Revision and Consolidation

MacroeconomicsGlobalisation and external economic

shocks

Globalisation

Tension / inter-relationship between developed

& developing countries

Economies more closely

integrated with each other

Essays

Vulnerable to external shocks

Economies more closely integrated

with each other

Oil prices Downturn in world economy

• Essential i/p, inelastic demand

• Higher COP, higher M spending

• Reduce X demand

• Fall in investment

Tension / inter-relationship between developed & developing countries

• Loss of CA to developing countries particularly in low-end, labour intensive manufacturing / services

• Firms relocate or outsource part of their operations

• Consumers, both at home and abroad, switch to goods from the developing countries

• Falling I & net exports

• Need for economic restructuring to move up value chain (SR pain, LR gain)

• Effect on 5 macroeconomic goals?

Developed countries

Tension / inter-relationship between developed & developing countries

Low production cost in the developing countries

When developed countries outsource or import from the developing countries, they too enjoy the low prices

Keeps down inflation and raises real incomes

As economic growth rate in the developing countries pick up pace, their rising incomes allow them to purchase more g&s, including imports

Developing countries increasingly become important export destinations for goods from developed countries.

Developed countries

Tension / inter-relationship between developed & developing countries

• Enjoy comparative advantage in low-end, labour intensive manufacturing / services

• Destination of MNCs relocation / outsourcing

• Rising I & net exports

• Effects on 5 macroeconomic goals?

Developing countries

SAJC 2006 “In 2004, higher global oil prices pushed up inflation in developed countries, which should result in a moderation of economic growth in 2005.”Adapted from Economic Survey of Singapore 2004, Ministry of Trade and Industry

a. Explain how rising global oil prices are likely to affect the external economy of Singapore. (10) BOP & ER

Imports

Sg: oil importer

↑ oil px with inelastic dd

TEM ___

Exports

Rising oil prices

___ export prices

Rising oil prices

world ec growth ___

Together, effect on TRX ____

Assumption about

px & Y elastic

ity of

dd for XEffe

cts on C/A and K/A?

Overall BOP & ER?

SAJC 2006b. Discuss possible measures that Singapore can adopt to alleviate the adverse effects of rising global oil prices.(15)

ER policy

• Allow S$ to appreciate against the US$

• Cost-push inflation

• ____ NY, ___ UN

• _____ BOP & ____ ER

3 policies + evaluation

• Limitations

• Possible trade-offs in goals

Wage freeze / Px ceiling

• Institute price controls to limit the rise in COP

Ss-side policies

• Productivity improvement to reduce unit COP to offset the effects of higher oil px

SAJC 2006b. Discuss possible measures that Singapore can adopt to alleviate the adverse effects of rising global oil prices.(15)

Long term policy

Seek to reduce reliance on oil through

• development of new, energy-efficient technology

• development of alternative energy sources

• Cost-push inflation

• ____ NY, ___ UN

• _____ BOP & ____ ER

Root cause of the problems

• Higher oil prices

TJC 2006“As global stock market topple the Japanese and USA economies sputter and financial seams begin to pop in major emerging markets, anxiety is bubbling into financial markets that the world may face its first global recession in a quarter century”a. Discuss the possible impact of a global recession on

Singapore. (8)

Economic effects

5 macroeconomic goals

“imported recession”

Evaluation

• How serious / significant are these effects likely to be?

• Reduce X demand

• Fall in investment

TJC 2006b. Examine the policy options that the government could

adopt in dealing with these difficulties. (17)

Appropriate policies

Seek to stimulate AD

• Expansionary F/P

• M/P: S$ ER to depreciate

• Wage freeze, trade restrictions

• ____ NY, ___ UN, deflation

• _____ BOP & ____ ER

Root cause of the problems

Global recession falling AD

3/4 policies + evaluation

• How policies deal with “these difficulties”

• Limitations / effectiveness

• Possible trade-offs in goals

TJC 2006a. Discuss the possible impact of a global recession on

Singapore. (8)b. Examine the policy options that the government could

adopt in dealing with these difficulties. (17)

Nov 2005Discuss the possible impact of a world-wide recession on Singapore and the policy options that the government could adopt to reduce the most harmful effects of this impact. [25]

• Identify which of the effects are most harmful

• Provide justification

• Then prescribe policies to solve these problems

Nov 2005Discuss the possible impact of a world-wide recession on Singapore and the policy options that the government could adopt to reduce the most harmful effects of this impact. [25]

Possible Effects

• Internal economy: ____ NY, ___ UN, possible deflation

• External economy: _____ BOP & ____ ER

Nov 2005Discuss the possible impact of a world-wide recession on Singapore and the policy options that the government could adopt to reduce the most harmful effects of this impact. [25]

Comparing the internal & external effects

Internal effects more severe & more harmful

• WW recession sharp fall in AD contractionary effect on NY and employment

(reason: external dd makes up 2/3 of our AD)

• should deflation set in, economy could be trapped in a deflationary cycle (Japan’s experience)

• Falling SOL & rising hardships

Nov 2005Discuss the possible impact of a world-wide recession on Singapore and the policy options that the government could adopt to reduce the most harmful effects of this impact. [25]

Comparing the internal & external effects

External effects less severe & less harmful

• Given high M content of X, the fall in X dd would lead to a fall in dd for imported raw materials & component parts may have little effect on C/A of the BOP

• Even if BOP actually does worsen, it should not lead to serious problems in the SR due to the availability of reserves.

• With a managed float ER system, the ER can also be allowed to adjust to reduce the deficit

JJC 2006a. Analyse the impact of globalisation on the components

of aggregate demand in an economy. (12)

Which group of countries?

• Emerging economies - China & India?

• US & European union?

• Australia?

Analyse

• Is the effect significant or weak?

• Is there a possibility that an AD component may both increase & decrease?

Choose 1 country to explain in greater detail (as a case study) the effect on:

1. Consumption ___

2. Investment ___

3. Govt expenditure ___

4. Net export ____

JJC 2006b. Discuss the appropriate policy measures that the government may undertake in the face of such challenges.

(13)

Depending on the choice of country in (a), the challenges & therefore policy options vary.

Most well-documented: effect of the emergence of China & India on the economies of US & EU

may consider using this as the case study for part (a) so that there is more room for analysis in part (b)

3 policies with evaluation

• ER policy

• Protectionism

• Supply-side policies

SAJC 2006“Driven by surging investments and exports, China’s economy grew by 9.9% in 2005.”Using economic analysis, account for the rise of China’s economy and discuss its impact on Singapore. (25)

Comparative advantage

Govt policies

5 macroeconomic goals

Threat

• Investment, net X

Opportunity

• Potential X market

• Lower prices & COP