HWA CHONG INSTITUTION

Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III Balance of Payments, Exchange Rates & International Economics
TUTORIAL #19: BALANCE OF PAYMENTS DISEQUILIBRIUM CONSEQUENCES, CAUSES & CURES
Section A: Complete BEE questions in Chapter #19 lecture notes

Pls see answers at the end of lecture notes in tutors copy.

Also, pls go through any concepts or clarifications for this topic.
You may proceed to complete the tutorial if the pace of your class is fast.

Section B: Data Handling Practice

Question 1: JJC 2012 Prelims
Table 2: Singapore: Selected economic indicators
2008
2009
2010
Current Account (S$m)
37,275
43,836
75,686
Financial & Capital Account
-21,860
-32,985
-17,626
(S$m)
Balance of Payments (S$m)
18,531
16,456
57,480
Real GDP growth (%)
1.7
-1.0
14.8
Inflation rate (%)
6.6
0.6
2.8

2011
71,679
-50,360
21,487
4.9
5.2
Source: Singstat

Note: JJC excluded Financial account in their question. In actual fact, Singapores Capital account cannot
be so large due to the way MAS records our transactions with the rest of the world.
(a) Describe Singapores Balance of Payments account between 2008 and 2011.

[2]

Singapores Balance of Payments account is in a surplus throughout the period and it increased till
2010 and fell thereafter.

Note to tutors:
1m state initial position of the balance, i.e. BOP surplus or deficit
1m describe how the balance has changed i.e. increased or decreased and the meaning to this
change i.e. improved or worsened.
For BOP, deficit to surplus improved; deficit increased worsened. But if the surplus kept increasing
and ballooning, it is in disequilibrium so we cannot say that it has improved.
But for individual accounts be it current or financial account, a growing surplus can be described as the
position has improved because it does not mean that BOP is definitely ballooning since there are other
accounts to take into account to balance it.

(b) Explain whether the evidence from Table 2 is sufficient to account for an improvement in living
standards in Singapore from 2008 to 2011.
[4]
Note to tutors:
This question seems similar to last years promos, but it isnt.
Last years promo: Consider whether data provided in Table 2 suggest that material standard of
living in the United States might have improved from 2009 to 2011. [6m]
Answer scheme is
Thesis: Data provided in Table 2 suggest improvement in material SOL 2m
Anti-thesis 1: Data provided in Table 2 suggest otherwise 2m
Anti-thesis 2: Additional data required 1m
Stand 1m

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HWA CHONG INSTITUTION

Year Two H2 Economics 2013
Tutorials #19-21: Macroeconomics III Balance of Payments, Exchange Rates & International Economics
However, this question is on whether the statistics in Table 2 is sufficient to determine improvement of
SOL. And it is 4m, so focus is on sufficient vs insufficient.

Yes, evidence from Table 2 is sufficient 2m

Real GDP growth in Singapore is generally positive throughout 2008 to 2011.
This suggests that peoples real income has increased and people have a higher purchasing power.
They can consume more goods and services, indicating a better material well-being.
No, evidence from Table 2 is insufficient 2m (priority given for qualitative aspect)
Table 2 does not provide any qualitative statistics like life expectancy which can reflect the
qualitative aspect of SOL. If an economy has better healthcare facilities and is less exposed to
pollution, the citizens may have a higher life expectancy.
Also acceptable: Population statistics is missing. Real GDP per capita is a better measure because
if population growth is higher than the real GDP growth, an average household will consume a
smaller quantity of goods and services. Standard of living would not have improved.
Stand (good practice to have a stand for whether questions)
Insufficient as data does not include qualitative aspect of SOL

Question 2: MI 2012 Prelims

Table 1: Selected Economic Indicators Malaysia & Singapore
Country
Malaysia
Singapore
2007
2008
2009
2007
2008
GDP at Current Market
186,642.
221,828.
193,092. 176,427.2 193,998.0
Prices (US$m)
2
4
9
Current Account (US$m)
Unemployment Rate (%)
Consumer Price Index
(Annual % Change)
Balance of Trade (US$m)
Domestic currency per
US$

2009
182,798.6

29727
3.2
2.0

38825
3.3
5.4

31817
3.7
0.6

47175
2.0
2.1

35817
5.4
6.6

32387
0.6
0.6

37668
3.44

51127
3.34

40217
3.52

46065
1.51

26453
1.42

30006
1.46

Source: Asian Development Bank, 2009

(a) (i) Define the term balance of trade.

[1]

The difference in the value between total exports (export revenue) and total imports (import
expenditure) of goods and services between a country and the rest of the world.
(ii) Compare the trend in Malaysias balance of trade with that of Singapore over the period 2007
2009.
[2]

to

Similarity (focus on position of BOT as it is obvious):

Both countries enjoyed BOT surplus throughout the period.
Difference:
Singapores BOT surplus generally decreased and the position has worsened whilst Malaysias BOT
surplus first increased in 2008 followed by a decrease in 2009 which means the position improved
in 2008 and deteriorated in 2009.

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HWA CHONG INSTITUTION

Year Two H2 Economics 2013
Tutorials #19-21: Macroeconomics III Balance of Payments, Exchange Rates & International Economics
Note to tutors:
Some students may look at current account statistic instead, which is incorrect. You may want to
show the difference between BOT and current account.
For Malaysias case, the 3 year period does not really have a specific trend as the surplus rose and
fell rather distinctively.
Question 3: Adapted from NJC 2012 Prelims
Table 1: Key economic indicators in selected economies
2007
2008
2009

2010
United States
Growth in GDP at constant prices (%)
2.0
0
-2.6
2.8
Inflation rate (%)
2.9
3.8
-0.3
1.6
Unemployment (%)
4.6
5.8
9.3
9.6
Current Account Balance (US$ billions)
-718.1
-668.9
-378.4
-470.2
China
Growth in GDP at constant prices (%)
14.2
9.6
9.2
10.3
Inflation rate (%)
4.8
5.9
-0.7
3.3
Unemployment (%)
4
4.2
4.3
4.1
Current Account Balance (US$ billions)
371.8
436.1
297.1
306.2
Japan
Growth in GDP at constant prices (%)
2.4
-1.2
-6.3
3.9
Inflation rate (%)
0
1.4
-1.4
-0.7
Unemployment (%)
3.8
4.0
5.1
5.1
Current Account Balance (US$ billions)
211.0
157.1
141.8
194.8
Source: International Monetary Fund, World Economic Outlook Database, April 2011
(a) Describe USAs current account balance between 2007 and 2010.

[2]

USAs current account deficit decreased and the position has improved.
(b) Describe Japans current account balance between 2007 and 2010.

[2]

Japans current account surplus decreased from 2007 to 2009 and rose thereafter which means it
deteriorated from 2007 to 2009 and improved in 2010.
(c) Compare the current account balance between USA and China from 20078 to 20101.

[2]

Difference (focus on position of BOT as it is obvious):

USA has a current account deficit whilst China has a current account surplus
Difference
Chinas current account surplus generally decreased so the position has worsened while USAs
decreased deficit showed that the position has improved.
Note:
Do not accept the similarity below as it is vague and unclear, since the starting position is actually
different
Similarity: Both the current account positions have been reduced.

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HWA CHONG INSTITUTION

Year Two H2 Economics 2013
Tutorials #19-21: Macroeconomics III Balance of Payments, Exchange Rates & International Economics
Question 4: PJC 2012 Prelims

(a)

(i)

Compare the change in Japans current account balance as percentage of GDP between
2005 and 2010 with that of USA over the same period.
Note to tutors:
Focus of question is really about how the percentage has changed. So the
description should be increase or decrease in percentage.

Also, an increase in percentage of GDP does not necessary mean an increase in

absolute amount, especially is there is a contraction of the economy.

Possible answers:
Differences
Japans current account as a percentage of GDP is always positive, suggesting a
surplus, whilst USAs current account as a percentage of GDP is always negative,
suggesting a deficit.
Japans current account as a percentage of GDP fluctuates gradually between 3-5%,
whilst USAs has a general fall in percentage from -6% to -3%
Not accepted (due to how question is being phrased)
Differences
Japan has a current account surplus as a percentage of GDP whilst USA has a
current account deficit as a percentage of GDP (focus on position of BOT as it is
obvious)

Japan current account surplus as a percentage of GDP improved slightly from 05-07
and worsened slightly from 07-09, whereas USA current account deficit as a
percentage of GDP has improved / reduced

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[2]

(a)
(b)

HWA CHONG INSTITUTION

Year Two H2 Economics 2013
Tutorials #19-21: Macroeconomics III Balance of Payments, Exchange Rates & International Economics

Section C: Essay Practice

NOTE TO STUDENTS:
You are to come up with a detailed essay plan for every ESSAY question.
Refer to the Skills Package for Essays and bring it for tutorials.

Question 1: TYS 2008 Q6 attempt part (b)

(a) Explain the determinants of the pattern of trade between Singapore and the rest of the world.
[10]
[note: this will be covered under Tutorial #21: International Trade]
(b) Discuss whether the Singapore government should change its policies for managing the
balance of payments.
[15]
Key Points from the Examiners Report:
(+)
Able to explain the rationale for Singapores policy
of gradual appreciation of the exchange rate and
to evaluate the consequences of it.

The best responses referred to the supply-side

policies employed by the Singapore government
to maintain export competitiveness and hence
counter the potential adverse effect of a rise in the
price of exports caused by a gradual appreciation.

The need to reconsider policy given the current

worldwide recession was introduced by the better
candidates with appropriate reasons for reversing
the policy to one of depreciation.

()
Did not fully understand the Marshall-Lerner
condition.

Misunderstanding of current Singapore

government policy in this area. These tended to
describe the increase in the number of Free
Trade agreements recently signed by Singapore
and little else.

What is the link between (a) and (b)?

Pattern of Trade X and M composition + trade partners
Balance of Payments X and M - earnings and expenditure
So the link suggests that the focus is on trade account in the overall Balance of Payment.
Table 1: Balance of Payments for Singapore, 2006 to 2011 (S$millions) Pg 19.9 of lecture notes
A. Current Account
B. Financial Account (Net)
C. Net Errors and Omissions
D. Overall Balance (A+B+C)
E. Official Reserves (Net)

2006
56,652.2
-30,819.7
1,163.2
26,995.7
-26,995.7

2007
69,082.4
-39,417.0
-367.8
29,297.6
-29,297.6

2008
37,275.5
-21,860.8
3,116.4
18,531.1
-18,531.1

2009
43,836.0
-32,985.8
5,606.0
16,456.2
-16,456.2

Note: Current account is in surplus while financial account is in deficit.

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2010
75,686.7
-17,626.8
-579.4
57,480.5
-57,480.5

2011
71,679.5
-50,360.5
168.7
21,487.7
-21,487.7

HWA CHONG INSTITUTION

Year Two H2 Economics 2013
Tutorials #19-21: Macroeconomics III Balance of Payments, Exchange Rates & International Economics
FACTS CANDIDATES MUST KNOW:
Singapores overall balance of payments has been in surplus since 1980s.
However a breakdown of the sub-accounts shows:
(a)
Surplus: BOT in goods and services (visibles & invisibles)
(b)
Deficit: income flow and current transfers
(c)
Deficit: Financial account (portfolio and short-term transfer of funds) [source: MAS reports
various issues]
Given the above breakdown, it is interesting to note that the overall BOP is still in surplus. This is because
the surplus in (a) > deficits in (b) + (c).
Simple Schematic Plan
INTRODUCTION
BODY
Thesis: No need to change existing policies.
Exchange
rate policy

Supply-side
policies

Trade
policies

CURRENT Account (trade)

Together
with
product
differentiation, ER policy
Improves X

FINANCIAL Account (FDI)

A strong currency inspires

confidence in the economy as
investors are confident of
making good returns/profits

Through
incentives
for
businesses such as lower
corporate taxes and good
governance and infrastructure

Anti-thesis: During Crisis

periods May need to
change existing policies
During recession
Any evaluation?

Through cost cutting and

improvement in quality to
improve the price and nonprice competitiveness of
exports

Any evaluation?
CONCLUSION
SUGGESTED ANSWERS
INTRODUCTION
Key Words
Issue

Balance of Payments (BOP) is a systematic record of all economic transactions between the
country and the rest of the world. It is made up of 2 main accounts: current account and
financial account
Problems sometimes arise over the BOP and thus the Singapore government needs to
monitor and if necessary introduce policies to manage BOP in order to ensure economic
growth and stability.

Approach
This essay aims to discuss whether there is a need for Singapore to change its policies for
managing its BOP, namely the current and financial accounts.
BODY
Thesis: No need to change existing policies.
Given our relatively healthy state of the BOP, there is no urgency to alter the set of existing policies
used to manage the BOP. This is because it has by and large benefited our exporters.
[i.e. The focus is on the trade account ]

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Year Two H2 Economics 2013
Tutorials #19-21: Macroeconomics III Balance of Payments, Exchange Rates & International Economics
(1) Exchange Rate Policy (Gradual and Modest Appreciation)
(i) Together with product differentiation to improve BOT (CURRENT account)
State

A gradual and modest appreciation of Singdollar (S$) has does not hurt exporters
significantly

Elaborat General explanation of how appreciation affects BOT:

e
and In most cases, an appreciation of the countrys currency is damaging to BOT.
Exemplif
This is because it increases the price of its exports to foreign buyers and
y
reduces the price of imports for locals.
If demand for exports is price elastic, Quantity demanded falls more than
proportionately and X. If demand for imports is price elastic, quantity
demanded for imports increases more than proportionately and M. However,
Singapore imports basic necessities (agriculture/Fresh Produce:
Vegetables; poultry; meat; fruits; eggs) and raw material (Oil; metals like
copper, aluminum and steel) and thus the demand is generally more priceinelastic.
With appreciation, Pm in terms of S$ and Qm less than proportionate since
demand for imports is price-inelasticM.
Since both X and M, NX if X>M
But as long as ML condition holds, i.e. PEDx+PEDm>1, appreciation would
worsen BOT.
Explain why appreciation helps Singapore:
However, in the case of Singapore the appreciation of Sing $ has not hurt
exporters significantly
Why?
Reason 1: Keep the price of merchandised exports competitive
Singapore exports of merchandise goods e.g. refined oil, electronics and
pharmaceuticals have a high-import content (estimated at 60%).
Rising value of S$ in the foreign exchange market makes imports relatively
cheaper in local currency => the cost of buying imported inputs for
manufacturing exports would be lower.
In theory:
Px is affected by (a) imported input costs + (b) domestic costs (e.g. wages;
rentals) + (c) nominal exchange rate
Thus, the reduction in import input price/cost could be used to offset the
domestic price of the final product.
Note: Appreciation alone will not make Singapores goods more competitive
in the international arena. It has to be used in tandem with product
differentiation (make demand price-inelastic to minimize the negative
impact of appreciation on export revenue) and supply-side policies to cut
domestic costs and improve the quality of the products/services that will
not only make the demand more price-inelastic but also to increase the
demand.

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Year Two H2 Economics 2013
Tutorials #19-21: Macroeconomics III Balance of Payments, Exchange Rates & International Economics

Hence, in addition to appreciation of S$,

Reason 2: Product differentiation
Singapore exporters have over the years consciously differentiated their products
from our rivals through various means like product innovation; strategic marketing,
strong branding (e.g. uniquely Singapore brand); benchmarking (e.g. ISO
certification; Singapore Quality Award, etc). The Singapore product or brand
name is internationally considered as unique; of good quality; reliable and
trustworthy. Hence, foreign buyers are willing to pay a premium e.g. PSA service
and SIA flight. In short, our exports are by and large relatively price inelastic. This
implies that when the appreciation indeed leads to raising prices of our exports in
terms of foreign currencies, it does not really hurt our exporters.
Some facts to show that Singapores exports do not have many competitors
(substitutes) Data is in 2005
In the semiconductor space, Singapore is a leading semiconductor wafer fabrication
location in the world with 12 operating fabs and 2 under construction (UMCi and
Chartered Fab 7).
Singapore is the 3rd largest refining centre in the world, after Rotterdam and Houston.
We leverage on our huge hydrocarbon base to produce key olefinic and aromatic
feedstocks to the petrochemicals and specialty chemicals sectors.
Singapore is the largest manufacturer of Jack-up Oil Rigs in the world, with Keppel FELS
produced 60% of global output since 1996. It is also the 2nd largest Aviation maintenance
repair and overhaul centre in Asia.
Singapore is largest LNG vessel repairer in Asia outside of Japan. The main player,
Keppel has the record of turning around 10 units of LNG tankers in 2001 and it has
repaired 32 out of 51 LNG tankers that have called at Singapore for repair since 1995.
Evaluation:
The above analysis may be true for merchandised goods as they have high
import content and the goods that Singapore produces has relatively less
rivals as they are usually high-value add/tech/knowledge base.
However, it may not be the case for services which has very low import
content and especially those with close substitutes. Example like tourism
which has close substitutes in the region will be hit with a stronger S$.
Hopefully with the two Integrated Resorts, we are able to differentiate
successfully from others.
Possible remark to sum up:
If product differentiation is successful to reduce PED so much so that ML
condition is not satisfied, appreciation can help improve BOT.
(ii) A strong currency boost confidence and attracts FDI (FINANCIAL account) (Don't harp on this
point too much! If you mention this point, you should always mention the evaluation point! Mr Tan)
So far Singapore has been able to attract sufficient Foreign Direct Investment (FDI) to fuel economic
growth. Foreign investors are attracted to invest here if there is confidence in the economy and good

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Year Two H2 Economics 2013
Tutorials #19-21: Macroeconomics III Balance of Payments, Exchange Rates & International Economics
economic outlook.
This is bolstered by the appreciating S$. A strong currency inspires confidence in the economy. Investors
are confident of making good returns/profits.
Evaluation:
A strong currency alone is not sufficient to attract investment. A skilled labour force, low corporate
tax rate, good infrastructure and political stability are also very important.
(2) Supply-side policies
(i)
To improve export competitiveness (price and non-price) (CURRENT account)
State
The key policy to promote exports is through sharpening export competitiveness through
promoting greater productivity/efficiency and product and service innovation.

Elaborate
and
Exemplify

This entails carrying out a set of policies to cut costs; promote innovation to offer foreign
buyers better products at competitive prices.
As mentioned above, an appreciation of the S$ will lead to an increase of the price of exports
in terms of foreign currencies via higher nominal exchange rate (c), ceteris paribus.
Prices of exports remains competitive through offsetting changes in terms of :
(a) Keeping costs of imported inputs low by our gradual and modest appreciation policy
(b) Keeping domestic costs low by supply-side policies e.g. improvement in productivity.
Thus, besides a gradual and modest appreciation, it is necessary for the Singapore
government to use supply-side policies to help exporters market their goods overseas by
keeping down domestic costs.
Costs cutting measures: Government subsidise/provide tax incentives to incentivize
business firms to upgrade technology and adopt more efficient methods of production to cut
costs; to upgrade skills of their employees and thus be able to price their goods more
competitively in the international market
Product Innovation: Government subsidise/provide tax incentives to incentivise firms to
innovate; embark on R&D, market and brand their products more effectively etc.
Ensure price competitiveness and good quality will lead to high demand for our exports.
Given our exports are generally income elastic, with economic growth in our trading partners,
demand for our exports will increase more than proportionately and increase export revenue.

(ii)
To attract FDI (FINANCIAL account)
Supply-side policies such as lowering of the corporate taxes will attract businesses into the country
since it means higher after-tax profits and dividends.
Government can also spend on building good infrastructure such as a good transport system and high
speed wireless internet network that support business.
Training and education that increase labour productivity will also attract businesses that require a skilled
labour force.
(3) Trade Policies (CURRENT and FINANCIAL account)
State
The government has in recent times embarked on a policy of forging FTAs with many
countries including non-traditional trade partners e.g. middle-east; eastern and central
Europe.
Elaborate and FTAs are preferential trading arrangements to encourage more trade between member
Exemplify
countries.

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Year Two H2 Economics 2013
Tutorials #19-21: Macroeconomics III Balance of Payments, Exchange Rates & International Economics

FTAs enhances trade and investment flows by providing lower tariffs for exports of goods,
hassle-free custom procedures, improved market access for various commercial and
professional services, easier entry for businessmen into other countries, better terms for
investment in foreign countries etc. FTAs will set a framework for businesses in a small
country like Singapore to grow and expand globally, which in turn will generate more
employment opportunities for Singaporeans.
To date, Singapore has about 18 FTAs spanning across the whole world from North
America (US), Middle East (Jordan) Europe (EU) to East Asia ( Japan) and the Pacific
( Australia/NZ)
Evaluation:
Besides improving our BOP, the multiple FTAs also helps to diversify markets
decoupled from too much reliance on US and EU.
Anti-thesis: During Crisis periods May need to change existing policies
During Recession
State

During a major global economic downturn e.g. Global financial crisis 2008 being a highly
globalised and trade-dependent country, our exports are bound to be hit badly.
Elaborate & There is the need to temporarily suspend our gradual and modest appreciation policy.
Exemplify
During the financial crisis, the MAS did indeed adopt a zero appreciation policy to
ease the adverse impact of a slump in demand on our exporters. In fact, when
necessary, MAS allows slight depreciation.
One also note that during recession, the threat of expensive imports is at ease
as demand for essential commodities such as oil and food products is lower as
compared to good times. So the main aim will be targeting the price of exports
directly rather than through keeping price of imports low.
Exports are generally more price-elastic during bad times as importers are more cost
conscious and will try to find cheaper alternativesavailability of substitutes. When
Px in terms of foreign currencies, Qx more than proportionate since the demand for
X is price-elasticX.
Evaluation:
However, with depreciation, Pm in terms of local currencies so there is a
possibility of import-price-push inflation. Also, with higher price, Qm less than
proportionate since demand for imports is price-inelastic, M.
BUT, it is supplemented by the use of other cost-cutting supply-side policies to help
our exporters tide over this turbulent period/crisis e.g. wage subsidies; Special Risk
Initiative (SRI) sharing of risks by the government for loans lent to businesses
during this crisis.
CONCLUSION
By and large, under normal circumstances the existing policies e.g., appreciation of the S$, have benefited
the overall BOP in particular our export competitiveness except during periods of crises. However from
time to time, especially when there is a crisis e.g. severe economic downturn, the government may need to
change its policies to accommodate these contingencies in order to ensure sustained economic growth and
stability.

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