2011 TJC JC2 Economics Tutorial Essays on Economic Integration

Question 1

(a) Explain whether Singapore’s trade patterns follow the outcomes

as predicted by the theory of comparative advantage [10]

L1: Define comparative advantage (CA) and recognize the benefits of engaging
in trade that is according to CA [1-2]

• A country has comparative advantage in producing a good if it has a lower

opportunity cost of producing that good compared to another country
• When countries specialise and trade according to comparative advantage,
consumption levels for both countries rise

L2: Explain the trade patterns as predicted by CA theory [3 - 5]

• Developed countries tend to specialise in and export capital, technology and

skill intensive products while developing countries tend to specialise in and
export labour and land intensive products
• Trade patterns will consist of inter-industry rather than intra-industry trade

L3: Analyse whether Singapore trade patterns are in accordance to what is

predicted by CA theory [6-10]

• Singapore is a net exporter of chemical products, machinery and transport

equipment. Considering that Singapore is a developed economy, the
specialisation in such capital and technology intensive products is in line with
CA.
• Singapore is a net importer of non-oil products like food, beverages and
tobacco and animal and vegetable oils. Considering that Singapore is a
developed but small country, land and labour are expensive. Hence, the lack
of specialisation in these land and labour intensive products is in line with
CA.
• Singapore imports crude oil to refine into oil-based products like diesel and
petroleum. While much of the products are exported, some are for domestic
use. This is the reason why Singapore is a net importer. While Singapore
does not have any oil resources, it still has a comparative advantage in oil
refining.
• As Singapore is a transhipments hub, much its imports are re-exported out.
Such trade is not related to comparative advantage but more due to
Singapore’s location advantage along major shipping routes.

(b) To what extent does economic theory explain Singapore's FTAs

[15]

L1: Define FTA, trade creation, trade diversion and recognise that trade creation
and diversion can be used to explain why countries join FTAs. [1-3]

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2011 TJC JC2 Economics Tutorial Essays on Economic Integration

• A free trade area (FTA) exists when there is free trade among member
countries while each member levies different external barriers against non-
member nations.
• Trade creation arises when entry into a FTA causes the production of a good
to be shifted from a less efficient to a more efficient producer
• Trade diversion arises when entry into a FTA causes the production of a good
to be shifted from a more efficient to a less efficient producer
• A country joins a FTAs when if it expects to benefit from overall trade
creation

L2: Explain how trade creation and trade diversion and affect a country's
decision to join an FTA. [4-8]

• When countries join a FTA, the country gains from a rise in export demand
and export prices, resulting in a improvement in the terms of trade
• When there is trade creation, the country benefits from importing a good at
a cost that is lower that what it could produce domestically
• Hence when there is trade creation, the country benefits from joining a FTA
• When there is trade diversion, the country ends up paying more for its
imports as it is now importing from a relatively more inefficient foreign
producer and this worsens its terms of trade
• If the rise in import prices exceed the rise in export prices, the terms of trade
worsens, hence the country should not join the FTA

L3: Analyse other possible reasons for the existence of Singapore's FTAs [9-11]

• Countries may want to form a FTA with Singapore in order for its exports to
gain access to third party markets which also have FTAs with Singapore
• Singapore could be offering cutting-edge technology, technical skills and
research knowledge to a FTA partner
• Singapore could be using FTAs to enhance its transhipment business or
attract FDI
• Extradition treaties and cooperating on security issues could also be part of a
FTA

E: Discuss the extent to which the existence of Singapore’s FTAs is explained by

trade creation vs trade diversion. [12 -15]

• Since Singapore has no initial trade barriers for almost all goods and
services, it experiences neither trade creation nor trade diversion, so
Singapore’s decision to join an FTA must be based on other considerations
e.g. gaining new export markets, creating more transhipment business,
attracting FDI, enhancing bilateral relations with its neighbours, improving
cooperation on security issues etc
• Given that Singapore has FTAs with many countries, a potential FTA partner
may be looking more at taking advantage Singapore’s FTA’s network to gain
greater market access for its exports

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2011 TJC JC2 Economics Tutorial Essays on Economic Integration

• A developing country may want to sign an FTA with Singapore because it is

more interested in acquiring superior technology, skills and knowledge from
Singapore, which is a developed country
• Hence standard economic theory based on trade creation and diversion only
explains at best a small part of Singapore's FTA networks

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2011 TJC JC2 Economics Tutorial Essays on Economic Integration

Question 2

(a) Explain how Singapore might benefit from globalisation [10]

L1: Define globalisation and identify some benefits of globalisation [1-2]

• Globalisation refers to the increasing integration and interdependence of the

world’s economies arising not only from trade but also from greater mobility
of factors like capital, labour and enterprise
• Benefits of trade include higher possibilities & variety of consumption
• Benefits of factor mobility include the acquisition of more and better quality
resources thus enhancing long run growth

L2: Explain the benefits of increased trade & factor mobility [3-7]

• Benefits of trade - paragraph 20 – 25 of Trade notes

• Benefits of factor mobility - paragraph 35 – 38 of Economic Integration notes
• (3 distinct benefits is sufficient but both the benefits of trade and factor
mobility must be covered)

L3: Analyse the benefits of globalisation in the Singapore context [8-10]

• Being a small country with a small domestic market, trade enables

Singapore to produce for a much larger world market and hence reap
economies of scale
• Due to a hot, tropical climate and a lack of natural resources, trade enables
Singapore consumers to consume goods which cannot be produced
domestically
• As Singapore’s population becomes more educated and skilled, importing
lower skilled labour addresses the labour shortages in the lower skilled
sectors
• In the initial years of development, FDIs has enabled Singapore to not only
raise its rate of capital accumulation but also improve its productivity
through obtaining superior foreign technology and business practices

(b)Discuss the policies that the Singapore government has adopted to

alleviate the adverse effects of globalisation [15]

L1: Identify the adverse effects of globalisation [1-3]

• Adverse effects of ↑ trade include greater vulnerability to external DD & SS

shocks
• Adverse effects of ↑ labour mobility include structural unemployment while
that of ↑ capital mobility include exchange rate instability and more severe
asset bubbles

L2: Explain the adverse effects (at least 2) of globalisation [4-7]

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2011 TJC JC2 Economics Tutorial Essays on Economic Integration

• A greater reliance on exports means that any fall in export demand is more
likely to cause recession and demand deficient unemployment, while a
greater reliance on imports causes a country to become more affected by
imported inflation
• Structural unemployment arises when competition from foreign workers
displaces domestic workers who then lack the relevant skills or education
take up other jobs
• Free movement of short-term capital causes exchange rate fluctuations and
asset bubbles which result in increased macroeconomic instability

L3: Analyse the policies that Singapore employs to counter such problems [9-11]

• When faced with a recession, Singapore lowers wages and business costs to
reduce retrenchment and business failure, which helps preserve capacity so
that the economy can recover faster when external demand picks up
• To address structural unemployment, the Singapore government through the
WDA and the NTUC subsidise, coordinate and certify training.
• Using a managed float, MAS aims to minimize exchange rate volatility, curb
inflation and avoid a sudden loss of exported competitiveness.
• Singapore uses financial and administrative regulations to dampen
speculation in the residential property market

E: Evaluate the policies employed by Singapore in alleviating the adverse effects

of globalisation [12-15]

• Given Singapore’s inability to control both domestic and external demand,

supply side policies are the only options available
• Retraining is better than protectionism as it facilitates economic growth by
allowing better utilisation of labour resources, although the extent of
retraining is limited for those who lack even basic education
• Since Singapore is so trade dependent, it makes sense for MAS to manage
the exchange rate rather than domestic interest rates and money supply
• By using controls that directly target the property market, Singapore is able
to reduce the severity of asset bubbles without harming the rest of the
economy
• The policies employed are generally appropriate given the Singapore's
context