International Economics – Trade, MAS Policy & Tariffs

Question 1a

Assuming there are only two countries, Country X and Country Y trading with each other. Discuss how changes in the national income of Country X can lead to a repercussion effect of its trading partner, Country Y. Using the income determination model, illustrate it with a numerical example when Country X increases its autonomous investment spending by $100 million dollars.

Country X’s marginal propensity to save is 0.10 and marginal propensity to import is 0.40. Country Y’s marginal propensity to save is 0.20 and marginal propensity to import is 0.30.

Question 1b

In the past few decades, Singapore’s Central Bank, the Monetary Authority of Singapore (MAS) has been maintaining a strong Singapore dollar. Examine the reason for having a strong Singapore dollar and what are the possible problems Singapore might encounter? 

Question 2a

Assuming South Korea uses the flexible exchange rate system, and its economy is currently in a recession and a balance of payment surplus with inflationary pressure. Discuss and illustrate a suitable macroeconomic policy mix to address these problems for South Korea’s economy. 

Question 2b

What are the likely consequences of a trade war when the new president of the USA, Donald Trump imposed new tariffs of Chinese goods on imports from China? Discuss the potential effects on the economic growth and the trade balance between the two countries. 

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Repercussion effect

This repercussion effect takes place when the increase in income in one country raises the imports from another country and this in turn leads to an increase in the income of that another country allowing them to import more from the same country to whom they are exporting earlier.
Step 1 – multiplier for country X MPS =0.10 and MPM = 0.40
The increase in the income of X is 2100 = 200 million Impact on the country why X imports = 0.40200= 80 million – This is Y’s export increase.
Multiplier for country Y MPS = 0.20 and MPM = 0.30
Increase in Y’s Income = 280=160 million Repercussion back to X Y’s Imports = 0.30160=48 million – this increases X’s exports and income further.

Strong Singapore Dollar policy –

The main reasons leading to strong Singapore dollar or strict controls over imported inflation, and the economy maintains price stability. It ultimately enhances the confidence of investors, and supports MAS exchange rate based monetary policy.
Possible problems – the possible problems could be the low competitiveness of its exports, slowly economic growth and decline in the tourism rate. This will ultimately create pressure on manufacturing and SMEs.
South Korea policy mix – the problems identified are the recession contributing towards low growth and unemployment, BOP surplus leading to excess inflows and inflation giving rise to prices.
Policy mix – the expansionary fiscal policy would contribute towards an increase in the government which in turn boost demand and reduce recession. The contractionary monetary policy increases the interest rate which in turn controls inflation. The exchange rate adjustments would allow for appreciation in the currency and thereby help correct surplus.

Effects of US-China Trade war

Impact on economic growth – in the USA, the higher import prices increases the inflation level while reducing the purchasing power of consumers, and as a result it leads to slower growth. In respect to China, the exports will decline which in turn slows down the manufacturing and lower the GDP growth rate of the country.
Impact on trade balance – the USA would witness a decline in imports from China which will improve the trade deficit. With respect to China, the trade surplus of the country with the US would decline, and it will be forced to redirect exports to other countries.
Global effects – the Global effects would be earduction in the efficiency because of trade war and it would adversely affect both economies and create global economic instability.

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