What this lesson teaches
I can weigh the benefits and costs of free trade and open flows for consumers, producers and governments.
Syllabus 9570, 3.3.1(c). Globalisation, International Trade and Economic Co-operation: Benefits and costs of free trade and flows of capital and labour on:; Consumers - Prices, choice and variety of goods and services; Producers - Size of markets, degree of competition, cost of production and innovation; Government - Macroeconomic objectives (and policy choice)
Make a guess
India restricts rice exports. Why does this hit Singapore's prices quickly?
- Singapore's own farmers stop growing rice in response.
- Almost all its rice is imported, so supply falls.
- The Singapore dollar weakens against the rupee.
Show the answer
Almost all its rice is imported, so supply falls.
With no local production to fall back on, a cut in imports reduces supply directly and pushes up prices.
Openness brings growth, but also makes Singapore vulnerable to shocks from abroad.
Trade and investment affect every macroeconomic objective. Strong foreign demand raises exports, AD, growth and jobs.
Openness also imports shocks. A global recession cuts exports and AD. Rising global prices for energy and food push up costs and inflation.
Singapore imports more than 90% of its food, so export bans abroad, such as Malaysia's 2022 ban on chicken exports and India's 2023 rice export restrictions, directly affect supply and prices.
So Singapore's policies focus on resilience: diversifying suppliers, keeping stockpiles, and using the exchange rate to limit imported inflation.
- Openness
- Growth, but exposure to external shocks.
- Singapore
- More than 90% of food imported.
Worked example: Fewer tourists and dearer fuel
Tourist arrivals fall while imported fuel prices rise. Ports and service firms still have spare capacity.
- Fewer tourists: lower exports of services, so AD falls.
- Dearer fuel: higher costs, so SRAS shifts up.
- Output falls; the price level could rise or fall depending on the sizes.
- Banning imports would not help: the problems are falling foreign demand and global fuel prices.
Watch out for this
Openness only brings benefits.
It also exposes the economy to foreign recessions, price shocks and supply disruptions.
Check your understanding
Why is Singapore especially vulnerable to external shocks?
- Trade is several times its GDP, and it imports most of its food and energy.
- Its currency is not traded abroad, so it cannot adjust to shocks.
- It has few domestic industries of its own, so it makes almost nothing at home.
Show the answer
Trade is several times its GDP, and it imports most of its food and energy.
Right. What happens abroad feeds directly into its AD and costs.