Вы находитесь на странице: 1из 15

TJC 2014 Preliminary Examinations: H2 Economics CSQ 1

Question 1 The evolution of the US domestic airline industry


Suggested answers
(a)

(i)

State the theoretical relationship between market power and prices in an


industry.

[1]

The greater the market power, the stronger the monopoly power, the higher the prices.
(ii)

Do the data reflect this relationship? Explain why or why not.


No, the data does not reflect this relationship stated in a(i) because despite the
number of carriers shrinking from eight or nine big carriers in 2000 to just four
(Extract 2), fare prices generally fell from 2000. [1]
Demand factor [2m]
The fall in fare prices (especially between 2008 and 2010) could be due to the
subprime mortgage crisis that led to a recession. This resulted in a fall in demand
for air travel, which is a luxury good, and hence a fall in fare prices.
Cost factors [2m]
Market dominance: as firms consolidate and grow bigger, they are at a better
position to reap internal economies of scale (e.g., bulk buy, managerial
economies, etc.), and this would result in their AC and MC falling, and hence
translating to cheaper prices
Price wars: as the domestic carriers are generally oligopolistic in nature and are
therefore mutually interdependent, there is a tendency for them to engage in price
wars. This is evidenced in the fire-sale airfares (Extract 2) charged by airlines.
This might possibly motivate the airlines to continually lower prices to undercut one
another, resulting in a price war and hence a fall in fare prices.
Bundling (indirect price discrimination): the fall in fare prices could also be due to
the existence of low cost carriers that charge low base fares but high ancillary
fees. The low base fares could have lowered the average fare prices.
Students just need to cite one possible demand and another possible cost factor to
score all 4m in the explanation component.

[5]

TJC 2014 Preliminary Examinations: H2 Economics CSQ 1

(iii) Describe the trend of the net income of US carriers over the period of 2004 to
2013.

[2]

25,000
20,000
15,000
10,000
5,000
0
-5,000

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

-10,000
-15,000

-20,000
-25,000

Total

-30,000

(b)

(i)

Net income level of the US carriers generally increased over the period of 2004 to
2009 [1]
The net income level of US carriers experienced great fluctuations between 2004
and 2009, but these fluctuations moderated after 2009. [1]

Identify how the market structure for domestic US airlines has evolved since the
early 1970s.

[2]

The deregulation of US domestic airlines in 1978 has caused the industry to evolve
from a more oligopolistic market structure to a more monopolistic competitive market
structure. [1m]
However, consolidation in the 2000s has caused the more monopolistic competitive
market structure to revert to a more oligopolistic market structure. [1m]

(ii)

Explain the reasons for the evolution identified in b(i).


Deregulation [2]:
The deregulation of the US domestic airline industry was a government
intervention to open the industry to higher levels of competition. This could force
carriers to increase efficiency and hence mitigate the rising costs arising from:
o Arab oil embargo ! rising cost of fuel (Extract 1)
o Inefficient routes (i.e. insufficient passengers per flight to cover the cost
of flying)
o Bureaucracy
The rising cost of production were passed onto consumers as rising fares,
resulting in mounting congressional pressure to review the regulated industry in
the interest of consumers.
Consolidation [2]:
The airline industry was making losses, causing many firms to face bankruptcy.
This led to the merger of firms in order to survive.
2

[4]

TJC 2014 Preliminary Examinations: H2 Economics CSQ 1

o
o

Labour costs were high due to the unionisation of workers that allowed
for a greater bargaining power for higher wages. Airlines were earning
supernormal profits then and hence, were not as stringent with wage
increases.
However, they were unable to cope with the high costs of production
when their revenue fell and hence some resulted in bankruptcy.
Merger of firms occurred, allowing the newly merged firm to reap
internal economies of scale (e.g., bulk buy, managerial economies,
etc.). This may help firms to lower their costs of production and become
profitable.

Mergers and acquisitions occurred as firms seek to reduce competition and


increase their market share.
o The larger market share may increase the firms market power and
enable the firm to set higher prices, hence earning higher revenue and
profits.
o The larger firm may also compete away market share from smaller
firms, resulting in a rise in demand. This may lead to an increase in
total revenue and profits.

Consolidation may have occurred because larger firms tend to have greater ability
to deal with demand shocks than smaller firms.
o The 2008 subprime crisis resulted in the global recession and a fall in
demand (both internal and external) for flights. Smaller firms tend to
have less ability to deal with sudden shocks relative to the larger firms.
Hence, the smaller firms may have fallen out of the industry (shut
down) or may have been acquired by the larger firms, resulting in the
consolidation.

Students just need to cite one possible reason for the consolidation to score the 2m.

(iii) Discuss the costs and benefits of the consolidation.


Introduction
A consolidation in the airline industry would reduce the number of existing firms and
allow major airlines such as Delta, United, Southwest and the new American to have
larger market shares and market power in air travel. This answer analyses the costs
and benefits of the consolidation to households, firms and the economy.
Costs:
Households
The consolidation increases the market dominance of the airlines, which may
reduce consumer surplus.
o With the consolidation, the degree of competition in the airline industry
is further reduced. The newly merged firm enjoys greater market power
and with its increased pricing power due to fewer available substitutes,
it has the ability to set higher prices and reduce output. As suggested in
Extract 2, profit-hungry carriers undoubtedly will push fares as high as
possible on routes with less competition. Hence, the firm may enjoy a
higher level of supernormal profits.
o Higher prices would reduce consumer surplus.

[8]

TJC 2014 Preliminary Examinations: H2 Economics CSQ 1

Economy
The increased market dominance may worsen market failure and inequity.
o [market dominance diagram to illustrate market failure] The difference
between price and marginal cost is now greater and hence allocative
inefficiency is worsened, with the result being a larger deadweight loss.
o As profits are concentrated in the hands of the merged firms, and firms
enjoy these profits at the expense of consumers who have to bear the
higher prices, there is greater inequity.
Benefits:
Firms
The consolidation might have helped with the survival of some of the major players
that could have filed for bankruptcy, if not for the merger.
o According to Extract 2 and Table 1, Consolidation is finally helping a
money-losing industry become profitable and the airline industry has
been making profits in recent years.
o The merger is likely to improve the firms efficiency by cutting redundant
or unprofitable routes, or replacing aging fleet that was not as fuelefficient.
o By merging to achieve greater scale of production, firms are able to
enjoy greater internal economies of scale through marketing economies
such as bulk purchase of aircrafts or lower unit costs of advertising.
o These have enabled firms to lower their unit cost of production and
hence increase profitability.
Households
The cost savings mentioned above can be passed on to consumers in terms of
lower prices, enhancing consumer welfare.
Stability in the airline industry brought about by the consolidation also allows for
greater stability in employment in the industry.
Evaluation
Even though there is increased market dominance, there has not been a
significant increase in fares. Instead, extract 2 mentioned, Since 2000, the
average airfare has fallen by 18 per cent. The consolidation may not
necessarily result in higher prices and hence the costs mentioned above. This
could be because the internal economies of scale reaped by the merged airlines
and costs savings were also translated to lower prices for consumers.
In particular, the merger between American and US Airways requires them to
divest prime take-off and landing slots at six key airports which will increase the
competition on non-stop and connecting routes throughout the country. The
government can regulate the consolidation such that it allows firms to be profitable
without reducing the level of competition in the market.
Hence, the benefits of consolidation may potentially outweigh the costs, which
perhaps can be inferred from the stance of the Department of Justice in allowing
the merger of American and US Airways.
Other possible costs:
Union loses bargaining power
o Consolidated firms have greater leverage over workers in comparison
to the 1990s where individual firms with smaller market share
Loss in choice of airlines that ply similar routes, lowering consumer surplus.
Other possible benefits:
Higher returns on investment in the airline industry might result in greater investor
4

TJC 2014 Preliminary Examinations: H2 Economics CSQ 1

optimism! higher levels of investment ! increase in AD


Reduce business costs due to improvement in transportation networks
Level Description
For a well-developed and balanced discussion of costs and
benefits of consolidating the airline industry on households, firms
OR the economy. Well-supported with case study evidence.
For an underdeveloped OR unbalanced discussion of costs and
benefits, OR an answer not well-supported with case evidence.

5-6

L1

For an answer that shows some knowledge of benefits and costs


of consolidation.

1-2

For a substantiated judgment and/or evaluative assessment


based on economic analysis.

1-2

L3

L2

(c)

Marks

3-4

Assume you are the economic advisor to the CEO of Jetblue. Justify your
recommended strategies for Jetblue to remain competitive in the airline
industry.
Introduction
In view of the recent spate of mergers by major network carries, there are clear
changes in the domestic airline industry. Given these changes, competitive strategies
ought to be reviewed in order to keep abreast with the times. New strategies should
focus on two key aspects, avoiding or mitigating the threats. As well as seizing the
opportunities that are opening up. In order to identify these strategies, one needs to
first recognise the current situation and possible trends in the industry.
Current situation + Possible trends (as seen in Extract 4)
Segmenting of the market:
Clear segmenting of the market into 3 separate segments
o (1) Network carriers American Airways, Delta Airlines
o (2) Low-cost carriers Southwest, Jetblue
o (3) Ultra low-cost carriers Spirit, Frontier
While the industry may exhibit certain characteristics that would take after the
major players, individual firms that belong to the separate segments will still be
able to exhibit characteristics and behaviour that differs from the overall
industry
Mergers of major network carriers:
Industry is evolving to become more oligopolistic in nature due to the various
mergers and acquisitions. As such, the remaining network carriers will be
gaining in market share and power.
Network carriers will then have greater price setting abilities, which further
restricts the smaller firms in the industry to following the prices set
Government stance on mergers in the industry
By allowing the merger of American and U.S. Airways, it implies that the U.S.
government is not against the consolidation of the industry in light of the
possible benefits it brings in comparison to the potential damages if a major
airline closes down
Nonetheless, the ruling for the newly formed American Airways to divest its
5

[8]

TJC 2014 Preliminary Examinations: H2 Economics CSQ 1

slots is seen as guaranteeing a bigger foothold for low-cost carriers at key U.S.
airports and is a signal for other firms in the industry about the governments
attitude towards competition
Business model of low-cost carriers converging to that of network carriers
Higher costs experienced by low-cost carriers due to
o Aging aircraft fleet which would cost more to maintain and will have
lower cost efficiency
o Maturing workforce which will increase labour costs as these workers
are promoted and given wage increments through seniority
Due to this increasing cost of production, low cost carriers increase their fares
to retain their profit margins, hence, fares will given to resemble network
carriers
This results in low-cost carriers losing their competitive edge over network
carriers, which was always the lower fares due to their ability to keep costs low
Growth of ultra low-cost carriers
Emergence of ultra low-cost carriers resulting in a new wave of price
competition by these carriers in an attempt to undercut BOTH network and lowcosts carriers
Increasing emphasis in improving product quality
Customers are placing more value on customer experience and this is resulting
in firms being more willing to invest in improving product quality (e.g. in-flight
Wi-Fi, premium seating options, and operational reliability infrastructure)
Given these current and future trends, Jetblue needs to understand its position as a
low-cost carrier in the U.S. domestic airline industry and the various threats and
opportunities that it faces in order to implement possible strategies.
Threats:
Increasing costs (as explained in the convergence of business models with
network carriers)
Falling demand ! Falling revenue
o Demand for Jetblue may be competed away by network carriers who
would have consolidated and are now better placed to engage in
aggressive competitive strategies (i.e. price wars, advertisements) as
they are able to reap greater internal economies of scales, hence,
incurring lower average costs, directing the profits to these competitive
efforts
o Demand for Jetblue may also be competed away by ultra low-cost
carriers who are able to charge a much lower airfare for the same
product air travel. Customers who are more price elastic in their
demand may choose to switch to ultra low-cost carriers due to the rising
airfares charged by Jetblue due to the increasing cost of production.
These customers tend also to be those who are flying short-haul flights
and are not overly concerned in the disparity between the services
provided on a low-cost carrier like Jetblue and the services that will
incur high ancillary fees on ultra low-cost carriers such as Spirit
Opportunities
Divestment of the newly formed American Airways
6

TJC 2014 Preliminary Examinations: H2 Economics CSQ 1

Mandate by the Justice Department for the firm to divest themselves of


prime take-off and landing slots at six key airports will allow other firms
to gain a foothold in the industry.
These slots are the rights to operate a service at a particular time and
place. As such, by having a greater number of such slots, an airline is
basically able to obtain greater market power in the industry since other
airlines will not be able to take-off and land on the firms slots.
As mentioned in Extract 3, this divestment provides opportunities for
other firms such as Jetblue to purchase these slots and increase their
market power

U.S. governments stance on mergers and acquisitions


o While there were objections to the various mergers and acquisitions in
the industry, most of these seem to have been approved by the U.S.
Justice Department.
o This might signal to firms that such actions are acceptable under
certain circumstances, hence, providing an opportunity for Jetblue to
follow suit if necessary
o However, a merger may not necessarily be the way to go since Jetblue
may lose its identity in the merger. Mergers may also result in a lengthy
period of de-conflicting with the other firm (i.e. Southwest) where two
firms may have differing ideas of how the merged firm should be
managed.
o It is good to note that the network carriers are moving towards the route
of merging with others only when they are facing bankruptcy and it
does seem as though merger is a desperate measure to prevent the
firm from shutting down.
o In the case of Jetblue, it might wish to engage in acquisition processes
that will still allow it to gain market power and increase its output,
thereby reaping more substantial internal economies of sale to reduce
its LRAC.
o Assuming that Jetblue is willing to pass these cost savings on as lower
prices, it will definitely cement its status as a low-cost carrier and to
make its demand more price inelastic.

It is vital to understand that the trends identified can be seen BOTH as threats and
opportunities, depending on how the firm approaches the situation and the strategies
implemented. That will eventually result in the firm Jetblue benefiting or losing due to
these trends.
Strategies in response
Upgrade operations and improve efficiency & buy newer, more fuel-efficient planes
o Lower costs of production ! cope with the rising costs and maintain cost
advantage
o However, one still needs to take into account the high initial cost outlay in
order to replace the entire fleet. As such, a possible suggestion would be to
do so in parts, and to proceed with the replacement when the firm is
earning supernormal profits to sustain this increased expenditure and still
break even (normal profits).
o It would be important to identify the presence of long run cost savings in
order to justify short run expenditure as well

TJC 2014 Preliminary Examinations: H2 Economics CSQ 1

Adopt business model held by ultra low-cost carriers in charging low airfares but
higher ancillary fees so as to compete for market share through low pricing but to
cover its increasing costs through ancillary fees
o The optional ancillary fees will also reduce operational costs since not
every passenger will opt for these added services
o By charging a lower base fare, it might translate to consumers as lower
prices since there will be consumers who might not consume any of the
added services that will be charged ancillary fees
o However, there are several questions should be asked at point of decision:
(1) consider the pros and cons of competing with ultra LCCs, especially
given LCCs rising costs (2) how would a firm that is facing rising costs still
be able to reduce its airfare?

Improvement of product quality


o Differentiate services and strengthen brand loyalty
o Jetblue needs to focus on non-price competitive strategies so as to reduce
its substitutability in relation to other low-cost carriers and definitely to ultra
low-cost carriers
o This may result in an increased market share ! ability to pass on higher
costs in terms of higher prices due to relative price inelasticity of demand
! higher total revenue to offset increases in costs

With the sale of taking-off and landing slots to low-cost carriers under the terms of
the settlement, Jetblue could buy the slots in order to expand Jetblues routes and
possible flight timing
o In doing so, it may allow Jetblue to gain a larger market share, hence,
increasing total revenue.
o Prime slots may allow Jetblues flights to shift to certain timings that would
greatly influence the demand of passengers. It may result in Jetblue flights
becoming more price inelastic as well for certain passengers who would
wish to fly at these prime timings and wont mind paying the added
premium to do so.
o Operating flights from these key US airports could also ensure a greater
chance of survival.

Giving up status as low-cost carriers and converge towards a network carrier


either by merging/acquiring another airline or to attempt to do so on its own may
be a possible strategy as increasing scale of production to reap internal economies
of scale in order to tackle the increasing costs of production

Conclusion
Eventually, Jetblue may have to consider if it would be better placed to compete
against the major network carriers, or to complete against the ultra low-cost carriers
seeing how its current category (LCC) might converge with network carriers and may
even be acquired by the network carriers.
Level Description
L3

Marks

For a well-developed and balanced justification of


recommended strategies that Jetblue is able to adopt given the
current trends in the industry. Well-supported with case study
evidence.

5-6

TJC 2014 Preliminary Examinations: H2 Economics CSQ 1

L2

For an underdeveloped recommendation of strategies that Jetblue


is able to adopt with reference to current trends that is supported
by case study evidence
and/or a developed recommendation of strategies that is not well
supported with case study evidence.

3-4

L1

For an answer that shows some knowledge of the airline industry


and the possible strategies available to Jetblue without any
attempt to justify with case evidence.

1-2

For a substantiated judgment and/or evaluative assessment


based on economic analysis.

1-2

TJC 2014 Preliminary Examinations: H2 Economics CSQ 1

Question 2 - Suggested Answers


(a)

(i)

Explain how the current account of an economy is calculated and suggest [3]
an explanation for the 62% growth in the current account of Singapore from
2009 to 2010.

The current account of the balance of payment contains four items: (1) the
balance of trade in goods; (2) the balance of trade in services; (3) net primary
income flow or net property income from abroad; (4) and the secondary
income flow or net unilateral transfers. [1]

The addition of all positive and negative payments reveals the current
account balance Credit items could include export revenue, dividends from
foreign financial investments and transfer of financial assets from Singapore
to overseas. Debit items could include import expenditure, repatriation of
money from foreign workers in Singapore and grants by the Singaporean
government to developing countries. [1]

The 62% growth from 2009 to 2010 can be explained by the recovery of other
countries from the 2008/9 recession leading to an increase in Singapores
exports. [1]

NOTE: Any reference to recovery from recession and exports will be credited.
(ii) Using Tables 3 and 4, explain the change in relative importance of the USA [2]
and China as Singapores trading partners, from 2007 to 2012.
14%
13%
12%
11%
10%
9%
8%
7%
6%
5%
2007

2008

US Imports

2009

2010

US Exports

China Imports

2011

2012
China Exports

The data reveal the relative increase in total trade with China and the relative
decline in total trade with the USA. [1]

This could be due to the decoupling of the US and Chinese economies.


Between 2007 and 2012, the US economy was undergoing a recession
caused by the financial crisis (hence lower ability to purchase Singaporean
exports), while the Chinese economy, relatively sheltered from the ill effects
of the financial crisis, managed to recover fairly quickly (hence higher ability
to purchase Singaporean exports). [1]

10

TJC 2014 Preliminary Examinations: H2 Economics CSQ 1

(b)

Explain one reason why the Chinese government is promoting structural [3]
change.

The government of China is promoting structural change to achieve


sustainable growth. [1]
The pattern of growth in China when unevenly relying on investment and
exports makes China vulnerable to external shocks. [1]

Any one of the following:


This has caused an imbalance with a relatively low level of consumption
expenditure [1] OR

(c)

Consumption expenditure is essential to ensure real GDP per capita


increases in China [1] OR

High levels of investment expenditure may lead to a waste of resource if the


economy develops excess capacity [1]

Extract 6 reports that the Indian middle class is expected to double by 2016. [4]
Explain how this might affect trade between India and Singapore.

(d)

The rise of a significant middle class in India may boost demand for
Singaporean export goods because Singapores economic growth relies on
exports. [1]
The extracts reveal that Singaporean firms are eager to develop markets
beyond the borders of the city-state. For instance, Charles and Keith may be
able to export to India or engage in outward financial direct investment (FDI)
and set up stores in India. References to SATS will also be credited with 1
mark. [1]
The extracts also refer to Singapores private hospitals. A reputation for high
quality medical service may encourage Indians to seek treatment in
Singapore; adding to Singapores invisible exports. [1]
Similarly, invisible exports may also rise with more Indians visiting Singapore
or travelling on Singapore Airlines. Foreign travel may be income elastic and
the rising levels of affluence may boost tourism, as has been the case with
China. [1]

Analyse potential impacts of the punitive tariffs on American producers [8]


and consumers.
Introduction

This essay analyses the potential positive and negative impacts on American
producers and consumers of punitive tariffs imposed by the US government
on imported steel products.

Thesis: Positive Impacts on American Producers

One of the major problems of increased globalisation is the dislocation


caused by inflows of cheaper imports. The US government may have reacted
to political pressures from unions and workers to protect their jobs from
cheaper steel imports. Structural change can be painful and often countries
are quick to accuse competitors of cheating i.e. unfair competition by
dumping.

The use of punitive sanctions may appear to be a solution to the problem of


importing steel. Raising the price of imports creates a level playing field with
11

TJC 2014 Preliminary Examinations: H2 Economics CSQ 1

the domestic production of steel. In the short-term workers retain employment


and firms continue to make profits. The tariff raises the price of imported
steel and because of the likely negative cross price elasticity the demand for
US steel will rise.

The creation of, or the protection of, jobs in the US steel industry will have a
positive impact on the households of American steel workers. This is a
potential impact on consumers.

Anti-Thesis: Negative Impacts on American Producers and Consumers

Producers: However, one of the fundamental principles of economics is that


competition can lead to efficiency. Protecting firms from competition may
weaken the incentives to cut costs or innovate. The long term future of
protected industries may be damaged by protection and the 118% tariff may
just delay the inevitable decline.

Consumers: US buyers of steel products may also suffer negative


consequences. Steel is a primary product and an increase in price may filter
through to increases in the CPI and add to inflationary pressures. Persistent
inflationary pressures fuel inflationary expectations and wage price spirals
can develop. An increase in wages without an increase in output will simply
add to the cost disadvantages of US producers. The US has a major auto
industry that is a heavy user of steel. The industrys inability to obtain the
cheapest supplies of steel may reduce its international competitiveness.
Thus the sanction may provoke the decline of other industries. This is
especially important in a globalised world. The US car industry competes with
Korea, Japan and Europe and its domestic and export markets may be
damaged by higher raw material costs.

Similarly consumers may pay higher prices for goods containing US steel, or
they may switch to buying cheaper imported substitutes. As mentioned
above if steel prices impact on the CPI households may claim higher wages
to protect their real income. A fall in real income may represent a fall in
household material standards of living.

Conclusion

In conclusion, overall the real issue is that dumping is often hard to accurately
identify, because lower labour costs or significant economies of scale may
cause lower prices and marginal costs are not easily measured. If the
allegation is unfounded there may be a long-term negative impact on the US
economy that will impact both US producers and consumers, which suggests
that it is not in the interests of the USA to impose punitive tariffs as they are
only punishing themselves ultimately.

NOTE: Clear reference to impacts on American producers and consumers is


required.
Level Description

Marks

L3

For a well-developed response that discusses the various


positive and negative impacts of the tariffs on American
producers and consumers, with reference to the source.

56

L2

For an unbalanced response that deals mainly with the


impacts of the tariffs, with reference to the source.

34

12

TJC 2014 Preliminary Examinations: H2 Economics CSQ 1

(e)

L1

For any undeveloped responses that make no reference to


the source.

For answers that show evaluative judgment or comment.

12
+2

Discuss the threats and opportunities facing the economy of Singapore in [10]
light of recent developments.
Introduction
This paper examines the threats and opportunities facing Singapores
economy in light of the recent developments in Asia, the USA, and Europe.
What are the major international events or trends that impact Singapores
economy
Asia is facing major economic changes. First, according to Extract 5, China is
restructuring its economy away from an investment and export-driven
economic model in favour of consumption-based growth, and building a more
competitive and vibrant economy that opens China to more private and
foreign participation. Second, according to Extract 6, India has a growing
middle class with a fast growing consumer market with rising incomes. Third,
in Extract 9 there is the rise of Myanmar, with its abundant resources and
cheap labour, which may be a big draw for Foreign Direct Investments (FDI).
Fourth, also in Extract 9, Japan is vigorously re-structuring through its
continued quantitative easing leading to a weakening yen.
The USA is starting to recover while Europe languishes. In Fourth, in Extract
9 it is stated that the USA is recovering, gaining competitiveness due to share
oil and gas, lower wages, and a resurgent industrial policy, while the
European Union (EU) is still in the doldrums, meaning still facing low growth
rates and high unemployment.
Threats
It can be argued that the recent Eurozone crisis and the continued low growth
rates and high unemployment in Europe pose a threat to Singapores
economic growth. As Singapore is a trade-dependent economy and Europe is
one of Singapores major trading partners, weak economic growth and high
unemployment could mean continued falling exports to Europe, which could
potentially hamper Singapores actual growth.
It can also be argued that the rise of Myanmar as a resource-abundant, lowcost producer could draw away FDI from Singapore, thus potentially posing a
threat to Singapores actual and potential growth. This is because Singapore
now faces a new competitor for investments, and Myanmar arguably is a
more attractive investment destination since its opening up from junta rule.
It can further be argued that, while a weakening yen implies cheaper
Japanese imports for Singapore, it means that Singapore exporters will face a
tougher time exporting goods to Japan. This is because the Singapore dollar
will appreciate vis--vis the Japanese yen due to aggressive expansionary
monetary policies and continued quantitative easing (QE) by Shinzo Abe. In
addition, Japanese QE could result in asset bubbles in Singapore, for
instance in the property and stock markets, due to the rapid inflows of cheap
capital. Therefore, the events in Japan could potentially pose a threat to
Singapore.
It can also be argued that if Chinas rebalancing efforts lowers Chinas rates
of economic growth or causes Chinas national income to fall, during the
transition from an investment and export-driven model towards consumptionbased growth, this may negatively impact Singapores exports to China.

13

TJC 2014 Preliminary Examinations: H2 Economics CSQ 1

Opportunities
However, a rising China and India may also provide opportunities for the
Singapore economy. First, rising consumption-based growth in China could
mean increases in Singapore exports to China as well as increases in
Singapore exports to other countries if China reduces its exports, which would
promote actual growth thus increasing Singapores AD, and possibly
promoting investments into export-oriented sectors, thus potentially
increasing Singapores AS. Second, the growing middle class in India with
rising incomes means a fast expanding consumer market for Singapore to
export to. Therefore, this could mean good news in terms of higher growth
and lower unemployment for Singapores economy.
Furthermore, in the USA, recovery could mean rising incomes, which could
potentially translate into more Singapore exports to the USA. This would
eventually raise Singapores AD and thus promote actual growth, and lower
unemployment in Singapore. Therefore, a healthy USA would be beneficial to
Singapore.
It can also be argued that the rise of Myanmar also provides Singapore
companies with a good chance to invest overseas, with many Singapore firms
such as Yoma Strategic Holdings investing in Myanmar. Capital outflows to
Myanmar could possibly result in future inflows into Singapores current
account. In addition, Singapore companies could tap on the comparative
advantages afforded by the relatively cheap land and labour in Myanmar, thus
benefiting from international trade and globalisation. Therefore, a rising
Myanmar may not pose a real threat to Singapore.
What are the major domestic trends facing Singapores economy
Extract 5 reveals that the exchange rate mechanism may be creating
problems for the many service based industries in Singapore. The Monetary
Authority of Singapore (MAS) has a policy stance of allowing a gradual
appreciation of the Singapore dollar. Tourism, for example, does not rely on
imported raw materials and therefore there is no mitigation from the
appreciating Singapore dollar. Tourism may be relatively price elastic as there
are other holiday destinations that may be close substitutes.
Furthermore, restrictions on the growth of foreign workers may result in wage
cost-push inflation. These threats can be managed if Singaporean businesses
can take advantage of the incentives offered by the government to increase
productivity.
Evaluative Conclusion
In conclusion, the various recent events will have an impact on Singapore, but
the extent of the threats or opportunities depends heavily upon how the
Singapore government responds to these changing circumstances. Through
the judicious use of exchange rate policy and supply side policies to manage
the economy, Singapore can weather the vicissitudes of economic change.
To a large extent, the developments in Asia will likely impact Singapore to a
larger extent compared to the changes in the USA and Europe because of the
economic rise of Asia and the varied myriad economic changes in Asia.
Level Description

Marks

L3

For a well-developed or elaborated response that discusses


the various threats and opportunities facing Singapore, with
reference to sources.

68

L2

For an unbalanced response that deals mainly with either


threats or opportunities facing Singapore, with reference to
sources; or a purely theoretical explanation of threats and
opportunities.

35

14

TJC 2014 Preliminary Examinations: H2 Economics CSQ 1

L1

For undeveloped responses that make no reference to the


source.

12

For answers that show evaluative judgment or comment


about the relative extent of the threats or opportunities.

+2

15