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]

intro

body

external

internal

define inflation

inflation will cause issues for sg given that we are a small and open economy

KW:

  • discuss whether: give 2 pov
  • impacts on the economy: give the 4 macro goals + you can talk about microgoals too

BOT

decrease equity

  • unintended redistribution of income
  • some pple gain at the expense of others

implications on output, employment and investment

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

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

hence singapore will experience widening income gap

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

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

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

Decrease in FDI

  • companies might lost confidence in sg
  • withdraw funds out of sg

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