2022 H2 Economics Paper 2 Essay 6: Suggested Answers

Globalisation is the increasing interconnectedness and interdependence among countries. For Singapore, a small and open economy, it carries significant benefits and costs.

Benefits. Globalisation gives Singapore greater access to global markets and so more trade. The expansion in net exports raises aggregate demand from AD0 to AD1, lifting real national income from Y0 to Y1 and supporting higher economic growth, while the extra trade creates jobs and can reduce cyclical unemployment. A higher level of exports relative to imports also improves Singapore's balance of trade and supports a healthier current account. In addition, globalisation raises foreign direct investment, which brings technology and knowledge transfers. These improve the quality of the labour force and industry capabilities, raising productive capacity and shifting the long-run aggregate supply curve rightward from AS0 to AS1, which supports higher potential growth.

Costs. Because trade and investment form a large part of GDP, Singapore is highly exposed to external shocks. Recessions or downturns in trading partner countries reduce demand for Singapore's exports and investment, lowering real national income and harming employment and the balance of trade, as seen during episodes such as the 2008 financial crisis, the COVID-19 pandemic and the US-China trade war. Dependence on imports for necessities and raw materials means that inflation or unfavourable trade policies abroad can raise the cost of imported goods, causing imported or cost-push inflation. Finally, access to cheap foreign labour keeps costs competitive for the export sector, but the influx of low-cost labour can raise the supply of low-skilled workers and hold down their wages, which can widen income disparities as higher-skilled wages continue to rise.