Economic Analysis Of The Article, “Singapore Cuts Trade Outlook As China Slowdown Caps Recovery” By Sharon Chen

1.0 Introduction

Countries have a duty to make robust macroeconomic policies to better their relative economic power. Macroeconomic tools such as fiscal and monetary policies create favourable conditions for monitoring and reacting to crucial economic indicators such gross domestic product (GDP), investment levels, international finance, exchange rates, inflation rates, price indices, national income, international trade, and unemployment rates. One of the most popular models that macroeconomists use to monitor and react to macroeconomic indicators is the aggregate-demand and aggregate-supply model (AD-AS model). This model explains a country’s price and real GDP levels by showing the equilibrium point between the aggregate demand and aggregate supply curves.

This report will employ the aggregate-demand and aggregate supply model to analyse an article by Sharon Chen titled, “Singapore Cuts Trade Outlook as China Slowdown Caps Recovery” dated 12 August 2013” and published on the popular business and financial information website, Bloomberg, on 12 August 2013.

2.0 Economic Concept: AD-AS Model

The AD-AS model is a powerful macroeconomic tool used across the world by economists to explain various macroeconomics trends. The AD (aggregate demand) part of the model explains how price levels affect aggregate demand, that is, the amount of output that households, firms and the government can afford at specific periods of the year. Presented in the form of a graphical curve, and as shown by Figure 2.1 below, the aggregate demand curve is a sloping curve chiefly because demand is a negative function of price, that is, more output is demanded when there is a price cut.

Figure 2.1 AD Portion of the AD-AS Model

The AD curve is a negative function of the price levelAD1Real GDPPrice LevelSource: Course Notes

The reason for a downward sloping curve is explained by three situations, the Pigou or the real balance effect, the Keynes or the interest rate effect, and net export effect. The real balance effect posits that when real prices decrease, real wealth increases, and therefore consumers are able to increase their purchasing powers. On the other hand, the interest rate effect posits that when commodity prices fall, the demand for money decreases and therefore interest rates decreases. Ultimately, this encourages more borrowing for both investment and consumption purposes. Lastly, the net export effect posits that when prices of commodities rise, domestic commodities become more expensive than the foreign commodities hence creating an exports decline.

On the other hand, the AS (aggregate supply) portion of the model shows how price levels affect the quantity of output supplied by firms in the short run. The aggregate supply is also known as the short run aggregate supply and is represented by an upward slopping curve chiefly because supply is a positive function of price, that is, output is likely to increase with the growth in price levels. As Figure 2.2 below shows, when the total output increases, more inputs will be required to produce the additional units of output and therefore, the price of inputs will definitely go up.

Figure 2.2: AS Portion of the AD-AS Model

Price LevelReal GDP ($ billions)13010080CAS12001000700ABStarting at point A, an increase in output raises unit costs. Firms raise prices, and the overall price level rises.

Source: Course Notes

The AS-AD model can be utilized in explaining various macroeconomics phenomena including inflation. The most important macroeconomic phenomenon shown by the AD-AS is the market equilibrium point. As Figure 2.3 below shows, the market equilibrium, that is, real GDP and real price level, is reached at the point where the AD curve and the AS curve intersects.

Figure 2.3: AD-AS Model

Price levelReal GDP (billions of dollars)0$1000100Short-run aggregate supply, SRASAggregate demand, AD

Source: Course Notes

3.0 Analysis of the Article

In her article, Sharon Chen lays out both the short-term agenda and growth prospects for the Singaporean economy. She illustrates how the country has lowered its forecast for exports due to the decreasing demand by China for the nation’s goods. She shows, that despite the increase in the growth of the service industry in Singapore, the country has been forced to devalue its exchange rate. As a result, exports become more competitive and imports become more expensive and thus the increase in demand for domestic products. To this effect, Chen states that the country’s economy is making steady progress amidst global uncertainties although the unemployment rates are still low in the country.

The article illustrates how the nations export recorded the longest decline since the global crisis as electronics dropped for the 11th month. A survey commissioned by Bloomberg which brought together about 11 economists gave a median estimate of 14.2% increase in quarter-on quarter GDP compared to Singapore’s governments estimate of 15.2%. The country’s GDP expanded 3.8% during the last quarter which was better than what was estimated of 3.7%. According to the AD-AS model, these changes in real GDP have indirect impact on the local demand and supply of goods and services within the country, hence the dipping domestic demand that is currently being experienced by the country.

The article also illustrates how Singapore is now dependent on its service industry. It is against this backdrop that the Singapore dollar lost 0.2 percent to S$1.2594 against the U.S dollar. Further, the article illustrates the financial position of Singapore’s trading partners the South Asian market and Europe. It states that the south Asian nations have recorded export slumps, while the European and Japan counterparts struggle to sustain their recovering economies. This has led to a reduction in the growth with the forecasts by international monetary fund stating that China economy is levelling off while Europe recession crisis is deepening. In the article we see that china’s GDP increasing to 7.5 % in April- June. China also adjusts its policies to facilitate more sustainable growth. The diversification of the export market in Singapore ensured that it is less vulnerable to external shocks. When the imports increase and the exports decrease the net export decreases. And because the net export is a component of the GDP, the country’s real GDP declines with the decline in net exports to China.

Volatility caused by swings in the pharmaceuticals casts an export outlook that is not faring well for Singapore. This is in tandem with the net export effect which posits that when prices of commodities rise, domestic commodities become more expensive than the foreign commodities hence creating a decline for foreign goods. To this end, the structural changes in China aimed at streamlining its aggregate demand and aggregate supply forces, affect Singapore’s export goods negatively. The Asian trade has seen the development of complex supply chains that helped split the production process in a range of countries. Close production integration has occurred between china, Japan and Singapore. Short-run market shocks may occasion temporal business cycle contraction for such closely interdependent market.

The change in policies by China to enhance its growth has had significant impact on Singapore which depends on China for its exports. Arguably, this excessive liquidity tightening could lead to a sharp slowdown on growth which will have spillover effects on export oriented economies. As a matter of fact, the article shows that it has slowed Japan’s projected growth by more than it was forecasted in the second quarter as a result of housing and business investment declines. The AD-AS model explains that when the net export decreases the aggregate demand decreases, this assumption suggests that an increase in exports boosts the aggregate demand and vice versa. Hence, the decrease in the AD for Japanese commodities creates a contraction. There is an inverse relationship between the domestic output and the price level. The effect on price is mainly dependent upon the magnitude of the shifts of aggregate supply and aggregate demand. The article shows that Singapore maintains a policy that allows gradual gains in its currency in reaction to the 3% drop in the Singapore dollar this year.

4.0 Conclusion

While using the AD-AS model, this report has shown that Singapore export trade has slowed down following a slowdown in its major trade partners, namely, China, Japan, and the United States. Though Singapore is fairing relatively well, the demand for its goods has slowed down starting the end of the second quarter. This report has also analysed the effect of China’s slowdown to sustain its growth and the effect it has on the export oriented economies. Overall, the report shows that the AD-AD model affects Singapore’s prospects in addressing critical macroeconomic issues such as full employment and perfect competition.

Bibliography

Chen, Sharon. Singapore cuts trade outlook as China slowdown caps recovery. Bloomberg, August 12, http://www.bloomberg.com/news/2013-08-12/singapore-lowers-2013-export-growth-outlook-amid-china-slowdown.html/

Dimand, Robert. Macroeconomics, origins and history of. New York: The New Palgrave Dictionary of Economics, 2008.

Healey, Nigel. “AD-AS model.” In An encyclopedia of macroeconomics, edited by Brian Snowdon, and Howard Vane, 11-18. Massachusetts: Edward Elgar Publishing, 2002.

Hubbard, Glenn, Anne Garnett, Phil Lewis and Anthony O’Brien, Essentials of economics, 2nd ed. Frenchs Forest, NSW: Pearson Australia, 2013.

Snowdon, Brian and Howard Vane. Modern Macroeconomics: Its Origins, Development and Current State. Massachusetts: Edward Elgar Publishing, 2005.