The United States has proposed a Trans-Pacific Partnership (TPP),

| November 24, 2016

Question 1

The United States has proposed a Trans-Pacific Partnership (TPP), which is a regional free trade area intended to enhance trade and investment among the partner countries. As at 2014, there are 12 members participating in the TPP, including USA, Australia, Brunei, Canada,Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

(a) Discuss and explain the possible benefits and costs of members joining the TPP?

(10 marks)

(b) A major obstacle in the TPP is the rigourous objection by the Japanese farmers on the import of farming product into Japan without tariff. With a suitable diagram, analyse why the Japanese farmers are strongly opposing the removal of tariffs on farming product into Japan.

(10 marks)

Question 2

(a) Refer to the website of Singapore Department of Statistics, balance of payments at

Search for the reports on the balance of payments of Singapore from 2010 to 2013. Go through the reports and discuss the current account balance and the capital account balance. Explain the balance of payment position of Singapore over time. What can you say about the investor’s confidence about investing in Singapore?

(10 marks)

(b) Singapore has been able to control inflation well in spite of the lack of natural resources which requires importing many products from other countries and hence subject to import inflation. The inflation rate is hovering around 3% over a long period of time. Based on the purchasing power parity theory, what can you predict about the strength of Singapore dollar against the major trading partners’ currencies? Explain.

(5 marks)

Question 3

(a) Consider an open economy without a government sector. It has the components of aggregate spending as follows:

· C = 120 + 0.8Y

· M = 60

· I = 500

· X = 200

· C is consumption, Y is income, M is import, I is investment and X is export.

(i) Discuss and determine the saving function, the multiplier, the equilibrium level of income and the trade balance at the equilibrium level of income.

(5 marks)

(ii) Suppose import now becomes positively related to output as M = 60 + 0.05Y. What is the new multiplier, the new equilibrium level of income and the new trade balance at this equilibrium level of income? Discuss.

(5 marks)

(b) Analyse why monetary policy is ineffective under a fixed exchange rate system.

(5 marks)

Question 4

(a) An economy on a fixed exchange rate system has been running a trade surplus for many years. This has led to accusations by its trading partners that the economy has deliberately undervalued its currency to boost its export. Analyse the effect on the economy’s trade balance and balance of payment when its currency is under-valued. What can you comment on the output and employment of the economy? Discuss with the help of a suitable foreign exchange market diagram.

(8 marks)

(b) Analyse the effect on the trade balance, balance of payments, output and employment of an economy when the economy that implements a fixed exchange rate system overvalues its currency. Discuss with the aid of a suitable foreign exchange market diagram.

(7 marks)

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