valuate whether Singapore’s status as an open economy supports improvements in its living standards.
In 2014, Singapore recorded a 2.9% growth in real GDP based on 2010 prices, while its total population increased by 1.3%. Inflation was at 1%, and the overall unemployment rate was 2%.
b. Evaluate whether Singapore’s status as an open economy supports improvements in its living standards. [15]
Singapore is an open economy that facilitates the movement of capital, trade, and, to some extent, labour. Openness to these factors has contributed significantly to Singapore’s economic growth and standard of living. By engaging actively in global trade and capital flows, Singapore benefits from economies of scale, lower production costs, foreign direct investment (FDI), technology transfer, and job creation. These contribute to both material and non-material improvements in the standard of living. However, openness also exposes Singapore to risks such as imported inflation, external economic shocks, increased competition for local firms, and potential social issues. Therefore, while being an open economy generally enhances the standard of living in Singapore, there are associated downsides that require careful management through government policies.
Openness to trade plays a crucial role in improving Singapore’s standard of living. By engaging in international trade, local firms gain access to global markets, allowing them to expand their production and benefit from economies of scale. This, in turn, enhances the competitiveness of Singapore’s exports. Additionally, openness to trade enables firms to import cheaper raw materials and intermediate goods, reducing production costs. Lower production costs improve firms’ profitability and competitiveness, which can lead to increased export demand. Consequently, net exports (X-M) rise, leading to an increase in aggregate demand (AD) from AD0 to AD1. As aggregate demand increases, national income experiences a multiplied increase, resulting in economic growth from Y0 to Y1. This process is depicted in Figure 5. Economic growth generates employment opportunities as firms expand production and require additional labour, thereby reducing unemployment. With higher employment and incomes, individuals gain greater purchasing power, improving their material standard of living.
Figure 5
Consumers also benefit from openness to trade, as they have access to a greater variety of imported goods and services. This enhances consumer choice and allows Singaporeans to enjoy high-quality and affordable products, further improving their material standard of living.
Openness to capital further supports economic growth and enhances the standard of living in Singapore. The country’s liberal capital policies, along with its investment-friendly environment, attract significant inflows of foreign direct investment (FDI). These FDI inflows stimulate economic activity by increasing aggregate demand through investment spending, leading to a multiplied increase in national income and economic growth (as illustrated in Figure 5). The expansion of business activity also leads to higher employment levels, which enhances material well-being by providing individuals with higher incomes and greater purchasing power.
Beyond the immediate economic benefits, FDI contributes to long-term economic development by bringing in advanced technology and expertise. In industries such as aerospace engineering and the casino sector, the transfer of skills and knowledge benefits local workers, enabling them to command higher wages. Higher wages enhance purchasing power, further improving material standards of living. Moreover, FDI has led to infrastructural developments, such as those seen in the Marina Bay and Sentosa areas. Investments in infrastructure, including shopping malls, entertainment venues, and restaurants, have expanded leisure and lifestyle options for residents. These amenities contribute to the non-material standard of living by enhancing overall quality of life through greater recreational opportunities.
However, the openness of Singapore’s economy also presents challenges that may negatively impact the standard of living. One of the key risks of being heavily reliant on trade is exposure to imported inflation. When trading partners experience supply-side shocks or when the Singapore dollar depreciates, the cost of imported goods and raw materials increases. As a result, firms may pass on higher costs to consumers, reducing their purchasing power and lowering material standards of living. Additionally, economic openness makes Singapore susceptible to external economic shocks, such as global recessions. During downturns, a fall in global demand reduces demand for Singapore’s exports, causing aggregate demand to decline. As shown in Figure 6, this leads to a contraction in real national income, lower disposable incomes, and a decrease in purchasing power, ultimately reducing the material standard of living.
Similarly, openness to capital poses challenges for local businesses. The presence of multinational corporations (MNCs) in Singapore intensifies competition, making it difficult for small and medium enterprises (SMEs) to survive. Many smaller firms may struggle to compete with MNCs in terms of pricing and economies of scale, leading to business closures and increased unemployment. While FDI generates employment opportunities, job displacement in local industries could offset these gains and negatively impact individuals who lose their livelihoods.
Furthermore, certain types of FDI may contribute to social issues that negatively affect non-material well-being. A prime example is the casino industry, which, despite its economic contributions, has led to an increase in gambling-related social problems, such as financial distress and higher crime rates. These negative externalities can undermine non-material standards of living by increasing social stress and financial instability among affected individuals and families.
Conclusion
In conclusion, Singapore’s openness to trade and capital flows has largely contributed to higher material and non-material standards of living by fostering economic growth, employment, and access to a wide range of goods and services. However, openness also brings challenges such as vulnerability to external shocks, inflationary pressures, competition for local businesses, and social issues. The Singaporean government actively mitigates these downsides through various policies. These include a managed exchange rate policy to control imported inflation, a prudent fiscal strategy to build financial reserves as a buffer against external shocks, and regulatory measures such as casino entry levies to curb the social ills associated with gambling. Overall, while the benefits of an open economy outweigh its drawbacks, continuous policy intervention is necessary to sustain and enhance the standard of living in Singapore.
📚 More Free A Level Economics & GP Resources — Just a Tap Away
If this model essay helped, you’ll love what’s waiting on our ETG Telegram Channel. Join over 2,000 JC students across Singapore and get instant access to high-quality revision materials — absolutely free.
Curated by Mr Eugene Toh, one of Singapore’s top economics tutors, these resources are designed to help you revise smarter — whether you're in JC1 prepping for Promos or in JC2 aiming for A Levels.
🎁 What You’ll Get:
📘 Model Essays (Economics & GP)
📊 Summary Notes for fast revision
📉 Annotated Diagrams for Micro & Macro topics
✍️ GP Templates, Examples & Paragraph Starters
💡 Study Tips, Evaluation Hacks & A Level Predictions
📲 Join free now → t.me/etgecons
No need to be enrolled in our H2 economics tuition or JC economics tuition classes to benefit — this is our way of giving back to every student searching for quality economics tuition Singapore support beyond the classroom.
Share the link with a friend, bookmark your favourite notes, and let’s score that A — together. 💪