Economics - How a Shrinking Gdp Affects the Economy of Singapore

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In a recent article by Channel News Asia dated 13 July 2012, it was reported that Singapore's GDP contracted by 1.1% on a Quarter-on-Quarter seasonally-adjusted annualized basis, compared to the 9.4% expansion in the preceding quarter. The weakened growth momentum in Q2 was mainly due to a sequential contraction in the manufacturing sector. The sector declined by 6.0% reversing the 20.9% expansion in the preceding quarter. Annex A

Singapore is an open economy with high trade to GDP ratio of 2.3 times (GDP 2011 was $326B, whereas total trade value in 2009 was $747.15B) and is exposed to many external factors, especially economic development in a main export market. Our main trading partners are: Malaysia China Euro zone USA Indonesia – 11.9% – 10.4% – 11.1% – 6.5% – 9.4%

These 5 regions accounted for 50% of Singapore’s total trade, of which the US, Euro zone and China contributed 28%. Any negative economic news in these 3 regions will have sizable impact on our economic development.

The US economy grew at a lower 1.5% in Q2 compared with 1.9% in Q1, which establishes the fact that the US economy is growing at an anaemic rate. In addition Singapore’s second largest trade partner the 27-nation European Union (EU) is currently in recession and does not have the ability to purchase the same amount of Singapore’s goods and services as they did before (demand declines).

From the article, it can be inferred that demand for our exports has decreased. The cause can be attributed primarily to 2 main reasons; 1) The weakening of the economies of our trade partners 2) The strengthening of the SGD

The strength of the SGD has also contributed to Singapore’s declining exports. In this aspect it is making export prices uncompetitive. (For the same $ spent, fewer goods could be purchased) Conversely a strong currency allows for higher purchasing power which would lead to an increase in imports. Exports to the EU totalled SGD$48.1 billion last year, while imports from the EU reached SGD$57.9 billion, official data showed.

Singapore’s Economy has been resilient amid the global economic slowdown by diversifying across a range of sectors including oil and gas, pharmaceuticals and electronic. More importantly, Singapore’s long term objective of going into high value-added industries such as medical, biotechnology, geno-technology and nano-technology has also supported the resilience in our economy.

In the past 10 years, ASEAN has developed to become a significant and sizeable trading zone within itself besides, NAFTA and Euro zone. It provides countries like Singapore and Hongkong the opportunity to lead the ASEAN effort as the more successful Asian economies.

Although from the article it can be seen that the simultaneous surges in the electronics and pharmaceutical production that increased GDP growth in Q1 are not sustainable amid global demand weakness. (Manufacturing sector declined by 6 %) Which brings to mind 2 questions when aggregate demand falls what is the possible effects on our economy and how will that affect us? And what is the relationship between aggregate demand and GDP? I shall demonstrate the r/s using graphs

Aggregate Demand Decrease Supply Supply

GDP Price Deflator

GDP Price Deflator

110

110

100

D1

Demand 100 Real GDP
Billions $

D2 90 100
Billions $

Real GDP

At the current price level of 110, producers are willing and able to sell $100 billion worth of Product. Given, the current situation with our trading partners, our trading partners do not have the ability to purchase $100 billion worth of products; however, they may still be able to purchase a small amount at a lower price of $90 billion. When this happens the demand curve shifts leftwards as there is a fall in demand, because of this the Price level also falls to meet at the new market equilibrium (Real GDP 90, Price Level 100)

What does this mean domestically in Singapore? When demand declines while...
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