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Discuss whether the increase in the rate of inflation is likely to cause…
Discuss whether the increase in the rate of inflation is likely to cause problems for the domestic or external sector of the singapore economy. [15]
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body
external
BOT
when there is high inflation
- px of X in terms of FC increase, px of M in terms of DC decrease
- asuuming PED >1, there is more than prop...
- export revnue fall, import revenue increase
- BOT worsen
EV:
- our dd is likely to be quite px elastic given that we produce electronic pdts which have close subs (eg from Korea or taiwan)
- our dd for imports is quite px inelastic given that we lack natural endowments
exchange rate
- since there is an increase in imports decrease in exports
- fall in dd for sgd and increase in ss of sgd
- sgd depreciate
Decrease in FDI
- companies might lost confidence in sg
- withdraw funds out of sg
internal
decrease equity
- unintended redistribution of income
- some pple gain at the expense of others
fixed income earners
- will suffer a drop in purchasing power, as although they recevie the same monetary amount, the real value of their wages has dropped
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entrepreneurial class
- likely to gain from rising inflation rates, assuming that inflation is still quite mild and that it si due to increase in dd
- this is because pdt pxes increase, pdtn costs lag behind given that these are fexed by agreements
- hence firms can quickly raise the px of their goods and enjoy revenue gains in for at least a short period of time
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implications on output, employment and investment
ineffficinecy in the economy
- px is an important signal for producers and consumers of their decisions
- Inflation causes inefficiency in allocation of resources
- crs cannot tell if the rise in price is due to inflation or due to increase in dd
- they challen their resouces to the wrong areas
- inefficinet resource allocation
lower employment
- if inflation is due to increase in wages
- firms may have to retrench some pple as they cannot afford to keep so many employees
- they might also have to reduce their production
- this will cause an increase in Unnmt
biz failures
- biz have to absorb the cost of the rise in prices
- if they cannot sustain then they will be unable to survive
lower FDI
- higher uncertainty in doing biz in sg given our inflation rates
- eg potential investors are unsure of future costs, prices of their products and irr
- long term economic growth harmed
KW:
- discuss whether: give 2 pov
- impacts on the economy: give the 4 macro goals + you can talk about microgoals too
Conclusion
inflation will have impacts on both the internal and external sectors of the sg economy
- given that sg is highly reliant on trade, since we lack natural endowments, the impacts on the external sector are likely to be more adverse
It is also likely that the imapct on external economy will spillover into domestic
- decrease in NX
- decrease in AD
- decrease in NY and thus employment and purchasing power
given that the impact on the external economy will affect the internal economy, the impacts on the external economy is much more adverse