(2015) A Level H2 Econs Paper 2 Essay Q6

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6. “We are restructuring to become more competitive, not less.” Mr Lim Hng Kiang, Minister for Trade and Industry, The MTI Times, Committee of Supply 2013.

(a) Explain why an economy’s comparative advantage might change over time. [10]

Explain comparative advantage

1. The theory of comparative advantage states that countries should specialise in what they have a comparative advantage in and export such goods while importing what they do not have a comparative advantage in

2. A country is said to have a comparative advantage in a specific good, if the opportunity costs associated with the production of such a good is lower than the opportunity costs of the production of another good

Changes in labour costs

1. Periods of economic development can lead to significant income growth over time, which can lead to a significant increase in wages of workers.

2. As wages of workers increase, a country that previously had a comparative advantage in producing low-value manufactured goods / labour intensive industries may find itself losing comparative advantage in such industries.

3. For example, Singapore used to be specialised in the production of hard-disk drives and was a key exporter of such a good. As labour costs went up, the comparative advantage in the production of such goods were eroded

Changes in technology

1. Technological advancement can reduce the cost of production and therefore increase the supply of a good -> as prices of goods fall -> the opportunity costs associated with the production of the good can increase (because it can be more viable to produce other goods with the labour / land resources available in the country)

2. For example, as prices of computers & electronics have fallen significantly over the years, the opportunity costs associated with the production of such goods will increase as the resources devoted to the production can be diverted towards the production of goods that can be sold for higher prices.

Changes in government policies

1. Government policies providing specific industries with subsidies, can as well have an impact of the comparative advantage of the good

2. Such subsidies, when given over time, can possibly help the industry grow in terms of output and efficiency.

(b) ) Assess the measures adopted by the Singapore government to improve its global competitiveness. [15]

Define global competitiveness

1. Ability to attract investments

2. Ability to attract foreign talent

Competitive tax rates

1. Low corporate tax rates – at 17%, our corporate tax rates are kept competitive and is one of the lowest in the world – this helps Singapore to attract investments inwards

2. Low personal income taxes – between 0 to 20%, our personal income taxes are also one of the lowest in the world – encourage workers to work more, and also attract inward foreign talent à increases our productive capacity

Quality & reliable infrastructure

1. Long term government spending on building reliable and comprehensive infrastructure to support businesses

   • Comprehensive and extensive transport networks – reduces transport time

   • High speed fibre broadband – improves business connectivity

   • Strong air & sea infrastructure (airports, ports) – increases air & sea links to the rest of the world

   • Reliable electricity and water supply

2. The above lowers the cost of doing business & increases the ease of doing business -> attracts investments

Ensuring labour force is equipped with relevant skills

1. Significant government spending on education, e.g. building of new universities & education forming one of the largest % of total government expenditure

2. Improvement in skills of workers à attracts investments

3. Policies such as SkillsFuture also help to ensure that skills of workers remain relevant

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