International Economics

Question 1

discuss the extent to which an economy would benefit from a protectionist stance on trade

Answer 1

economy would benefit

• tariffs increase P of M –>↓in M via a fall in Qd [domestic] and a rise in Qs [domestic] –> fall in import expenditure –> if the economy initially had a trade deficit, the deficit will be reduced –> improve CA and BOP
• ↑in Qsd would create more jobs –> UN↓
• since tariffs would not apply to goods made domestically, producers will be incentivized to relocate their manufacturing plants into the country –> increased inflows of FDI into the country [improves KFA and BOP] + more goods produced domestically means less dependency on imports [improves CA and BOP] + more investments increases AD and hence real national output [lowers unemployment]

economy would not benefit
- tit-for-tat retaliation would reduce X [CA may not improve]
- beggar thy neighbour effects in a globalized world –> mutual economic interdependence –> reduced trade and economic slowdown –> economic slowdown for TP too –> reduced ability of TP to purchase country’s X [CA may not improve]
- tariffs increases P of M –> COP may↑–> AS shifts upward [cost-push inflation]
- many domestic companies invest overseas to tap on the cost efficiencies provided by other countries –> tariffs would reduce their sales or increase their costs if
they have to shift to higher cost but lower tariff countries –> lower profits and dividends from investment income –>↓in primary income balance [CA may not improve]
- if X↓due to retaliation, AD↓–> combined in AD and AS will cause the country’s real output to↓–> EG↓+ UN↑

EV
- economy is unlikely to benefit
- in an increasingly globalized world, domestic companies are themselves benefitting from the greater profitability offered by lower costs from tapping on the global supply chains and higher revenues from foreign consumer
mkts –> a protectionist stance would deny them from such advantages due to consequences
such as retaliation or beggar thy neighbor effects
- a protectionist stance is usually triggered by unfair trading practices of TP or a loss in CA –> unlikely that such issues can be resolved simply by protectionism and neither does it address the root cause of the problem
- instead of turning inwards with a protectionist stance, an economy should adopt ss measures to enhance global competitiveness in its areas of CA, improve trade relations as well as address alleged unfair trading practices through diplomatic means

Question 2

explain how the exchange rate can be used to maintain price stability in Singapore

Answer 2

exchange rate: rate at which one currency trades for another on the forex mkt

price stability: situation in which there is zero or only small changes in GPL

SG actively pursues an exr policy that focuses on the gradual and modest appreciation of the SGD to neutralize dd-pull and cost-push inflation

dd-pull inflation

• appreciation of the SGD –> Px↑[FC] while Pm↓[DC] –> Qdx↓while Qdm↑–> X-M↓–>↓in AD [with diagram] –> GPL↓
• EV –> X-M component of AD for SG is higher than many other countries due to small domestic demand [small C and I] –> hence, exr policy will be effective in dampening dd-pull inflation as it targets a significant component of AD

cost-push inflation

• appreciation of the SGD –> reduces P of M [raw materials] which form the bulk of production cost –> COP↓[with diagram] –> GPL↓[as firms pass on the lower costs of production to consumers]
• EV –> SG has a lack of natural resources –> heavily reliant on M –> highly susceptible to imported inflation –> hence, exr policy will be effective in dampening cost-push inflation as inflation is usually imported in nature

Question 3

list the benefits of globalization

Answer 3

consumers

• can consume beyond PPC with favourable TOT
• more variety [intra-industry trade]
• lower prices
• higher quality

firms

• larger mkts [higher dd –> higher revenue + profit]
• cheaper FOPs [offshoring]
• reap IEOS by expanding in other countries [when they were previously constrained by small dom mkt]

employees
- higher employment [as derived dd for labour increase]

Question 4

list the costs of globalization

Answer 4

firms
- more competition esp for sunset –> lose MS and MP

employees

• SUE + WIG
• external shocks: recession –> CUE

Question 5

globalisation may not be desirable to

Answer 5

DCs
- SUE + WIG

LDCs

• brain drain
• neg externalities
• hard to develop infant industries

open economies
- external shocks [recession and inflation]

Question 6

assumptions of comparative theory may not always hold true in reality because

Answer 6

trade barriers
- trade more with countries that you sign FTAs with even though they may not produce at the lowest opp cost

transport cost barriers
- trade more with countries that are nearer even though they may not produce at the lowest opp cost [esp if the good is perishable / in the case of low-value added goods where transport cost takes up a sig proportion of COP]

dd factors
- diff TnP –> intra industry trade despite both countries having similar opp cost

FOPs are not homogenous / perfectly mobile
- opp cost is not constant but rising / PPC is not linear but concave –> partial specialisation instead of full

Question 7

patterns of trade change because

Answer 7

change in factor endowments

• govt policies –> retraining / lower income tax to attract foreign talents
• globalization –> influx of workers + tech transfer from FDI
• depletion of resources –> China: closer to Yf –> wages↑–> CA in LI sectors eroded

others

• Y levels –> China: strong EG –> import more lux goods
• trade policies

Question 8

discuss the impact of SG’s policies to promote free trade on consumers and producers

Answer 8

TCA: a country can gain from IT if it specialises in the production of goods it has a comparative advantage in

FTA: lower barriers to trade

FTA [good]

• consumers: greater variety + lower prices + higher quality [increase in competition –> firms incentivized to product and process innovate]
• producers: lower COP [imported factor inputs] + IEOS + higher revenue [increase in dd due to larger mkt] + higher profits

FTA [bad]

• consumers: CUE [external shocks: recession] + SUE + WIG [structural shifts due to increased specialization]
• producers: greater competition [from foreign firms] + external shocks: inflation

ssp: attract FDI [infrastructure] + increase X competitiveness [productivity]

ssp [good]

• consumers: maintain PP [GPL falls due to PEG] + higher mSOL + lower SUE [education and training] + nmSOL [convenience from new infrastructure]
• producers: lower COP [more productive workers] + higher profits + EEOS [infrastructure]

ssp [bad]

• consumers: lower nmSOL [opp cost: healthcare / transfer payments]
• producers: sunset industries receive less support

Question 9

discuss the likely impact of protectionism on the EG, inflation and SOL of an economy

Answer 9

perpetrator [good]

• M↓–> (X-M)↑–> AD↑–> EG↑+ UN↓–> mSOL↑
• protect infant industries –> gain CA over time –> X (high value-added goods)↑–> TOT↑–> mSOL↑
• protect sunset industries –> prevent / cushions SUE
• UN↓–> less stress for the unemployed –> nmSOL↑

victim [good]

• X↓–> AD↓–> dd pull inflation↓
• X↓for countries that pollute –> externalties↓–> nmSOL ↑
• inflation↓–> less stress for HH, especially the poorer ones who find it harder to cope with inflation –> nmSOL↑

perpetrator [bad]
- less access to cheaper or better imported
capital goods –> QQ of K –> slower rise in PC
- tariffs on imported inputs –> COP↑–> SRAS↓–> cost push inflation + EG↓+ UN↑–> mSOL↓
- M↓ –> (X-M)↑–> AD↑–> dd pull inflation –> mSOL↓
- intra industry trade↓–> product variety↓–> mSOL↓
- tariff diagram –> CS↓+ DWL –> mSOL↓

victim [bad]
- X↓–> AD↓–> EG↓+ UN↑–> mSOL↓