Using AD-AS analysis, explain the impact of global recovery and international supply chain issues on Singapore’s economy.
In 2022, consumer prices in Singapore increased by 6.1%, marking the fastest inflation rate since 2008. This sharp surge in inflation was largely fuelled by the global economic recovery and disruptions to international supply chains.
a. Using AD-AS analysis, explain the impact of global recovery and international supply chain issues on Singapore’s economy. [10]
Aggregate demand
The post-pandemic global rebound saw rapid economic recovery across major economies such as the United States, China, and the European Union. As global incomes rose, foreign demand for goods and services increased, particularly from small, open economies like Singapore that rely heavily on exports. This surge in external demand led to an increase in Singapore’s net exports (X - M), a major component of aggregate demand.
As export revenues rose, the AD curve in Singapore shifted rightward from AD₀ to AD₁.
This outward shift reflects higher overall demand for Singapore’s goods and services in both external and domestic markets.
Beyond exports, global optimism and improving consumer and business sentiment also contributed to a rise in domestic consumption (C) and investment (I). As households felt more secure in their employment and incomes, they increased spending on goods and services. Meanwhile, businesses anticipating future growth were more willing to invest in new capital, technology, and infrastructure.
The cumulative effect of increases in C, I, and X led to a significant rise in AD.
In the AD-AS diagram, this movement causes real national output to rise from Y₀ to Y₁, while also pushing the general price level from P₀ to P₁.
This demand-pull inflation arises when the economy begins to operate closer to or beyond its productive capacity, and firms respond to excess demand by raising prices.
Aggregate supply
While demand was rising, the supply side of the economy faced serious constraints due to global supply chain disruptions. During the pandemic, many critical production and logistics systems were impaired. Key issues included:
Labour shortages due to illness, border controls, and quarantine rules.
Shipping delays and container shortages resulting from port congestion and uneven reopening of economies.
Increased cost of raw materials and intermediate goods, especially in electronics, energy, and food.
Singapore, as a highly import-dependent economy—especially for raw materials, capital goods, and food—was significantly affected. The increase in the cost of imported inputs raised firms’ overall cost of production, particularly in manufacturing and logistics-intensive sectors.
These higher costs led to a leftward shift of the short-run aggregate supply (SRAS) curve, from AS₀ to AS₁.
Firms were less willing or able to produce at previous output levels without passing on the costs to consumers, which further pushed up the general price level from P₀ to P₂, while output fell from Y₀ to Y₂.
This situation reflects cost-push inflation, where inflation is driven not by excess demand, but by rising production costs that squeeze profit margins and reduce the willingness or ability of firms to supply goods at prior prices.
Conclusion
On the one hand, the economic rebound increased aggregate demand through higher export revenues, consumption, and investment. On the other hand, supply chain disruptions constrained aggregate supply by raising production costs, leading to a leftward shift in SRAS. The combination of rising AD and falling AS caused inflationary pressures, explaining why Singapore experienced its fastest price increase since 2008.
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