How constraints affect Singapore firms

2017 H2 A Level Paper 2 Suggested Answer and Mark Scheme
Essay 1
In the small island economy of Singapore, producers face different constraints from those
in larger economies.
(a) Explain how firms in Singapore will be affected by constraints such as having a small
domestic market and a lack of resources. [10]
(b) Assess which are the appropriate policies that firms and governments could adopt to
overcome such constraints. [15]
Question Analysis (Part a)
(a) Explain how firms in Singapore will be affected by constraints such as having
a small domestic market and a lack of resources. [10]
What are the implications of these words?

What comes to your mind?
Command Words: Provide clear economic reasons to link how the constraints
Explain lead to impacts.
Content Words: - Aim of firm: Profit-maximisation

- Firms - Small domestic market:
- Constraints i) smaller market demand  lower P, and lower Q
- Small domestic  smaller revenues  lower profits
market
- Lack of resources ii) limited market size might mean firm cannot
produce on large scale and thus reap internal
EOS  higher unit costs of production  lower
profits
- Lack of resources (land, labour, entrepreneurship):

i) Higher labour + land e.g. water / electricity costs
 lower profits
ii) Lack of entrepreneurs  lacks creativity and
innovation  which can help make a good /
service ‘unique’, and thus lower the PED value of
product  unable to increase price and thus to
increase total revenue
Context:
- Singapore Candidate to choose appropriate context(s).
Type of question Decision-making, market structure

End point When making profit-maximising decision, how firms’
revenue and costs decisions are constrained by a small
domestic market and a lack of resources.
1
Eunoia Junior College - Suggested answers for 2017 H2 Economics A Level Paper
2
Introduction: The aim of a firm is profit-maximisation where marginal benefit is equal to
marginal costs. Profits are the difference between total revenue and total costs. In the
pursuit of profit-maximisation, a firm seeks to increase revenue faster than the increase
in costs when increasing the level of output produced. In Singapore, we will look at the
pursuit of profit-maximisation is constrained by a small domestic market and a lack of
resources.
Body 1
Point A small domestic market is likely to limit how much a firm can increase
revenue and reduce costs.
Explain A small domestic market would mean smaller market demands. As a

result, a firm say in a monopoly market faces a smaller market demand
Elaborate (DD1 in Figure 1) or the average revenue curve (AR1), and thus smaller
+ marginal revenue curve (MRq). For profit-maximisation where MR=MC,
examples / the monopoly will set a lower P1 and a lower Q1, and thus earn smaller
diagram revenue (which is P1 x Q1). By contrast, in a larger domestic market, a
firm would face a bigger demand curve (DD2 or AR2) and thus MR2. The
price and quantity would be higher at P2 and Q2 and thus the firm earns
bigger revenue (P2 x Q2).
P/R/C
MC
P2
P1
LRAC
C1
C2
MR1 MR2AR1 = DD1 AR2 = DD2

Q1 Q2 Quantity
Figure 1: A monopoly firm in a small domestic market

faces a smaller market demand (DDq)
A small domestic market size poses challenges for a firm in Singapore to

scale up and operate on large scale production. This means that firms in
Singapore are not able to scale up production to reap internal economies
of scale such as marketing economies where firms could enjoy discounts
when making bulk purchases of raw materials. Internal economies of
scale lead to unit cost reductions and are illustrated along the downward
portion of the long-run average cost curve (LRAC) as output level rises.
As a consequence, a firm in Singapore would incur higher costs of
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production at C1 in Figure 1. In contrast, Silicon Valley or Chinese
entrepreneurs can achieve low unit costs quickly at C2 by being able to
scale up rapidly in the massive domestic consumer markets. China has a
market of 1.4 billion people.
Figure 1 shows that Singapore firms with lower demand (AR1) and
producing at a higher average cost (C1) will thus earn lower profits of
[(P1xQ1) – (C1xQ1)]. This contrasts to firms in bigger countries with
higher demand (AR2) and producing at a lower average cost (C2) will thus
earn higher profits of [(P2xQ2) – (C2xQ2)].
Link back Therefore, a small domestic market size would spell that a firm in
to Q Singapore will have smaller revenue and higher costs and consequently,
lower profits.
Body 2
Point A lack of resources (land, labour, capital and entrepreneurship) is likely to
limit how much a firm can increase revenue and reduce costs.
Explain Given the smaller population size and smaller geography in Singapore,
the problem of scarcity is more severe for the Singapore economy
Elaborate compared to other bigger economies. A lack of resources such labour and
+ land would mean higher labour costs and land and office rentals, leading
examples / to higher average costs of production (at AC1, where AC1>AC2), and thus
diagram lower marginal costs of production (at MC1, where MC1>MC2) as some
of these are variable costs. Hence, Singapore firms earn smaller profits,
(P1 – C1) x Q1.
Moreover, since Singapore lacks resources, Singapore firms are more

dependent on imported raw material. Thus, costs of production is heavily
influenced by external events  more volatile costs of production, and
thus more volatile profits. For example, when Indonesia banned sand
exports to Singapore in 2007, the costs of production increased for
Singapore construction firms.
P/R/C Figure 2: A monopoly firm in

Singapore faces higher labour
MC1 costs and land rentals and thus
have higher average costs
represented by AC1
MC2
P1 AC1
P2
C1
AC2
C2
MR1 AR1 = DD1

Quantity
Q 1 Q2
4
Link back Therefore, both a small domestic market and a lack of resources would
to Q create challenges for a firm in Singapore to increase revenues and to
keep costs from rising faster than revenue, and thus to increase profits.
Marking scheme
Level Descriptor Marks
L3  Well-developed explanations + well-drawn diagrams + well-illustrated 8-10

examples
 Answer focuses on the microeconomic issues faced by producers

operating in the small economy.
 Answer delivers an analytic explanation to explain how each of the two

constraints affects both total revenue and total costs for firms in the small
economy.
L2  Good explanations but not well-developed explanations 5-7
 Answer gives a good explanation of the problems caused by either a lack

of resources or a small domestic market.
 Answer lacks analytic explanation and coverage of the problems caused

by either a lack of resources or a small domestic market. For example,
answer does not link to how a firm’s affects total revenue or total costs.
L1  Weak explanation just gives a mere listing of the problems that caused 1-4
by either constraint.
 Answer is void of economic analysis and contains glaring content errors.
 Irrelevant response such as government policy rather than firm decisions
5
b) Assess which are the appropriate policies that firms and governments could
adopt to overcome such constraints. [15]
Question Analysis
What are the implications of these words?

What comes to your mind?
Command Words: Showcase a mix of appropriate policies with the need for
Assess evaluative statements and judgement
Content Words:  Firms: Pricing, output and / or non-pricing strategies to

Appropriate policies increase revenue and to reduce costs
o Non-pricing strategy to increase revenue: Expand

production in bigger overseas markets via marketing
and R&D
o Non-pricing strategy to reduce costs: offshoring /
outsourcing; moving into online space to reduce
rental costs
o Non-pricing: Merger and acquisitions to increase
demand and reap iEOS (unit costs reductions,
leading to lower LRAC)
 Governments:
o Free trade agreements (FTAs) to reduce tariffs and

thus prices of imported raw materials
o [Optional] AC- and MC-pricing in market of resources
such as water, electricity to keep costs low. Also,
make these markets contestable /competitive
o Supply-side policies such as indirect subsidies for
training and reskilling of workers  increase labour
productivity
o Education  via direct provision, overhaul education
system to instill entrepreneurship
o Legislation / competition law through CCCS
o Liberalisation / deregulation  lowering barriers to
entry
Context:
Firms and Governments
- Firms
- apply real world examples
- Governments
Type of question Firms’ strategies and government policies
End point How firms and governments can use appropriate policies to
overcome the 2 constraints that negatively affect revenues
and costs
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Strategies and policies by firms and governments to boost revenues and thus
enjoy iEOS
Point To overcome the small domestic market, a firm in Singapore should
expand production in bigger overseas markets.
Explain To further grow its revenue beyond what can be earned in the small
domestic market, a local firm (or also known as small and medium-sized
Elaborate + enterprises i.e. SMEs) in Singapore should venture into overseas
examples / markets in countries such as China to sell its goods. Local firms can
diagram harness new technology, innovate and internationalise in these
markets. Innovation is also critical for local to better differentiate their
offerings and gain market share.
There have been a few well-known examples of home-grown firms

going abroad to pursue revenue growth such as bread chain BreadTalk,
barbecued pork chain Bee Cheng Hiang and budget airline Scoot were
among those that ventured to new cities such as China, Japan and
India.
In addition, the Singapore government has actively sign free trade

agreements (FTAs) with various countries and regions. FTAs remove
trade barriers such as tariffs on Singapore exports to overseas market,
making Singapore exports cheaper and give preferential access to the
markets of these countries.
With more consumers in overseas markets, a local firm in Singapore

will enjoy an increase in the demand for its goods  with reference to
Figure 1, demand or AR curve increases from AR1 to AR2  firm will
be able to increase its total revenue from (P1xQ1) to (P2xQ2). Output
level rises and hence the firm is also able to produce at a lower point of
the AC curve.
Link back to A local firm should expand production in overseas markets and innovate
Q to increase its demand and make demand more price inelastic to
increase TR.
Assessment But most local firms limited by small profits and thus are unlikely to have
the incentive and ability to innovate and expand production in overseas
With the markets. Furthermore, due to small scale of production initially, local
help of firms might not be able to compete in terms of costs with foreign
government competitors. Consequently, the Singapore government might need help
policies to and support local firms to venture abroad. It may need to provide
increase subsidies to help SMEs innovate and make their products more
revenues competitive to increase overseas demand. For instance, this year
Singapore Manufacturing Federation (SMF) and Innovative Hub
launched the SMF SMART app, an online business-to-business
platform, to help local food manufacturers to innovate and expand
overseas.
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Firms’ non-pricing strategies to boost revenue and thus enjoy the benefits of
iEOS to overcome the stiff competition within a small domestic market
Point A firm in Singapore might expand through a merger or through an
acquisition of other firms to increase revenue and to reduce costs.
Explain A merger occurs when 2 separate firms amicably combine to create a
bigger firm, while and acquisition refers to a takeover of one firm by
Elaborate + another. In doing so, the smaller firms is often consumed and ceases to
examples / exist, and its assets become part of the larger firm.
diagram
Through a merger or an acquisition, the new combined and bigger firm
is able to enjoy greater number of consumers and thus increase
demand (as well as more price inelastic demand) set higher prices to
increase TR. Furthermore, a horizontal integration, where firms
producing the same good or service in the same stage of production,
are produce on a larger scale of operation and thus reap internal
economies of scale, lowering LRAC.
For example, from 1998 to 2000, there was a wave of mergers and
acquisitions in the banking industry in Singapore. For example, DBS
and POSB merged and UOB takeover of OUB. The banking industry is
characterised by large economies of scale. A larger bank is able to
invest in billions of dollars in the latest technology and sophisticated
systems, and spread these costs over millions of customers, thus
enjoying technical EOS. As a result, they can produce a wide-range of
financial products and services at lower unit costs.
Link back to At the backdrop liberalisation and greater foreign competition, local
Q banks had to consolidate and merge to increase their customer base
and reap meaningful economies of scale. By merging, local banks can
enjoy managerial EOS when they attract talent and enjoy technical EOS
when they make necessary investments in technology and build
capabilities. As a result, local banks can compete with the bigger foreign
banks in terms of lower costs and higher quality and sophisticated
financial services.
Assessment Sometimes, there is little choice but for the local firms in Singapore to
merge to increase revenues and to reduce costs. The Singapore
government acknowledged this and thus supported the bank mergers.
This is despite that mergers might lead to a few dominant firms left in
the market with large market power. This might give rise to abuse of
market power and anti-competitive environment. The government via
the Competition and Consumer Commission of Singapore (CCCS) has
to monitor and regulate the market to ensure that the firms do not
behave anti-competitively which might lead to further rise in the costs of
doing business for firms.
8
Government policies to reduce costs given a lack of resources
(land and capital)
Point Governments whose countries have a lack of resources can reduce
tariffs on imported raw materials.
Explain Reducing or removing tariffs (taxes) on imported raw materials would

mean that firms would pay less for resources and thus enjoy a lower
Elaborate + costs of production  with reference to Figure 2, this shifts AC and MC
examples / curves from AC1 and MC1 to AC2 and MC2  increasing profits.
diagram
For example, the Gulf Cooperation Council-Singapore FTA spells tariff-
free or reduced tariff access to a broad range of goods and services
would mean that firms in Singapore would enjoy a better access to oil
and petroleum, reducing costs of production.
Link back to By inking FTAs with countries with key resources, the government can
Q + help firms to reduce their costs of production.
Evaluation
[Optional] Government policies to reduce costs given a lack of resources

(land and capital)
Point To help firms in Singapore keep costs of production low, the Singapore
government has adopted are price regulation (Marginal cost pricing) in
market of key resources / inputs such as water and electricity.
Explain [How it works] MC pricing: Make monopoly charge / price ceiling at

P=MC  increase output from Qm to Qs, reduce price from Pm to Ps.
Elaborate +
examples / A price regulation seen in the electricity market in Sg which mandates
diagram a certain amount of electricity produced by the generation companies
where price is to be benchmarked to marginal cost of electricity
produced (in the long run)  remove the ability of the dominant
generation firms to exercise their market power to charge high price
In state-owned monopolies such as PUB  P= LRMC i.e. cost of

producing and conveying the next drop of water  PUB also invest and
ensure a reliable and sustainable supply of water
Link back to Low prices of water and electricity would help firms’ to keep costs of
Q production low.
Assessment In a natural monopoly (only 1 firm is needed to produce for the market
demand at a lower price than 2 firms can), as AC curve is falling
throughout and hence the MC curve, MC<AC  P=MC, then P<AC 
subnormal profits  unsustainable in the LR  natural monopoly
would shut down. Whether MC-pricing is feasible depends on the
sustainability of the subsidy support since MC-pricing results in the
firm making sub-normal profits [show via diagram].
9
In the electricity market, rather than just relying on MC-pricing, the
Singapore government has also liberalise (reduce the barriers to entry
for potential firms) the electricity retailing market and make it more
contestable in 2001. This means that business consumers can choose
which retailer to buy electricity from. In 2015, business consumers
such as SMES have to opportunity to enjoy competitive electricity
prices.
Government policies to reduce costs given a lack of resources

(labour and entrepreneurship)
Point Given a lack of natural resources, Singapore highly values its labour
resources. In view of labour and entrepreneurship shortage, the
Singapore government has implemented appropriate supply-side
policies to help firms keep costs of production low.
Explain Increase labour productivity  increase output per man hour or worker
 assuming that productivity gains > wage increases  unit labour
Elaborate + costs fall  with reference to Figure 2, this would then shift AC and
examples / MC curves from AC1 and MC1 to AC2 and MC2  increasing profits.
diagram
E.g. of policies in recent years: Workfare Training Support Scheme
(WTS in 2010) for low-wage workers which subsidies training for their
employers, Continuing Education and Training (CET in 2011) which
are subsidies for PMETs plus full time student grants for PMETs who
choose to purse their first degree / diploma on a part-time basis;
SkillsFuture in 2015
Direct provision and subsidies  the government also invest more in

human capital through education and training at the post-secondary
levels. E.g. the setting up of 4th university SUTD, and the expanding of
polytechnics and ITEs.
Through introducing new curriculums in primary, secondary schools

and junior colleges, there is greater emphasis on critical thinking and
creativity and entrepreneurship skills. E.g. Project Work in JCs is
introduced to foster critical thinking and problem-solving skills which
are essential for cultivating an entrepreneurship spirit.
Link back to Q Policies will help to keep cost of labour low and grow the number of
entrepreneurs in Singapore.
Assessment Both increasing labour productivity and changing the mindset and
attitude towards risk-taking will take a long time for the effects to come
through.
10
Evaluation:
- Build on Despite these policies, the two constraints have continued to pose
prior challenges for firms and businesses in Singapore. The two constraints
analysis will become even more challenging as the economy faces greater
competition from other emerging developing countries, and as the
growing sentiment towards protectionism. Both the firms and
Singapore government should not tackle the constraints using just
microeconomic policies, but there is also a role for macroeconomic
policies.
Make a stand Nonetheless in the short run, firms could take a more proactive role in
/ judgement overcoming the constraints since contractual agreements and
with criteria strategies are unique to differing firm circumstances. The firms could
thus be nimble in doing so suitably rather than wait upon governmental
policy decisions which typically takes much time to formulate and
implement, let alone inter-government agreements.
Having said that, government policies would provide the extra push to
facilitate ease of entry into new markets or cheaper input costs which
will complement firm strategies, especially so in the long run.
Propose a To further enhance the overcoming of the constraints, it is necessary

further for a synergistic public-private partnership to be further strengthened.
solution In particular, the government could seek to better understand the
challenges of local firms in different industries, some of which may
benefit more from an outward orientation and some by further
expanding the local market albeit constraints.
Level Descriptors Marks

L3 Displays full slew of skills across AO1, AO2 and AO3: 8 – 10
 A clear and well-developed answer which covers at least
three policies that have been adopted by firms and the
Singapore government in overcoming both of these
constraints.
 Policies mentioned are current examples.
 Good use of economic analysis / economic tools with little
conceptual errors.
L2 Displays AO1, AO2 and AO3 skills: 5–7

 An under-developed but balanced answer which lacks in
scope or depth which covers at least two policies that
have been adopted by firms and the Singapore
government in overcoming either of these constraints.
 Lacks of good examples for policies considered
 Less rigorous economic analysis support analysis
L1 Uneven display of AO1 and AO2 skills: 1–4
 An under-developed answer which lacks scope and

depth which covers only one policy that have been
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adopted by either firms or the Singapore government in
overcoming either of these constraints.
 Largely focuses on macroeconomic policies that might be
employed to overcome problems faced by Singapore’s
economy as a whole.
Evaluation
E3 Well-reasoned judgements: 4–5
 A well-reasoned judgement
 Question any unstated assumptions to arrive at this well-
reasoned judgement.
 Good explanation of the limitations of the policies
 With reference to current context and challenges
E2 Largely unexplained judgements: 2–3

 Some attempt to explain their judgement on the questions
statement.
E1 An unsupported judgement 1
 Mere evaluative statements or judgements that are
neither supported nor relevant to the specific context of
the question
12
Essay 2
Falling interest rate, continued income growth and other factors continue
contributed to a period of rapid residential property price inflation in Singapore
from the middle of 2009. However the government has successfully pursued
polices to restrict this rise to the extent that residential prices actually fell in
2014 and 2015.
a) Use supply and demand analysis to explain why falling interest rates and
continued income growth may have led to a rapid rise in residential property
prices. [10]
b) Discuss the policies that might be used by the Singapore government to

reduce residential property inflation. [15]
Question analysis for (a)

Command Explain
Word
Question Type Causes
Approach
Account for a rapid rise in residential
End Point property prices.
Factors affecting demand
 Falling interest rate
 Income growth
Income elasticity of demand
Content
 Luxury goods
Content and
Context Price elasticity of supply
 Time period
Market for residential properties

Context
Introduction
In a free market, the prices of private residential properties are determined by demand
and supply conditions of the market. This essay explains how the above-mentioned
demand and supply factors account for a rapid rise in residential property prices.
Both falling interest rates and income growth has led to an increase in demand of
residential properties.
Main body
With falling interest rates, the cost of taking housing loans by prospective house
owners reduces. This lowers the mortgage payment and encourages more
prospective house owners to buy residential properties, thus leading to an increase
in the demand of residential properties from DD1 to DD2.
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Moreover, Singapore has experienced strong economic growth in recent years and it
has resulted in the growth of income and purchasing power for Singaporeans and
foreigners living in Singapore. Income elasticity of demand (YED) measures the
responsiveness of demand to a change in the consumer’s income level. Since
residential properties are considered to be luxury goods, YED > 1. The increase
in the income levels would lead to a more than proportionate increase in demand, and
hence a significant increase in price of private properties. A rise in income induce
home-buyers to increase the demand for residential properties, thus leading to a
further rightward shift of the demand curve from DD2 to DD3.
Due to the shortage that now appears at the original price of P 1, the consumers will
now bid for higher prices. As price rises, the Qd falls (in line with the Law of Demand)
while the Qs rise (in line with the Law of Supply since a higher price incentivises
suppliers to increase Qs). This results in a large increase in equilibrium price from
P1 to P3, further increasing prices of residential property where there is no longer a
shortage.
Furthermore, price elasticity of supply (PES) measures the responsiveness of quantity

supplied to a change in price of the good. As residential properties require a relatively
long period of time to be developed and built, its supply tends to be price inelastic
in the short run. An increase in demand of and price inelastic supply of residential
properties causes the prices to rise significantly. In Figure 1, a rightward shift of
demand curve from DD1 to DD3 (due to the above mentioned factors) leads to a
significant increase in price of residential properties from P1 to P3.
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Level descriptors
Level Out of 10 Descriptors

marks
Level 3 8-10 Displays full slew of skills across AO1, AO2 and AO3:
 Thorough knowledge displayed by explaining how
falling interest rate and income growth account for a
rapid increase in the price of residential properties.
 Skilled application of relevant elasticity concepts to
account for the rapid increase in the price of residential
properties.
 Clear and coherent analysis, grounded by economic
concepts, frameworks and principles
Level 2 5-7 Displays AO1 and AO2 skills:

 Answers are relevant to question but undeveloped
explanation of demand and supply factors
 Undeveloped explanation of how relevant elasticity
concepts account for the rapid increase in the price of
residential properties.
 For scripts that only considers demand and supply
factors.
Level 1 1-4 Uneven display of AO1 and AO2 skills:
 Ability to identify key theory without explanation
 Ability to give a list of relevant factors
 Answers that give a few valid points, showing some
knowledge but meaning of question not properly
grasped
15
b) Discuss the policies that might be used by the Singapore government to
reduce residential property inflation. [15]
Question analysis
Command Discuss
Word
Question Effects
Approach Type
Policies implemented by the Singapore
End Point government to reduce residential property
inflation.
Measures to cool demand for and expand supply
of residential properties:
 To increase BTO flats
Content and Content  To discourage foreign buyers
Context  To tighten financial conditions for housing
loans
Context Market for residential property market
Introduction
The government has a strong interest in making residential properties affordable for
social reasons. It can implement a series of measures to cool demand and expand
supply in order to moderate the increase in housing prices in markets for both public
and private properties.
Policies that might be used to reduce the demand for residential properties in
order to reduce residential property inflation:
Policy 1: To Impose the Additional Buyer’s Stamp Duty (ABSD)

How it works: The Singapore government has raised the Additional Buyer’s Stamp
Duty (ABSD) which are taxes levied on the purchase of property by foreigners. The
government can discourage prospective foreign buyers from buying private residential
properties so as to moderate the increase in private housing prices. Since foreign
buyers would have to pay ABSD, it reduces their ability and willingness to buy private
residential properties. Even though falling interest rates reduce the cost of taking home
loans, ABSD is able to decrease the extent to which demand for private residential
properties increases. With a smaller increase in demand, it causes a slower rate of
increase in private residential property prices.
Limitation: However, the impact of the ABSD could be mitigated by changes in prices
of residential properties in other countries. For many foreigners who purchase private
residential property in Singapore for investment purposes, they consider the relative
prices of residential properties in other countries also. Thus an increase in the price of
private residential property in other countries could make Singapore’s properties seem
relatively cheaper and offset the effect of ABSD. Therefore, ABSD may not be able to
effectively deter foreign buyers from buying private properties in Singapore.
16
Policy 2: To discourage over-borrowing and tighten financial conditions for housing
loans.
How it works: The government has imposed a mortgage service ratio for HDB loans
in order to limit buyers’ ability to finance purchases. For example, no more than 35%
of a borrower’s gross monthly income could be used to finance payments on housing.
Even if local buyers’ income has increased, this would still reduce their ability and
willingness to purchase a residential property, thus leading to a smaller extent of
increase in demand for public residential properties. With a smaller increase in
demand, it causes a slower rate of increase in public residential property prices.
Limitation: However, the mortgage service ratio would have a limited impact on high-
income consumers because the amount of their income eligible for taking housing
loans will be sufficient to finance payments on housing.
Policies that might be used to increase the supply of residential properties in

order to reduce residential property inflation:
Policy 1: To increase the supply of Build-to-Order (BTO) flats.
How it works: The government can increase the supply of residential properties to
moderate the increase in public housing prices. The Housing and Development Board
(HDB) is Singapore's public housing authority. It plans and develops Singapore's
housing estates and builds public residential properties. The majority of the residential
housing developments in Singapore are developed by the HDB. The government can
increase the number of Build-to-Order (BTO) flats. This leads to an increase in the
supply of residential properties, thus causing a rightward shift of supply curve from
SS1 to SS2. With an increase in supply, the rising demand for residential properties
results in a small increase in price from P 1 to P2 in Figure 4.
Limitation: However, the HDB usually takes several years to complete a BTO project.
It is unable to increase the supply of residential properties within a relatively short
period of time. Hence, a slow growth of BTO flats would not be able to moderate the
increase in residential properties in the short run.
17
Policy 2: To lower cost of production by easing immigration laws to welcome more
foreign workers
How it works: The government can ease its immigration laws to increase the influx of
foreign labour. This helps to increase the supply of foreign labour and reduce labour
wages. With reduced labour wages, it helps property developers to reduce their cost
of constructing residential properties, thus resulting in an increase in the supply of
residential properties. A higher supply of residential properties will be able to reduce
residential property inflation.
Limitation: However, with the ease of immigration laws, there will be a higher number
of foreign labour working and living in Singapore. This leads to a higher demand for
residential properties and causes the prices of residential properties to rise.
Policies that might be used to reduce residential property inflation directly:
Policy 1: To implement price ceiling in the residential property market

How it works: The government implements price ceiling on certain types of residential
property, such as one or two room HDB flats which may be deemed as essential goods.
This results in a maximum price below the equilibrium price at Pmax in the residential
property market. This is to prevent the prices of residential properties from rising to a
very high level.
Figure 5: Market for residential properties
Limitation: However, at Pmax, Qd >Qs results in a shortage in Figure 5. Furthermore,

price ceiling results in deadweight loss (area ABC) because of the loss of consumer
(area ADC) and producer surplus (area DBC).
Evaluation:
Since the residential property inflation is mainly caused by the rising demand, polices
that might be used to reduce the demand is able to address root cause of the problem.
However, the extent to which the demand can be reduced by these policies as the
demand might be driven by external factors beyond the government’s control.
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Due to this, it may necessary to implement policies that aim to increase the supply of
residential properties in order to solve the problem in the long term. However, this is
also limited due to the land size of the country.
Thus, the government may need to take a target approach and implement price ceiling
on certain types of residential properties (e.g. one/two-room/multi-generational HDB
flats). It is to make residential properties affordable for low-income families and
families with both small children and elderly. This is because government regards
public housing as an important element to strengthen the social fabric in Singapore.
It is inevitable that multi-pronged approach will be required to address the property

price inflation in Singapore.
Level descriptors
Level Out of 10 marks Descriptors

 Thorough knowledge and skilled application
how policies implemented by the Singapore
government can moderate the increase in
residential property prices.
 Clear and coherent analysis, grounded by
economic concepts, frameworks and principles
Level 2 5-7 Displays AO1 and AO2 skills:

 Answers are relevant to question but
undeveloped explanation of facts and theory
 There is clarification of question and
application of economic concepts, frameworks
and principles to relevant contexts
 For scripts that only considers policies without
limitations

 Ability to identify key theory without
explanation
 Ability to give a list of relevant factors
 Answers that give a few valid points, showing
some knowledge but meaning of question not
properly grasped
 Basic errors of theory e.g. analysed impact on
the BOP instead
19
Levels Out of 5 Descriptors
marks
E3 4-5 Well-reasoned judgements/decisions
 Critically evaluates policy choices
 Synthesises economic arguments to arrive at well-
reasoned judgements and decisions
E2 2-3 Largely unexplained judgements

 Some attempt at evaluation or a summative conclusion
 Relevant to the question but does not substantiate the
judgement
 Evaluation may not be a logical progression from the prior
analysis
E1 1 An unsupported judgement
 Mere evaluative statements or judgements that are neither
supported nor relevant to the specific context of the
question
20
Essay 3
Government policies to restrict the use of cars and encourage the public to use the
Mass Rapid Transit (MRT) system continue to be a source of heated debate in
Singapore.
Assess the effectiveness of the policies available to the Singapore government in

overcoming market failure in Singapore’s land transport market.
[25]
Suggested Answers and Mark Schemes
Question Analysis:
Command
Assess
Word
Question
Approach Policy effectiveness
Type
Overcoming of market failure: reduction in deadweight
End Point
loss, improvement in equity
Market failure: Negative externalities in consumption,
Content
Content and Market dominance
Context Land transport market: Public buses and trains,
Context
private hire vehicles.
Introduction
 Government intervention is required in the land transport market in Singapore due to

negative externalities in the consumption of private automobiles
Main Body
1. Explain how there is market failure in Singapore’s land transport market
Source 1 of Market Failure: Negative externalities in the consumption of automobiles

 Third party: Pedestrians who breathe in the harmful gases emitted by the exhaust of
automobiles
 External cost: Increase in healthcare expenditure to treat respiratory problems in the
long run
 Third party 2: Firms whose employees commute to work via private transportation,
country
 External cost 2: Forgone revenue and national income when labour arrives late for
work due to congestion.
 Divergence between MSB and MPB by a vertical distance equal to MEC.
 Assume no externalities in production MSC=MPC
 Qp>Qs, there is an overconsumption of automobiles in Singapore.
 Deadweight loss (forgone societal welfare) exists, resulting in allocative inefficiency
21
Cost/benefit MSC (= MPC’ )
MPC
ES
E
Tax=MEC
B
MPB = MSB
Quantity of private
QS QP automobiles
Fig 1
Source 2 of Market Failure: Market dominance in the market for private hire vehicles (Taxi
companies & Ride-hailing apps)
 Small number of large firms that dominate the market.
 Taxi industry: Comfort, SMRT, Citicab, Transcab, Premier, Ride-hailing industry: Grab,
Train Transport: SMRT and SBS Transit
 Due to market dominance and high market power, the demand in these industries is
price inelastic due to the lack of availability of close substitutes. Consumers can only
turn to one of the few firms in the market.
 Firms have the market power to raise prices and restrict output, such that price is larger
than marginal cost at the profit maximizing output q
 P > MC
 Deadweight loss (Area HGE)  allocative inefficiency  market failure.
 The high prices also mean that lower income consumers may not be able to afford
private transportation. Hence there is a need for governments to make public
transportation convenient and affordable.
Price
MC
P H
G
MC E
MR DD=AR
Quantity
q*DD qS
Market dominance in market for private hire vehicles/ Taxi
Industry
22
Other sources of Market failure: Students can also argue that there are positive externalities
in the consumption of public transportation due to lesser pollutants being emitted when
switching away from private transportation.
2. Discuss the effectiveness of policies in overcoming market failure in

Singapore’s land transport market
Policies to address negative externalities in consumption
Policy 1: Certificate of Entitlement (Quota)
 Certificate of Entitlement (COE) is a quota imposed to limit number of new vehicle

registrations. Motorists bid for the right to register, own and use a vehicle in Singapore.
Price of COE depends on the demand for vehicles in Singapore, as well as the supply of
vehicles allocated for that month. Supply is perfectly price inelastic.
 Governments can limit the number of vehicles to the socially-optimal amount of vehicles
on the road, Qs. As a result, the deadweight loss will be eliminated, and the market will be
allocative efficient.
 Limitation: However, as mentioned above, unable to effectively contain vehicle population

in Singapore due to incorrect estimations of vehicle deregistrations. Since 2005, growth in
vehicle population has continually exceeded “allowable annual growth rate” determined by
government. Consequently, congestion has not been successfully controlled.
Policy 2: Taxes (Including Electronic Road Pricing)

 The government imposes taxes such as Additional Registration Fee and road tax to reduce
car ownership. Increases cost of vehicle ownership with aim to reduce vehicle population.
The newly imposed Vehicular Emissions Scheme (VES) will impose a tax on vehicles
depending on the amount of pollutants that they emit. There will be a fall in supply indicated
by a shift from MPC to MPC’ (Fig 1). This will reduce amount of vehicles on the road
(driving) to socially optimal level.
 These taxes helps to alleviate the air pollution caused by the consumption of automobiles,
but does not target users that contribute to congestion.
 Instead, Electronic Road Pricing (ERP) is used as a finer method to deal with the problem
of congestion
 ERP is a congestion pricing system that charges drivers when their vehicles enter popular
areas during peak hours. Encourages motorist to change their period of travel, mode of
travel or to use a different route, reducing congestion on roads with heavier traffic.
 Only road uses who contribute to congestion and to travel delays that incur external costs
for third parties will be taxed based on the amount of congestion that they contribute to.
Electronic Road Pricing (ERP), and its predecessor Area Licensing Scheme, introduced
as form of congestion pricing system where drivers are charged for driving into certain
roads/areas at certain times of day.
Advantage: ERP is electronic and requires little manpower to enforce.
23
Limitation 1: ERP system is very expensive as it requires the building of ERP gantries.
Furthermore, ERP may have little effect on travel behaviour because of the “sunk cost”
mentality where users have already paid huge upfront cost paid for the vehicle and ignore the
relatively smaller ERP charges associated with daily use of the vehicle.
Limitation 2: By its design, ERP charges can only be imposed on the roads where the gantries
are built. This has diverted congestion towards other roads and hence not addressing the root
issue of traffic congestion.
 LTA is testing a new satellite ERP system which charges motorists based on the distance
that they travel on congested roads, rather than a flat fee when they enter a restricted ERP
zone. This will allow the government to further fine-tune and adjust the amount of tax to
impose based on the exact level of congestion.
Policy 3: Investment in Public Transportation
 Singapore government invests heavily in upgrading trains and buses to become more
efficient modes of transportation, so as to encourage citizens to move away from private
vehicles to public transportation as their daily means of transportation
 This can be in the form of more frequent train service by improving the train signalling
system, and increasing the number of train and bus routes to serve different communities.
 When public transportation becomes more convenient, there will be a change in tastes
and preferences of the citizens, resulting in a fall in demand for automobiles. MPB falls to
MPB’ (Fig 2)
 As a result, equilibrium quantity Qp decreases, resulting in a fall in deadweight loss,

increasing societal welfare.
Limitation: as with any form of research and development, improvement in train and bus
services require extended periods of testing. In the short run, commuters may face train faults
due to failures in the new system, but in the long run, the more efficient train and bus services
should encourage more commuters to switch over from private automobiles to public
transportation.
Cost/benefit MSC
MPC
ES
E
Tax=MEC
B
MPB = MSB
MPB’
Quantity
QS QP
Fig 2: Fall in demand for private automobiles.
24
Policy 4: Indirect subsidies for Green Vehicles
 The earlier mentioned VES is also an indirect subsidy whereby rebates are given to
vehicles considered as eco-friendly based on a certain emission standard. This will
increase the supply of Green Vehicles, and reduce their price.
 Assuming that Green Vehicles and non-Green Vehicles are close substitutes, their XED>1.
The given fall in price of Green Vehicles will cause a more than proportionate fall in the
demand for non-Green vehicles. In the market non-Green vehicles, the equilibrium
quantity Qp falls, resulting in a fall in deadweight loss and increase in societal welfare.
Limitations:
o These subsidies are payouts that will increase the government expenditure,
resulting in a worsening of the government’s budget position. As a result, in order
to fund these subsidies, the government may need to raise taxes, which are
politically unpopular. This expenditure on subsidies could have been spent on other
areas such as long term transport and telecommunications infrastructural projects,
which are the opportunity costs incurred due to these subsidies.
o These subsidies address the problem of pollution (negative externalities in the
consumption of automobiles, but does not address the problem of congestion,
which will bring about negative externalities as external costs are incurred by third
parties when commuters and motorists are delayed.
Other possible points: Students may also talk about how the Singapore government is
subsidizing and encouraging the R&D of autonomous electric vehicles, which if successful can
help to address both the problems of pollution and congestion, because autonomous driving
allows automobiles to drive faster and closer together due to the presence of sensors that
ensure safety. This will allow a smoother flow of traffic even in congested areas, thereby
reducing congestion (MEC)
Policies to Address Market Dominance in the public transport market
Policy 1: Pro Competition Acts

 Pro-Competition Acts aim to prohibit monopolization of a market by any firm. For example,
any mergers / acquisitions of firms will have to be approved by the regulatory authority.
 In Singapore, the regulatory authority is the CCCS
 Recently, due to the acquisition of Uber’s South East Asia’s assets by Grab, the CCCS
found that the merger significantly reduced competition in the ride hailing market, and
forced Grab to maintain its pre-transaction pricing algorithm and driver commission rates
until competition is revived.
 This means that Grab has to maintain its previous pricing and output strategy, despite its
demand becoming higher and more price inelastic now. This prevents Grab from abusing
its high market power and raising prices at the cost to consumers  price is reduced closer
to MC  reduction in deadweight loss
 Advantage: Unlike other policies used to address market dominance, pro-competition acts
target the root cause of market dominance by preventing firms from having too high market
power in the first place.
 Limitations: It is very difficult and time-consuming for the authorities to prove that there
has been a significant enough reduction in competition in the market to warrant a rejection
by the CCCS.
25
Policy 2: Bus contracting model
 The bus contracting model involves the following changes:
o Government ownership of capital equipment: Buses, bus depos
o Government bearing the revenue risk of bus transportation, rather than bus
operators
o Government bundling bus routes together in a contact to ensure accessibility
regardless of profitability
 Consequences:
o Improvement in bus frequency as dictated by the contract
o Improvement in quality of buses and bus rides as governments now own the buses
and bus transport infrastructure
 USB chargers
 Electronic bus arrival time displays at bus stops
o More extensive bus routes as dictated by contract
 Due to the improvement in bus services which is a form of public transportation, bus
services become a closer substitute and a more viable alternative compared to private
transportation
 This can lead to a change in tastes and preferences of the consumers in favour of public
transportation, leading to an increase in demand (Qe  Qs).
 This reduction in consumption of private transportation helps to address market failure by
bringing the market equilibrium output closer to the socially optimal output, thereby
reducing the deadweight loss
 Advantages:
o Deals with one of the root causes of the earlier mentioned problem, which is the
overreliance on private transportation due to the inconvenience of public
transportation
 Limitations:
o Improvement in bus services may not be immediate, especially those that involve
the physical improvement of buses
o Difficult to change consumers tastes and preferences, especially if there is a social
stigma against taking public transportation
o Requires policing by LTA to ensure that bus operators are fulfilling the terms of
their contract in terms of bus frequencies. This can be costly to monitor.
Evaluative conclusion:
 Negative externalities in consumption of automobiles is a multi-faceted problem:

o Too many cars on the road
o Cars are not eco-friendly
o Congestion in popular areas and during peak hours aggravates the problem of the
negative externalities in consumption of automobiles.
o Public transportation is not convenient enough
 This requires a multi-pronged approach as every policy is effective in dealing with a
different problem
o COE sets a maximum number of cars in Singapore
o VES encourages consumers to buy more eco-friendly vehicles.
o ERP reduces the amount of congestion in Singapore
o Investment in public transportation
26
 In the long run, the investment in public transportation will solve the root cause of the
problem, which is overdependence on private automobiles. However in the short run, in
order to mitigate the effects of negative externalities in consumption of private automobiles,
the government can make use of taxes to reduce the deadweight loss. Once public
transportation becomes more convenient and popular, the flexibility of the tax allows the
government to reduce the tax on automobiles.
 For the high income group, the proportion of income spent on automobiles is not as high
as that of other groups, and the degree of necessity is high as many of them are probably
holding higher management positions in firms who will value the added convenience of
having a personal private vehicle. As a result, the high prices and taxes will only cause a
less than proportionate decrease in their quantity demanded, thereby rendering those
policies ineffective.
 On the other hand, these policies are very effective for the middle income group who may
feel that public transportation and private transportation are closer substitutes, and who will
have a demand for automobiles that is price elastic due to the higher proportion of income
spent on the good.
Level descriptors
Level Out of 10 marks Descriptors

 Thorough knowledge displayed, well-elaborated
and all-rounded assessment of the policies
adopted by the Singapore government
 Skilled application to relevant current situations i.e.
support analysis with at least one real world
example.
 Clear and coherent analysis, grounded by
economic concepts, frameworks and principles
Level 2 9 – 14 Displays AO1 and AO2 skills:

 Relatively coherent and sound analysis of the
policies adopted by the Singapore government
Answers are relevant to question but undeveloped
explanation of facts and theory
 Some ability at graphs with incomplete
explanation, where appropriate.
 States the policies implemented by the Singapore

government with little attempt made at explaining
the policies and their workings.
 Incomplete answer lacking elaboration
 Basic errors in economic theory
27
Levels Out of 5 Descriptors
marks
E3 4-5 Well-reasoned judgements/decisions
 Critically evaluates alternative theories, contemporary
issues, perspectives and/or policy choices
 Evaluates relevance of unstated assumptions
 Synthesises economic arguments to arrive at well-reasoned
judgements and decisions
E2 2-3 Largely unexplained judgements

 Some attempt at evaluation or a summative conclusion
 Relevant to the question but does not substantiate the
judgement
 Evaluation may not be a logical progression from the prior
analysis
E1 1 An unsupported judgement
 Mere evaluative statements or judgements that are neither
supported nor relevant to the specific context of the question
28
Essay 4
High rates of unemployment remain a major issue in many economies in the world. An
understanding of various causes of unemployment is needed in order for a government
to decide on the economic policies that would help its economy achieve full
employment.
Discuss the various causes of unemployment and the economic policies that would
help to achieve full employment in today’s globalised world. [25]
In today’s globalised world, it is largely characterised by larger degree of openness and freer
labour mobility and greater capital flows. As a result of this, demand deficient and structural
unemployment are even more pertinent. It is important to note that frictional unemployment is
still one of the underlying causes of unemployment.
Unemployment of labour refers to the situation where people of working age are unable to find
employment, even though they are able and willing to work and actively seeking employment
at current wage rates.
In today’s globalised world where it is characterised by greater degree of openness, countries

that are small and open such as Singapore is heavily reliant on exports as her main source of
economic growth. Hence, recession in trading’s partner economy can result in demand-
deficient unemployment. In the context of Singapore, exports revenue takes up 170% of her
GDP. The implication of this is during a recession by Singapore’s trading partner, this would
affect cause the demand for Singapore’s export to, as Singapore exports normal goods
(YED>0). Since AD= C + I + G + (X-M), a fall in X will lead to a fall in AD. This fall in AD is
represented by a leftward shift of AD from AD1 to AD2 in Figure 1.
Figure 1: A fall in AD
With reference to Figure 1, the initial equilibrium national income is at YFE (full-employment
level of national income), where AD is equal to aggregate supply (AS) at point E1. With a fall
in AD from AD1 to AD2, firms find that they are unable to sell their current level of output and
stocks of unsold goods will build up. Firms will thus reduce production and cut back on the
amount of labour they employ, since labour is a form of derived demand. The fall in national
income will lead to a further fall in induced consumption due to the multiplier effect. As a result
of this, the new equilibrium is at E2, where it is at a lower national output (Y2). The economy
29
is said to be operating with spare capacity or unemployed resources, and the gap (YFE – Y2)
represents the presence of demand-deficient unemployment.
Furthermore, as a result of openness, the theory of comparative advantage states that trade
between nations is beneficial to all if each specialises and trades according to its comparative
advantage. Therefore, changing comparative advantage in a globalised world can be a key
reason to structural unemployment. Structural unemployment is a type of unemployment
caused by the structural changes in the economy. In this context, Singapore’s comparative
advantage has shifted from manufacturing (especially in the areas of chemical, electronics
and engineering) in the 1990s to R&D (especially in the areas of environmental & water
technology, biomedical sciences and interactive & digital media) in the millennium. Those
who were previously working in manufacturing sector that do not have the relevant skill set for
the R&D sector will be unemployed. The unemployed do not possess the right skills, hence
unable to fill existing job vacancies. Hence, people made redundant in the labour intensive
manufacturing sector cannot immediately take up jobs elsewhere, even though there are
vacancies. Hence, structural unemployment as a result of changing comparative advantage
is one common causes of unemployment in today’s globalised world.
Finally, market imperfections such as imperfect information of existing market

conditions is an important cause of frictional unemployment. Frictional unemployment is
a type of unemployment which occurs when people leave their jobs and are unemployed for
a period of time while they are searching for a new job. In today’s globalised world where
there are numerous opportunities presented to a worker, the search time to find the right job
to fulfil individual’s work aspirations would be even longer than before. Even when they have
found a job, they might quit to search for better opportunities in terms of better remuneration,
promotion or more flexible work arrangements. During the search period, the labour is not
employed and is classified as frictional unemployment.
The next part of the essay will focus on the policies to achieve full employment in today’s
globalised world. To deal with demand-deficient unemployment, governments can adopt
demand management policies such as expansionary fiscal policy or expansionary
monetary policy. In particular, expansionary fiscal policy refers to governments increasing
government expenditure (G) and/or decrease government taxation rates (T). Since G is a
component of AD, by increasing G, this would lead to an increase in AD. Reducing direct tax
such as personal income tax will increase households’ level of disposable income (i.e. post-
tax income) which translates to an increase in C, assuming household income is the same.
Reducing corporate tax rates will increase post-tax profits and encourage firms to increase I.
Given that C and I are components of AD, AD will increase accordingly. Hence, expansionary
fiscal policy works through an increase in G and decrease in T to increase C and I.
30
Figure 2: Expansionary Fiscal Policy
Referring to Figure 2, the increase in G, C, I raises AD from AD1 to AD2. The excess AD at
the original general price level, P1, creates a shortage of goods and services produced. This
causes an unplanned fall in stocks/inventories, which creates an upward pressure on prices,
and prompts firms to increase production. A new equilibrium is reached at (Y 2, P2), where
general price level has increased, and national income or national output has increased from
Y1 by a multiplied effect. In order to increase production of goods and services, firms needed
to hire more factors of production, such as labour. As such, the demand for labour increased,
since labour is a form of derived demand. Demand-deficient unemployment (Y1 – Y2) is hence
eliminated, as the economy is brought closer to full-employment as represented by the full-
employment level of national income or national output, YFE.
However, there are some limitations to expansionary fiscal policy in trying to reduce the
demand-deficient unemployment. In particular, for expansionary fiscal policy to work, it
depends on government spending and this further depends on government budget. If the
government is in a large and persistent fiscal deficit position, this will severely limit the
effectiveness such a policy as the government is unable to increase spending to stimulate AD.
In the event that the government chooses to borrow from Central Bank, this would lead to a
financial crowding out issue. As the government chooses to borrow more from the bank, it
will compete for scare funds with the private sector and this will drive up interest rates. This
would discourage firms from borrowing, hence leading to a fall in I. Finally, another important
factor to consider is the size of the multiplier. In the context of Singapore, a small multiplier
size exists because of a relatively high propensity to save (due to Asian culture of savings and
compulsory savings in the form of CPF) and large propensity to import (due to high reliance
on imports for consumer and capital goods). As compared to a country with a larger multiplier
size, with the same amount of government spending (injection), the country with a larger
multiplier size will see a larger increase in real national income than that of a smaller multiplier
size. Hence, expansionary fiscal policy will be most effective for countries that have a larger
multiplier size in dealing with demand-deficient unemployment in a globalised world.
To deal with structural unemployment in today’s globalised economy, governments

can consider using supply-side policies. Supply-side policies to improve occupational
immobility, such as subsidies for education and training in the forms of reskilling and
skill-upgrading, are the primary methods for reducing technological and sectoral
unemployment. In particular, Singapore government launched SkillsFuture programme where
part of the programme gave Singaporean aged 25 and above will get $500 worth of
31
SkillsFuture credits that can be used to pay for a variety of courses, ranging from financial
literacy to photography and cooking. The purpose of such a programme ensures that citizens
are equipped with the relevant skills for Singapore’s economy today. With the right set of skills,
this will better ensure employability and reduce structural unemployment within an economy.
However, there are limitations that are similar across all retraining programmes. A key
determinant of the effectiveness of supply-side policies like education and training is the
attitude and aptitude of the unemployed (or in-employment workers) towards learning new
skills and knowledge. Employers’ attitude towards these skill upgrading and reskilling
opportunities also matter, as some employers may be resistant to investing time to train their
employees, to co-funding such training, and/or letting their employees use work hours to
engage in training. Hence, effectiveness is uncertain. Response time lag is significant as it
takes time to equip people with skills. It may take several years before the workforce is
equipped with the right skills, for them to be effectively employed in the growing industries. By
the time the labour force is equipped with the relevant skills, the economy’s comparative
advantage might have change, rendering those who have been equipped with the skills being
unemployed again.
Other than supply-side policies, the government can consider using protectionist measures
such as the imposition of a tariff. By imposing a tariff on goods where a country’s trading
partner has comparative advantage in, it can help to prevent structural unemployment by
increasing domestic employment. Such a policy is common in today’s globalised world where
we see US imposing tariffs on China’s product.
Price
($)
8 Sd
4 Sw + t
a b c d
2 Sw
1
Dd
0 Q1 Q2 Q3 Q4 Quantity of good
Figure 3: Imposition of tariff
Referring to Figure 3, the world price initially was $2 and the country will import Q1 to Q3 units.
With the imposition of tariff, the country will reduce the amount of imports to Q2 – Q3. Domestic
production will increase from Q1 to Q2, the increase in domestic production will mean that there
is an increase in domestic employment. While the imposition of tariff, help to mitigate structural
unemployment, it might not be justified because it will result in deadweight loss to
society, represented by area b & d. Furthermore, there is a reduction in consumer surplus by
area a.
Lastly, governments can consider using supply-side policies in the form of providing
information to help to reduce the imperfect information of existing market conditions in
today’s globalised economy. For example, organisation of job fairs (e.g. those organised by
the Community Development Councils (CDCs) and Employment and Employability Institutes
(e2i)) to bring employers and jobseekers together, where the former can mass recruit, and the
32
latter can find out more about available vacancies as well as market themselves to potential
employers. Such fairs would help to reduce the market imperfections through the provision of
information of the current market conditions.
The effectiveness of the policies to improve labour market information depends largely
on the attitude and mind-sets of jobseekers. At the same time, improving job market
information may have the unintended consequence of paradox of choice, where potential
employers and jobseekers are faced with too many choices and hence unable to quickly
decide who to hire and who to be employed with respectively. This will then lengthen the job
search process.
In conclusion, any economy in a globalised world today will be bound to be faced with different
types of unemployment. Ideally, a government would want to be able to implement a
range of policies to deal with the different types of unemployment. However, given the
constraints, governments would need to prioritise which unemployment to tackle. The
priority can be dependent on the nature of her economy.
In the case of Singapore, her size and openness make her extremely susceptible to
demand-deficient and structural unemployment in today’s globalised world. This
explains why the Singapore government would increase her spending in 2009 because of the
global financial crisis to mitigate the demand-deficient unemployment. At the same time, she
has been investing in skills training programme to prevent structural unemployment in today’s
globalised world.
In the US, as a result of their openness, they are bound to face with more structural rather
than demand-deficient unemployment. Therefore, this can explain why President Trump
has been imposing large amount of tariffs on China’s imports to protect her steel industry.
Another factor that governments can consider in deciding on which policy to implement
could be their fiscal position. Instead of using expansionary fiscal policy which requires
government spending, a more preferred policy would be lower of interest rates to stimulate
spending. In the event the country faces structural unemployment, the government can
consider imposing tariffs to earn tax revenue and redirect the revenue to training programmes
to equip the workforce with relevant skills.
All in all, in a globalised world today, demand deficient and structural unemployment are the
most prevalent types of unemployment because of economic conditions of trading partners
and changing comparative advantage. Government’s choice of polices are largely influenced
by the nature of their economy and their fiscal position.
Knowledge, Application/Understanding and Analysis

L3 For an answer that explains with relevant diagram on the different causes 15 –
of unemployment in today’s globalised economy. The answer uses 20
appropriate analysis to discuss a range of policies and their effectiveness (18)
in achieving full employment in today’s globalised world
L2 For an answer that explains 2 causes of unemployment in today’s 9 – 14
globalised economy. The answer gives a descriptive discussion of (12)
policies and their effectiveness in achieving full employable in today’s
globalised world.
L1 For an answer that explains the types of unemployment but did not link 1 – 8
to the causes of the unemployment and the policies does not deal with (5)
achieving full employment in today’s globalised world.
33
E3 For an answer that uses appropriate analysis to support an evaluative 4 – 5
conclusion such as coming up with 1 to 2 criterion relevant in deciding on
policies to achieving fully employment in a globalised economy.
E2 For an answer that makes some attempt at evaluation of the types of 2 – 3
policies in achieving full employment in today’s globalised world. Answer
could have suggested a few criterions, but lacks economic analysis.
E1 For an answer that gives an unsupported evaluative statement. 1
Essay 5
Singapore is considered to have a high standard of living, a high cost of living and a
strong overall macroeconomic performance.
(a) Explain the link between the standard of living, the cost of living and the
macroeconomic performance of a country. [10]
(b) Discuss the economic policies which might have resulted in Singapore arriving at
this position. [15]
Part (a)
Question Analysis:
Framework Details
Approach Command
Explain (the link)
word
End point Linkages between standard of living, cost of living and
overall macroeconomic performance
Content and Content  Standard of living
Context  Cost of living
 Overall macroeconomic performance
Context Generic
Suggested Answer:
Introduction
 Define key terms:
o Standard of living – the quality of life (both quantitative/tangible as well as
intangible aspects) for an average person of a country.
o Cost of living – a measure of the average cost for a household of buying a common
basket of different goods and services.
o Macroeconomic performance – measured by the attainment of the four
macroeconomic goals of (i) high and sustained economic growth, (ii) price stability
in the form of low inflation, (iii) low unemployment, and (iv)healthy balance of
payments.
 State essay approach: This essay aims to explain the linkages between the three concepts
(as defined above), in terms of cause and effect where relevant.
34
Body
1. Explain the possible linkages between the three concepts:
 Note that the following is non-exhaustive, but that students’ answers should cover
at least one point each from (i), (ii) and (iii). Alternatively, students could explain
the links between all three entities in every developmental paragraph.
 In terms of analysis, explanation of the linkages must be premised on a well-
developed analysis of each concept (students are expected to be able to expand
on the key points outlined below).
i. Between standard of living and overall macroeconomic performance.

a. High and sustained economic growth, low inflation and low unemployment 
means an increase in household income (in real terms)  increase in real
purchasing power  increased ability to consume more and better quality
goods and services  higher material standard of living.
b. High and sustained economic growth, low inflation and low unemployment
 …  increased ability to consume more and better quality goods and
services, including taking frequent holidays abroad; or having access to better
education / healthcare options etc.  less stress, more enjoyment; or better
career prospects / health status  higher non-material standard of living.
c. Healthy balance of payments (BOP) in terms of BOP surplus  could lead to

currency appreciation  increase in external purchasing power since price of
imports (in foreign terms) falls  greater ability to consume imported goods
and services  higher material standard of living. With increased ability to
travel abroad on a stronger domestic currency, there is greater enjoyment of
leisure  higher non-material standard of living.
d. High and sustained economic growth  means rising real national income 
increase in tax revenue (income tax revenue, corporate tax revenue, sales tax
revenue) collected by the government  finances government spending on
healthcare and education  improves non-material standard of living.
ii. Between standard of living and cost of living.

a. High standard of living  signifies healthy growth and employment prospects,
as well as socioeconomic and political stability  attracts foreign direct
investments (e.g. by multinational corporations (MNCs)), and expatriates with
high spending power  increase in investment and consumption expenditure
 increase in AD  increase in general price level in the short run where there
might be lack of spare capacity  i.e. demand-pull inflation and hence a higher
cost of living.
b. High cost of living could have been an outcome of strong/inflationary growth.

Under strong growth, real national income and hence household income
increases  improves material standard of living.
iii. Between cost of living and overall macroeconomic performance.

a. Strong growth and low unemployment, but amidst tight capacity in the economy
(e.g. tight labour force)  could lead to demand-pull inflation  rise in cost of
living ( reduces real purchasing power  worsens material standard of living).
35
b. Strong macroeconomic performance in terms of healthy balance of payments
could be due to increased inflows of export revenue and foreign direct
investment (FDI).
i. Increased export revenue  increase in AD  demand-pull inflation if
there is lack of spare capacity in the economy.
ii. Increase in FDI is likely to be accompanied by an inflow of expatriates
(i.e. foreign labour/talent) who have high income and thus spending
power  increase in consumption spending  demand-pull inflation if
there is lack of spare capacity.
Conclusion
While strong macroeconomic performance can accompanied by high standard of living, it may
also be inevitable that strong macroeconomic performance or high standard of living is
associated with high cost of living. Hence, policies need to be calibrated to ensure that cost of
living is kept affordable, in the pursuit of strong macroeconomic performance and high
standard of living.
Mark Scheme

L3 For an answer that uses analysis to explain at least two linkages between 8-10
standard of living, the cost of living and the macroeconomic performance. (9)
L2 A descriptive explanation of the linkages between standard of living, the cost 5-7
of living and the macroeconomic performance, or an answer which uses (6)
analysis to explain only one linkage.
L1 For an answer which shows knowledge of standard of living, cost of living 1-4
and macroeconomic performance but largely unexplained, or one that is (3)
mostly irrelevant and contains a few valid points made incidentally.
Part (b)
Singapore is considered to have a high standard of living, a high cost of living and a
strong overall macroeconomic performance.
(b) Discuss the economic policies which might have resulted in Singapore arriving at
this position. [15]
Question Analysis:
Framework Details
Approach Command
Discuss
word
End point A synthesis (e.g. ranking) of the economic policies that
achieved high standard of living, high cost of living and
strong overall macroeconomic performance for Singapore
Content and Content  Macroeconomic policies – how they work and their
Context limitations
 High standard of living
 High cost of living
 Strong overall macroeconomic performance
36
Context Singapore
Suggested Answer:
Introduction
 State essay approach: This essay will discuss demand-management, supply-side and
trade policies which Singapore adopts to achieve a high standard of living and strong
overall macroeconomic performance, but which may inevitably result in high cost of living.
The essay will analyse how the various policies work, and consider their limitations for a
balanced discussion.
Body
Demand-management policies
1. Expansionary fiscal policy (with supply-side effects).
Explain how the policy works to achieve the three given outcomes
 Increase in government spending (e.g. on infrastructure), and reduction in
corporate income tax rate to attract investments (especially foreign direct
investment (FDI))  increase in AD  in the short run amidst lack of spare
capacity (e.g. tight labour market): increase in real national income (RNY) by a
multiplied effect (i.e. actual growth), fall in demand-deficient unemployment, but
also increase in general price level (i.e. demand-pull inflation)  material
standard of living improves since real income rises, but cost of living also
rises.
 However, in the long run when productive capacity increases (when the
infrastructure is built, and capital goods bought by firms are ready for operation),
increase in AS will bring down the inflationary pressures  overall, sustained
growth is achieved  enables Singapore to achieve her internal
macroeconomic goals which raises material standard of living in the long
run.
 Increase in FDI  improves capital and financial account  improvement in
balance of payments, thereby contributing to Singapore’s BOP surplus.
 Increase in RNY  higher tax revenue  increase in government ability to spend
on raising healthcare and education standards for e.g.  improvement in non-
material standard of living.
Assess the policy limitations

 The increase in government spending and cut in corporate income tax may worsen
Singapore’s fiscal budget balance in the short run.
 Additionally, there are also opportunity costs involved in spending on a certain

sector of the economy, which may compromise standard of living in certain aspects
– e.g. spending on infrastructure in order to boost growth and employment may
mean having to spend less on security and defence, thereby compromising non-
material standard of living.
o In-paragraph evaluation: How significant the opportunity costs are depends
on the government’s priorities during a particular time period, and what it
more urgently needs to spend on in order to achieve the macroeconomic
goals and improvement in standard of living.
37
2. Exchange rate policy – gradual and modest appreciation of SGD, helps Singapore
achieves price stability in the form of low inflation, which contributes towards her
strong macroeconomic performance and high standard of living.
Explain how the policy works to achieve the three given outcomes
 Keeps imported inflation low, given our dependence on imports due to lack of
natural resources.
o Fall in price of imported raw materials and intermediate goods and services
(in SGD terms)  fall in cost of production  rise in SRAS  fall in general
price level  i.e. import cost-push inflation is lowered  fall in cost of living
 rise in real purchasing power  improvement in material standard
of living.
o Fall in price of imported final goods and services  fall in cost of living 
rise in real purchasing power  improvement in material standard of
living.
 Indirectly lowers demand-pull inflation. If Marshall-Lerner condition (i.e. sum of

price elasticities of demand for exports and for imports more than 1) holds,
appreciation of SGD  fall in net exports  fall in AD  fall in general price level
 i.e. demand-pull inflation is lowered  fall in cost of living  rise in real
purchasing power  improvement in material standard of living.
 Gradual and modest appreciation of the SGD attracts FDI because foreign firms
are confident that the profits (in their currency terms, e.g. USD) will increase given
the strengthening SGD. This is despite the rise in cost of production (in their
currency terms), because foreign firms’ confidence in Singapore is likely to be high
given the government and central bank’s commitment to ensuring strong economic
performance of the Singapore economy. (Explain how rise in FDI has short run and
long run effects on the macroeconomic goals and standard of living – as above
under the expansionary fiscal policy).

 Appreciation of SGD may have side effects – price of Singapore’s exports
becoming more expensive (in foreign terms), potentially reducing export price
competitiveness.
o In-paragraph evaluation: Given high import content in our exports, lowering
price of imported inputs (in SGD terms) through appreciation has the effect
of lowering the final price of exports – thus mitigating the initial/potential
loss of export price competitiveness due to a stronger SGD. Moreover,
Singapore does not compete based on price only, but more importantly,
quality. Quality competitiveness is achieved through supply-side policies
(as outlined below).
3. Supply-side policies that increases the quantity, quality and mobility of factors of
production.
 Training and education (under the SkillsFuture national movement)  raise quality
of labour  increase in AS to bring about sustained growth, as well as reduce
structural unemployment  helps Singapore achieves the internal macroeconomic
goals associated with growth and employment, as well as improves standard of
living.
38
 Government subsidies on R&D (e.g. biomedical, infocomm technology)  increase
in productivity  increase in productive capacity  increase in AS.
 Both improvements in quality of labour and productivity will attract FDI (e.g. MNCs
such as P&G, Rolls Royce to locate their R&D and regional marketing operations
in Singapore). (Again, the increases in AD and AS allow sustained growth and low
unemployment to be achieved.)

 Suppy-side policies have long implementation and response time lag.
 Effectiveness is also not guaranteed since employers and/or employees may not
be convinced by the need for and benefits of training and education. It takes time
to change Singaporean’s mindsets towards lifelong learning, and to make good
use of the schemes rolled out under SkillsFuture instead of for e.g., enrolling in
recreational courses using the $500 SkillsFuture Credit.
 For R&D, given its experimental nature, it may succeed but may also fail. (e.g.
heavy subsidies into the life science sector in Singapore have not yield as much
success as anticipated).
 While the Singapore government’s fiscal position is able to finance the supply-side
policies, spending on training and education as well as R&D has inevitably strained
the government budget. Hence, there was a need to raise tax revenue through for
e.g. Goods and Services Tax (GST) hikes which are regressive in nature.
o In-paragraph evaluation: The government is wary of compromising equity
and has put in place transfer payments (e.g. GST rebate vouchers) to take
care of the lower-income group.
4. Trade policies
 Signing of Free Trade Agreements (FTAs) with many countries to secure
favourable trading terms for Singapore, which is very export- and import-
dependent. The FTAs will entail lowering of tariffs on Singapore’s exports 
reduces price of Singapore’s exports  increase in quantity demanded by more
than proportionately, assuming demand is price elastic  export revenue (X)
increases. At the same time, having preferential access to these foreign markets
is equivalent to expanding the size of Singapore’s export markets  demand for
Singapore’s export increases  X increases as well. AD increases  amidst lack
of spare capacity (e.g. tight labour market): increase in real national income (RNY)
by a multiplied effect (i.e. actual growth), fall in demand-deficient unemployment,
but also increase in general price level (i.e. demand-pull inflation)  material
standard of living improves since real income rises, but cost of living also
rises. Increase in net exports  improves balance of trade  improves
current account and hence BOP.

 Implementation time lag – e.g. the EUSFTA (EU-Singapore FTA) took five years
to negotiate, and another four-five years to draft and be passed through the
Singapore Parliament and the European Parliament (currently still not effective till
2019).
 Difficult to achieve especially in the context of growing protectionism (e.g. the US
pulling out of the Trans-Pacific Partnership).
39
Evaluative Conclusion
 Final stand: Synthesise that a combination of policies led Singapore to achieve its
current state of high standard of living, strong macroeconomic position, and
inevitably high cost of living.
 Rank policies: Recognise that while Singapore relied on a mix of policies to

simultaneously achieve the different outcomes, certain policies may have been a mainstay
(e.g. gradual appreciation of the SGD) while other have evolved along the way (e.g. types
of SSPs). (Why? Changing government priorities depending on state of economic
development).
o Consider how nature of economy affected Singapore’s choice of policies.
 Consider how changing context (both domestically – ageing population, and globally –
growing protectionism) may affect Singapore future policy options. (Is there a need for
Singapore to change its policies or not?)
Mark Scheme:

For a thorough answer that fully analyses how different types of policies work
and their limitations. Answer should cover a range of policies including supply-
L3 8-10
side policies. Answer is well-contextualised and include relevant ADAS
diagrams.
For a relevant answer which analyses how demand-management or supply-
L2 side or trade policies work and their limitations, or an answer which has 5-7
sufficient scope but analysis lacks depth.
For an answer which shows some knowledge but is mostly irrelevant, and only
L1 contains a few valid points made incidentally in an irrelevant context. Basic 1-4
errors of theory may be evident.
Evaluation
An evaluation which synthesises the economic arguments put forth using clear
criteria, critically examines any underlying assumptions, and considers
E3 4-5
alternative perspectives / policy options / related issues. Judgement is well-
reasoned.
Some attempt at evaluation or a conclusion that answers the question, but
E2 2-3
does not explain the judgement.
E1 Unsupported evaluative statement(s). 1
40
Essay 6
6 The Singapore economy grew by 1.8% on a year-on-year basis in the second quarter of
2015, sharply lower than the 2.8% growth in the preceding quarter, the Ministry of Trade
and Industry (MTI) announced on Tuesday 11 August 2015.
(a) Explain the internal and external factors that are likely to have contributed to
this slowdown in the economic growth rate. [10]
(b) Discuss whether the policies aimed to increase the economic growth rate
might cause difficulties for Singapore’s economy. [15]
Suggested Answers and Mark Schemes
Part a
Qn analysis
Command
Explain
Word
Approach
Internal and External factors leading to slowdown in
End Point
economic growth rate
Internal and External Factors resulting in changes to
Content and Content
AD and AS
Context
Context Preferably follow context of preamble (Singapore)
Intro
Economic growth can be defined as an increase in national output (or income level) of an
economy over a specific time period, usually a year. A slowdown in economic growth rate can
be due to a rise in national output (due to rise in aggregate demand and supply) being
mitigated by a fall in aggregate demand and or aggregate supply (caused by other factors) of
an economy. These falls in AD and AS can be due to either internal or external factors.
Body
P1: External factor affecting AD
One external factor that could lead to the slowdown in economic growth in Singapore could
be the slowdown in the economies of Singapore’s trading partners such as China. This is
especially so given Singapore’s profile as a small and open economy, one that is susceptible
to external shocks. As these economies face a fall in national income, the purchasing power
of their people falls resulting in a fall in demand for Singapore’s exports as the nation exports
normal goods. This resulted in a fall in total revenue of Singapore’s exports leading to a fall in
net export revenue which is a component of aggregate demand. This fall in export revenue
will mitigate a rise in aggregate demand (AD) cause by a rise in other components of AD such
as government expenditure and domestic consumption. This caused a small rise in AD (from
AD1 to AD2) as compared to the previous period whereby AD increased from ADo to AD1.
41
The overall rise in injection (assuming rise
in G & I is greater than fall in X-M) will lead
to a corresponding initial increase in
national income. Consequently, this rise in
incomes will lead to a rise in induced
consumption and a rise in withdrawals (in
the form of savings, taxes and import
expenditure). The amount of rise in induced
consumption is determined by the value of
marginal propensity to consume. The
higher the value of MPC, the greater is the
fall in induced consumption and hence the
larger is the rise in national income. The
multiplier process continues until the initial
rise in injections is equal to the total rise in
withdrawals.
Hence, the economy reaches a new equilibrium national income at Y2. This results in a
slowdown in growth from Y1 to Y2 as compared to the previous period where the economy
grew from Yo to Y1.
P2: Internal factor affecting AD

Internal factors could also reduce the AD of Singapore’s economy. With weaker economic
outlook, both consumer and producer confidence will worsen resulting in a fall in both
consumption and investment. Consumers will put their purchases on hold as they fear that
they might experience a fall in income or even unemployment. Firms on the other hand will
reduce their investment as a weak economic outlook will affect the rate of returns on
investment. The fall in consumption and investment can again mitigate the rise in AD due to
other factors. This again will cause economic growth to slow down.
The trigger cause would relate to why C or I rise too at a slower rate.
P3: Internal factor affecting AS

One internal factor that could lead to the slowdown in economic growth in Singapore could be
the shortage in the labour market. As Singapore faced the serious issue of manpower crunch,
such a shortage could lead to rising pressure on wages as firms compete for the limited
amount of labour. The rise in wages could lead to a rise in production costs at every given
output level, causing a fall in short run aggregate supply. Furthermore the fall in labour quantity
as retirees leave the labour force could also lead to a fall in productive capacity causing a fall
in the long run aggregate supply. These effects could mitigate the rise in AS due to an
improvement in technology causing a small rise in AS from AS1 to AS2 as compared to the
previous period whereby AS increased from ASo to AS1.
42
A surplus is created by the downward shift
of the AS curve, which in turn causes a
downward pressure on the general price
level. As the GPL falls, due to the wealth,
interest rate and international trade
substitution effects, spending on goods and
services increases and this is represented
by a movement along the AD curve. The
GPL continues to fall until the disequilibrium
is eliminated at P2 and equilibrium real
national income is higher at Y2.
Hence, the economy reaches a new equilibrium national income at Y2. This results in a
slowdown in growth from Y1 to Y2 as compared to the previous period (Yo to Y1).
P4: External factor affecting AS

External factors could also reduce the AS of Singapore’s economy. An example would be
external supply shocks which increase the prices of imported raw materials. As a small nation
with lack of natural resources, Singapore is highly dependent on imported factor inputs such
as sand from Indonesia. The recent ban in export of sand from Indonesia to Singapore which
was implemented by the Indonesia government resulted in a shortage of sand causing price
to rise. This could lead to a rise in production costs at every given output level. This fall can
again mitigate the rise in AS due to other factors causing economic growth to slow down.
Conclusion
The slowdown in economic growth rates can be caused by a small rise in AD and AS due to
opposing forces causing both AD and AS to rise by a smaller extent. These can be due to
both internal and external factors. This slowdown could lead negative consequences for the
government and therefore measures must be implemented to tackle this slowdown.
Knowledge, Application, Understanding and Analysis

L3 For an answer that gives a detailed and analytic explanation of the external and
8-10 internal causes (AD & AS) of economic slowdown.
L2 For an answer that describes the external and internal causes (AD & AS) of
5-7 economic slowdown.
L1 For an answer that shows unexplained knowledge of external and internal causes
1-4 of the economic slowdown such as a definition and / or any unexplained list of its
determinants
43
Part b
Question Analysis
Command
Discuss whether: Thesis & Anti-thesis
Word
Approach
Economic Growth Policies conflicting with other goals
End Point
of the Government
Content and Content Economic Growth Policies
Context Context Singapore
Intro
In view of the slowdown in economic growth rates, the Singapore government will have to
implement policies to rectify the issue. Such policies will have to result in a rise in either the
aggregate demand or supply of the Singapore economy. When implementing these policies,
the government must be aware of the difficulties that it might have to face to its economy.
Body
P1: Difficulties arising from Zero Appreciation exchange-rate policy
In order to address the mentioned challenges, the Singapore government may choose to
change its exchange rate policy from gradual modest appreciation to a zero appreciation one
like it did during the 2008 subprime crisis. This is done through skilful manipulation of
currencies while maintaining zero NEER (Nominal Effective Exchange Rate) – depreciate
against currencies of countries that it sells exports to and to appreciate against currencies of
countries that it buys imports from. By flattening the band to allow more room for the Singapore
dollar to depreciate, the price of Singapore’s exports will fall in foreign currency resulting in a
rise in quantity demanded for Singapore’s exports. At the same time, the price of imports in
Singapore dollars will increase resulting in a fall in quantity demanded. The demand for
Singapore’s exports is price elastic, to the availability of many close substitutes from other
countries. Being a small country that lacks natural resources, Singapore is heavily reliant on
imports resulting in the PED of its imports to be price inelastic. However, assuming that the
sum of PED for exports and imports is more than one, depreciation in the Singapore dollars
will lead to a rise in net export revenue due to the Marshall Learner Condition.
This rise in net export revenue will result in

a rise in AD causing it to shift from ADo to
AD1. This rise in AD will then result in
multiple increase in national income via the
multiplier process causing national income
to rise from Yo to Y1 assuming that the
Singapore economy is not operating at the
full level of employment. Thus there will be
a rise in economic growth rates.
Difficulties:
1. The rise in export revenue which is a form of injection will lead to multiple increase in
national income. The extent in rise in national income is determined by the size of the
44
multiplier. The size of Singapore’s multiplier is small, which is due to high MPW arising
from high MPS and MPM.
 High MPS arises from compulsory savings through Central Provident Fund
contributions where 20% of gross income is saved. In addition, households save
another proportion for precautionary and other purposes. Overall, Singapore’s savings
as a % of GDP is 50%.
 High MPM is due to Singapore’s limited resources. We import virtually all final
goods & services and raw materials. For every $1 spent, 60 cents go into imports.
2. Hence exchange rate policy is not very effective to stimulate growth because with a
small multiplier value, the final rise in national income is limited.
3. This policy however might result in imported inflation. Domestic firms that rely on imported
raw materials such as crude oil and sand will face a rise in their production costs forcing
them to pass on the rise in costs to consumers in the form of higher prices resulting in
import price push inflation. This could mitigate or even offset the fall in prices of exports
due to the depreciation of the Singapore dollar as most of Singapore’s exports have high
imported content thus resulting in this policy being ineffective.
EV: Being a small country without any natural resources, Singapore is highly dependent on
imported final goods and services as well as raw materials. Therefore the problem of imported
inflation is severe. However, this issue can be mitigated as the government could choose to
only depreciate the Singapore dollars against the currencies that the nation sells its exports
to. Furthermore, being a country highly dependent on external markets due to its small
domestic market, it is important for Singapore to boost its export revenue in order to achieve
high growth rates.
P2: Difficulties arising from signing of more Free Trade Agreements
To mitigate the effects of an economic slowdown in any one of its trading partners, the
Singapore government may choose to sign more free trade agreements with other nations. A
free trade agreement (FTA) is a legally binding agreement between 2 or more countries to
bring about closer economic integration. As a major trading nation, Singapore strongly
supports the multilateral trading framework of the WTO. But it needs to supplement this with
bilateral FTAs with key trading partners so as to secure its economic ties and access to their
markets. Such agreements result in the elimination of trade barriers resulting in the rise in
volume of exports and at the same time reduce to prices of imported factor inputs. This will
help increase the AD and thus result in a rise in economic growth rates.
Difficulty: Just as Singaporean businesses gain preferential access to overseas markets, its
FTA partners will also enter Singapore more easily than before. Should the rise in import
expenditure exceeds the rise in export revenue, the current account in the balance of
payments might worsen creating difficulties for Singapore’s economy.
IEV: In order to mitigate such problems, goods and services produced by Singapore will have
to remain competitive so as to ensure that the rise in export revenue is greater than the rise
in import expenditure. Being endowed with quality labour and high tech capital equipment,
Singapore will be able to stay competitive in the global market.
45
P3: Difficulties arising from expansionary fiscal policy
The Singapore government may choose to engage in expansionary fiscal policies in order to
achieve an increase in economic growth rates. One way is to increase its government
expenditure. The government could bring forward the construction of public goods such as
highways as well as upgrading of lifts and infrastructure in the country as seen in part of its
2009 Resilience Package. As government expenditure is a component of AD, a rise in G will
result in a rise in AD resulting in multiple increase in national income. Thus, there will be a rise
in economic growth rates assuming that the economy is not operating at full employment level.
Difficulty: The rise in AD might result in demand-pull inflation if the economy is operating near
full level of employment. The rise in production will result in firms competing for limited factor
inputs such as labour. This increase in demand for factor inputs will result in an upwards
pressure on the cost of production. Firms will then pass on the rise in cost to consumers in the
form of higher prices resulting in demand pull inflation.
This rise in government expenditure may also cause a strain on the government budget
affecting national reserves. This could limit the government’s ability to fund future projects.
The crowding out effect might arise if the government were to borrow from the private sector
in order to fund its expenditure. This will increase the demand for loanable funds which will
increase interest rates causing a fall in investment and consumption due to a rise in cost of
borrowing.
The rise in income levels may also increase the purchasing power of households causing
them to purchase more imported final goods and services. As import expenditure increases,
there will be outflow of funds worsening the current account balance in the balance of
payments of the country.
EV: The Singapore government has been prudent in its spending and therefore able to
accumulate quite an amount of reserves. This will reduce the possibility of the government
amassing a huge debt. The crowding out effect is also unlikely to occur.
The worsening of the BOP due to rise in import expenditure may be worrying as households
in Singapore spent quite a high proportion of their income on imported goods and services
due to the lack of natural resources and the high degree of openness to trade. Demand pull
inflation might be an issue as Singapore has been experiencing a low rate of unemployment
all these while. This means that the economy is operating at point near the full employment
level. Therefore supply side policies must be implemented to mitigate this issue.
P4: Minimal difficulty from the use of supply-side policies
To address the issue of falling aggregate supply due to the labour shortage, the Singapore
government may choose to engage in supply-side policies. One such policy is the provision of
training as seen in its Jobs Future Scheme where a fixed amount of fund was provided for
Singaporeans to upgrade themselves. Such scheme aims to improve the skills of workers in
Singapore so as to improve labour productivity.
46
The government may also provide grants to
encourage firms to engage in research and
development or to adopt more high-tech
capital equipment in their production. These
policies allow firms to adopt a more capital
intensive method of production as to ease
the labour shortages. Through the increase
in labour productivity, the nation’s
productive capacity will increase causing a
rise in AS. National income will rise from Yo
to Y1. Thus there will be a rise in economic
growth rates.
IEV: Although supply-side policies do not cause any difficulties to the Singapore economy
unlike the others, the government will have to be aware of the time required for the policy to
take into effect. Training might not have a 100% success rate as some workers might not be
willing or able to pick up new skills. Even if they do, their ability to effectively translate the
knowledge and skills into their work is also suspect.
Conclusion
In order to increase the rate of economic growth in Singapore, policies have to be implemented
to increase the AD and AS of the country. Such policies will cause difficulties for Singapore’s
economy due to the possible economic problem they bring such as high inflation and the
worsening of the balance of payments. The characteristics and conditions of the Singapore
economy as well as the level of competitiveness of Singapore’s goods and service will
determine whether these problems will be a cause for concern. Due to Singapore’s heavy
reliance on imports, the difficulty of imported inflation caused by adopting a zero appreciation
exchange rate policy will be more severe as compared to other policies. Despite the favourable
conditions such as the availability of reserves and high competitiveness of goods and services,
the government will still need to ensure that supply side policies are in place to prevent the
problems of high inflation and to enhance the level of competitiveness of its exports.
Knowledge, Application, Understanding and Analysis

L3 Detail analysis of the measures as well as thorough assessment of how these
measures adopted by the Singapore government could cause other economic
8-10
problems.
L2 For an answer that provided some analysis of the measures adopted by the
Singapore government to increase economic growth rates and its possible conflicts
5-7
but answer is lacking in analysis or scope.
L1 Largely presentation of measures that can increase economic growth rates but
answer largely lacks assessment of how these measures could cause other
1-4
economic problems or largely lacks consideration of Singapore context.
Evaluation
E3 For an answer that uses appropriate analysis to support an evaluative conclusion
about the extent of possible conflicts cause the measures adopted by the Singapore
4-5
government to increase economic growth rates. The criteria used are supported
with rigorous economic analysis.
E2 For an answer that makes some attempt at evaluation or a summative conclusion
about the extent of possible conflicts cause the measures adopted by the Singapore
2-3
government to increase economic growth rates. The answer should have certain
criteria in assessing the measures, but lacking in detailed analysis.
47
E1 For an answer that gives an unsupported evaluative statement about the possible
conflicts cause the measures adopted by the Singapore government to increase
1
economic growth rates.
48

How constraints affect Singapore firms

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How constraints affect Singapore firms

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2017 H2 A Level Paper 2 Suggested Answer and Mark Scheme

Question Analysis (Part a)

What are the implications of these words?

Content Words: - Aim of firm: Profit-maximisation

- Lack of resources (land, labour, entrepreneurship):

Type of question Decision-making, market structure

Explain A small domestic market would mean smaller market demands. As a

MR1 MR2AR1 = DD1 AR2 = DD2

Figure 1: A monopoly firm in a small domestic market

A small domestic market size poses challenges for a firm in Singapore to

Moreover, since Singapore lacks resources, Singapore firms are more

P/R/C Figure 2: A monopoly firm in

MR1 AR1 = DD1

Level Descriptor Marks

L3  Well-developed explanations + well-drawn diagrams + well-illustrated 8-10

 Answer focuses on the microeconomic issues faced by producers

 Answer delivers an analytic explanation to explain how each of the two

 Answer gives a good explanation of the problems caused by either a lack

 Answer lacks analytic explanation and coverage of the problems caused

 Answer is void of economic analysis and contains glaring content errors.

 Irrelevant response such as government policy rather than firm decisions

What are the implications of these words?

Content Words:  Firms: Pricing, output and / or non-pricing strategies to

o Non-pricing strategy to increase revenue: Expand

o Free trade agreements (FTAs) to reduce tariffs and

There have been a few well-known examples of home-grown firms

In addition, the Singapore government has actively sign free trade

With more consumers in overseas markets, a local firm in Singapore

Explain Reducing or removing tariffs (taxes) on imported raw materials would

[Optional] Government policies to reduce costs given a lack of resources

Explain [How it works] MC pricing: Make monopoly charge / price ceiling at

In state-owned monopolies such as PUB  P= LRMC i.e. cost of

Government policies to reduce costs given a lack of resources

Direct provision and subsidies  the government also invest more in

Through introducing new curriculums in primary, secondary schools

Propose a To further enhance the overcoming of the constraints, it is necessary

Level Descriptors Marks

L2 Displays AO1, AO2 and AO3 skills: 5–7

L1 Uneven display of AO1 and AO2 skills: 1–4

 An under-developed answer which lacks scope and

E2 Largely unexplained judgements: 2–3

b) Discuss the policies that might be used by the Singapore government to

Question analysis for (a)

Market for residential properties

Furthermore, price elasticity of supply (PES) measures the responsiveness of quantity

Level Out of 10 Descriptors

Level 2 5-7 Displays AO1 and AO2 skills:

Context Market for residential property market

Policy 1: To Impose the Additional Buyer’s Stamp Duty (ABSD)

Policies that might be used to increase the supply of residential properties in

Policy 1: To increase the supply of Build-to-Order (BTO) flats.

Policies that might be used to reduce residential property inflation directly:

Policy 1: To implement price ceiling in the residential property market

Figure 5: Market for residential properties

Limitation: However, at Pmax, Qd >Qs results in a shortage in Figure 5. Furthermore,

It is inevitable that multi-pronged approach will be required to address the property

Level Out of 10 marks Descriptors

Level 2 5-7 Displays AO1 and AO2 skills:

Level 1 1-4 Uneven display of AO1 and AO2 skills:

E2 2-3 Largely unexplained judgements

Assess the effectiveness of the policies available to the Singapore government in

 Government intervention is required in the land transport market in Singapore due to

1. Explain how there is market failure in Singapore’s land transport market