paper 1 tic prelims

TJC 2014 Preliminary Examinations: H2 Economics CSQ 1

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. [5]

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.


2

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

[2]

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]

(b) (i) 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). [4]

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.

-30,000

-25,000

-20,000

-15,000

-10,000

-5,000

0

5,000

10,000

15,000

20,000

25,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Total

I


3

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.

o However, they were unable to cope with the high costs of production when their revenue fell and hence some resulted in bankruptcy.

o 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. [8]

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.


4

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 fuel-efficient.

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


5

optimism! higher levels of investment ! increase in AD Reduce business costs due to improvement in transportation networks

Level Description Marks L3 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.

5-6

L2 For an underdeveloped OR unbalanced discussion of costs and benefits, OR an answer not well-supported with case evidence.

3-4

L1 For an answer that shows some knowledge of benefits and costs of consolidation.

1-2

E For a substantiated judgment and/or evaluative assessment based on economic analysis.

1-2

(c) Assume you are the economic advisor to the CEO of Jetblue. Justify your recommended strategies for Jetblue to remain competitive in the airline industry.

[8]

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


6

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 low-costs 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


7

o 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.

o 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.

o 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


8

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 Marks L3 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


9

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

E For a substantiated judgment and/or evaluative assessment based on economic analysis.

1-2


10

Question 2 - Suggested Answers

(a) (i) Explain how the current account of an economy is calculated and suggest an explanation for the 62% growth in the current account of Singapore from 2009 to 2010.

[3]

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 and China as Singapores trading partners, from 2007 to 2012.

[2]

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]

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

2007 2008 2009 2010 2011 2012

US Imports US Exports China Imports China Exports


11

(b) Explain one reason why the Chinese government is promoting structural change.

[3]

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

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]

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

[4]

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]

(d) Analyse potential impacts of the punitive tariffs on American producers and consumers.

[8]

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


12

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.

5 6

L2 For an unbalanced response that deals mainly with the impacts of the tariffs, with reference to the source.

3 4


13

L1 For any undeveloped responses that make no reference to the source.

1 2

E For answers that show evaluative judgment or comment. +2

(e) Discuss the threats and opportunities facing the economy of Singapore in light of recent developments.

[10]

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, low-cost 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 consumption-based growth, this may negatively impact Singapores exports to China.


14

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.

6 8

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.

3 5


15

L1 For undeveloped responses that make no reference to the source.

1 2

E For answers that show evaluative judgment or comment about the relative extent of the threats or opportunities.

+2

Documents

paper 1 tic prelims