(2017) A Level H2 Econs Paper 2 Essay Q6

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6. The Singapore economy grew by 1.8% on a year-on-year basis in the second quarter of 2015, sharply lower than the 2.8% growth in the preceding quarter, the Ministry of Trade and Industry (MTI) announced on Tuesday 11 August 2015.

(a) Explain the internal and external factors that are likely to have contributed to this slowdown in the economic growth rate. [10]

Internal factors 

Economy already at near full employment level 

1. With unemployment rate at between 2% to 3% in most years, Singapore economy is already operating at near full employment level 

2. This means that any increase in AD without an accompanied rise in AS would likely bring about more inflation than an increase in economic growth 

 

Tightening of foreign worker inflow 

1. The Singapore government has been tightening the inflow of foreign workers through increasing foreign worker levies / reducing dependency ratio ceiling 

2. This would likely mean that the increase in the foreign migrant labour population would be slower, facilitating a slower increase in LRAS 

 

External factors 

Slower regional / global economic growth 

1. Regional and global economic growth has been slowing down (contextualized to 2015) 

2. This would mean that the increase in demand for Singapore’s exports would likely be seeing a smaller increase 

 

Collectively 

1. Economy operating at near full employment level 

2. Smaller increase in AD 

3. Smaller increase in LRAS 

4. This would result in a smaller increase in GDP compared to previous years, causing a slowdown. 

(b) Discuss whether the policies aimed to increase the economic growth rate might cause difficulties for Singapore’s economy. [15]

Expansionary fiscal policy 

1. Expansionary fiscal policy can be carried out through increasing government expenditure 

2. For example, embarking on infrastructural projects such as building Changi Terminal 5 or building of new highways / schools / hospitals 

3. An increase in G -> increase AD -> increase real NY 

 
 

Usual problems associated with fiscal policy and whether they might cause difficulties for Singapore’s economy 

1. Increasing G when economy is operating at near full employment level can cause demand pull inflation -> this can apply to Singapore since our unemployment rate is at the natural rate of unemployment mostly 

2. Increasing government spending can lead to budget deficit which can cause higher debt / tapping into reserves -> this is likely less significant for Singapore’s economy at this point but with social expenditures increasing (e.g. healthcare) due to ageing population -> this can become a problem for Singapore eventually (depending on government spending to stimulate economic growth) 

 

Supply side policies 

Spending on education and retraining & reducing reliance on foreign labour 

1. Singapore takes a 2-pronged approach towards increasing potential growth & increasing our productive capacity 

2. On one end, we attempt to reduce our reliance on foreign labour through measures to tighten the inflow of foreign labour via increasing foreign worker levy / reducing dependency ratio ceiling 

3. On the other end, we increase spending on policies to encourage re-training and education e.g. SkillsFuture Credit -> such spending increases the skills & productivity of workers -> allowing a rightward shift of LRAS  

4. The two policies, when taken together, allows Singapore to achieve a sustainable way of increasing our productive capacity 

 

Problems with such a supply side policy and how they might cause difficulties for Singapore’s economy 

1. Policies to encourage retraining and education takes time; productivity increases take time 

2. At the same time – increasing foreign worker levy and reduction in dependency ratio ceiling can cause an increase in cost of production à->leftward shift of SRAS 

3. This can cause cost push inflation 

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