD increases Actual economic growth.
Evaluation of SSP:
Time lag needed to retrain workers, retention of skills learnt and transference to job may not be apparent, cost of financing training. Time lag needed to develop technology as well as R&D.
(Any well explained limitation will be accepted)
Expansionary Fiscal policy
Increase Government expenditure on physical and social infrastructure spending. spending on R&D, education G increase➜ AD increases NY increases more than proportionately via the multiplier effect actual economic growth and reducing cyclical unemployment. If the government spends on R&D and infrastructure leads to an improvement in technology and quality of resources Increases the productive capacity of the economy LRAS increases Potential Economic growth resulting in high and sustained economic growth for Singapore, and reducing inflationary pressures.
Lower corporate tax cuts in corporate taxes to raise the rate of return from investment (I) for foreign investors Increases → AD increases-> National income increases more than proportionately via the multiplier effect Actual economic growth and reducing cyclical unemployment. Increasing FDI leads to a credit in the financial and capital account → Improving the balance of payments (BOP)
Diagram to show both AD and/or AS shifting right
(Remarks by Econs tuition teacher: (highlight the possibly supply side effects)
Evaluation of FP and exchange rate policy
This may cause a strain on government budget. However, with prudent fiscal policy enabling Singapore to achieve healthy budget surpluses over the years, impact is less significant.
Crowding out effect, Time lag, Small multiplier
Monetary Policy and its ineffectiveness
Not relevant to discuss MP as it is not effective for Singapore.
Conclusion (Overall judgment):
Given the small and open nature of our economy, with great dependence on imported goods, depreciate the S$ could possibly bring about cost push inflation, which may not be the best policy for Singapore. However, in the context where we are facing falling. global oil prices, the effects of imported cost push inflation due to deprecation will mitigated. Furthermore, there is a pressing need to stimulate growth in Singapore currently and depreciate our currency will bring about actual growth. Hence, this will improve economic performance of Singapore.
However, in future when global oil prices start to pick, it will be better to maintain a strong S$ to keep out imported inflation to achieve price stability so as to sustain economic growth. A strong S$ may cause the price of exports in foreign currency to be more expensive but this will encourage firms to innovate and do R&D to continually move up the value chain in order to remain export competitive. Hence, exchange rate policy will be beneficial for Singapore’s economic growth in the LR as well as maintaining our price stability.
Also, exchange rate may be a preferred policy over fiscal policy as fiscal policy is more! towards targeting the domestic economy. However, Singapore has a small domestic economy where domestic consumption (40 %), investments (23%) and government spending (11%) takes up a relatively small proportion of the GDP (approx. 74% of GDP) as compared to our large external demand of exports and imports (400% of GDP). Hence, exchange rate policy may be a better policy in influencing AD as compared to fiscal policy.
Exchange rate policy cannot act alone but a policy mix of supply side policies and fiscal policy with supply side effects need to be employed to address the other economic problems such as structural unemployment and potential trade-offs in ensuring successful economic performance for Singapore.
A-Level Economics Essay Marking Scheme (25-mark, no-part essay type)
|Level||Marking Descriptors (Application & Analysis)|
Answer shows excellent knowledge of the appropriateness of exchange rate policy in improving the economic performance of Singapore.
Well-balanced answer which explains the workings, appropriateness and limitations of exchange rate policy in achieving the macroeconomic aims as well as 1 other AD management policy (Fiscal policy) and AS management policies in improving the economic performance. All 4 macroeconomic aims to be addressed in terms of Exchange rate policy.
Excellent development and rigour in economic analysis.
Answer shows excellent knowledge of the appropriateness of exchange rate policy in improving the economic performance of Singapore. Well-balanced answer which explains the workings, appropriateness and limitations of exchange rate policy in achieving the macroeconomic aims as well as 1 other AD management policy (FP) and AS management policies in improving the economic performance.
At least 3 macroeconomic aims to be addressed in terms of Exchange rate policy. Good development and rigour in economic analysis. Good use of AD-AS diagrams.
Good knowledge of Singapore context with good illustrative examples.
Answer includes fairly good explanations of the appropriateness of exchange rate policy in improving the economic performance of Singapore.
Somewhat balanced answer which explains the workings, appropriateness and limitations of exchange rate policy in achieving the macroeconomic goals AND discusses at least 1 other policy that is well developed.
At least 2 macroeconomic aims to be addressed in terms of ERP.
Answer includes fair explanations of the appropriateness of exchange rate policy in improving the economic performance of Singapore.
At least 2 macroeconomic aims to be addressed in terms of Exchange rate policy.
Answer shows some knowledge of the appropriateness of exchange rate in improving the economic performance of Singapore.
At least 1 macroeconomic aim to be addressed in terms of Exchange rate policy. Some conceptual errors in the explanation, showing lack of understanding of the economic concepts. No reference to Singapore context. Largely one-sided.
Answer is mostly irrelevant.
|E2 3-5||For a well-reasoned judgment, with clear criteria, on whether exchange rate policy is the best way to improve the economic performance of Singapore.|
|E1 1-2||For a mainly unexplained judgment on whether exchange rate policy is the best way to improve the economic performance of Singapore.|
JC Econs Marker’s Comments on S$ & SG Econ Performance:
a) General Comments:
while the question is rather straightforward, a large number of candidates misinterpreted question requirements and wrote unnecessary content. Those who were able to interpret question requirements accurately were able to be in the high L2 as well as L3 band.
b) Question Analysis:
Many Economics students misinterpreted the question and interpreted that “easing of monetary policy” meant increasing money supply and thus lowering interesting rates. These candidates went into great details about the indirect transmission mechanism and thus spent about 1.5 to 2 pages writing on monetary policy centred on interest rates. They failed to read the question carefully which is to explain monetary policy centred on exchange rate and not interest rate. Furthermore, Singapore does not centre our monetary policy on interest rate due to the open economy trilemma.
A number of candidates just wrote 1 policy- exchange rate policy. They failed to interpret question requirements of “best way”, which requires 2 other policies to make a comparison on which is the best policy for Singapore. Hence, this candidates can only score the very most a low L2 grade. Candidates need to know how to use relevant data in the preamble for their answers. While most could explain how the policies could boost declining growth, a significant number of candidates did not make use of falling oil prices for their answers at all.
Several Econs pupils were unable to explain the effects of depreciation of exchange rate in the context of Singapore properly, missing out on concepts such as price elasticity of demand of imports and exports for Singapore. These candidates did not justify clearly why Singapore’s PEDX>1 and PEDm <1 or left these elasticity concepts out completely. Some candidates did manage to take into account falling oil prices in the preamble by explaining the effects of falling oil prices on cost of production and hence increases SRAS, reducing GPL. However, they are just merely explaining the effects theoretically. Better candidates would have linked to the context of the question on depreciation of exchange rate; falling oil prices which lowers the cost of production will help mitigate the effects of imported inflation when the currency depreciates. These candidates have shown that they are able to use the preamble appropriately and not just give a purely theoretical explanation.
A number of candidates spent a huge chunk of the essay explaining the the causes of declining growth in Singapore such as falling exports due to neighbouring countries who also face declining growth. While this may be theoretically correct, the focus of the question is not on explaining the causes of the declining growth, but rather the policies/measures to address the declining growth in Singapore. Candidates should thus be clear of the focus of the question and not write unnecessary content in great detail. A significant number of students explained why Singapore used monetary policy centred on exchange rate and not interest rate due to the open economy trilemma that we face. This again is not the focus of the question to justify why we use exchange rate policy over interest rate policy.
Some candidates interpreted “economic performance” as only economic growth, hence did not bring in other macroeconomic aims of a country such as low unemployment, low and stable inflation and healthy balance of payments. While most could explain how economic growth could be achieved through the AD-AS analysis, . there were a number that just merely stated increase in national income will lower unemployment. These candidates did not explain how unemployment could be lowered such as explaining that labour is a derived demand and thus more labourers will be employed to produce the output, hence reducing cyclical unemployment. Students should note that a brief explanation of multiplier effect is expected for the top L3 band. Fiscal policy was the policy that most candidates could explain well. However, Supply side policy lacked rigor as a number of candidates just listed down examples after examples and just said potential economic growth is achieved. Candidates should incorporate economic analysis by explaining how quantity/quality of resources are affected and linking to productive capacity increases.
Most candidates could explain the workings of policies, but better candidates would be able go further and explain the appropriateness of the policy. Eg: Exchange rate is appropriate as it is able to influence a large proportion of AD since (X-M) takes up 400% of GDP, hence the effect of national income would be greater, boosting declining growth. Fiscal policy, on the other hand ,affects C, I and G which takes up a smaller proportion of the GDP and hence may not be able to be as effective as exchange rate policy.
(Read more: MAS & Past Monetary Policy Decisions)
Most candidates were able to have a certain structure in their essay by first explaining the workings and limitations of exchange rate, moving on to fiscal policy and lastly supply side policy.
Candidates should note that there is a difference between writing imports and import expenditure, similarly there is a difference between exports and export revenue. Writing Imports or exports refers to quantity. However, import expenditure ($) or export revenue ($) refers to price X quantity. Candidates should note that they are expected to be accurate by writing import expenditure and export revenue when explaining the effects of depreciation of exchange rate and not just merely imports/exports.
f) Question choice
Overall, this qn on S$ and economic performance is still a good choice to aim for in your eventual GCE A-Levels Cambridge exams., though it should not be your 1st choice. It is definitely still a much better qn choice over Market Structures.
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More full length essays examples: JC Econs Essay #40 | #42