Suggested Answers of BT2 Revision Package - ASKnLearn

oooHigh level of integration increases vulnerability of smaller and more open economiesby exposing them more significantly to external demand conditions-­‐ exacerbates economic problems: Xd and FDI as a proportion of AD is much higher for smaller and more open economies à economy becomes more vulnerable to external environment à economic activity becomes more volatile due to influence of trading partners’ economic situations on domestic economy à smaller and more open economies less stable than large and less open ones, who depend more on domestic demand for economic growth. Free movement of labour arising from globalisation has significant impact inequity on the domestic economy, especially on wages. §§Influx of foreign workers increases supply of workers than reducing wages. This is especially important because foreign workers tend to form a larger proportion of workers in small and open economies such as Hong Kong and Singapore. Wages of low skilled workers may become especially depressed because influx of foreign low-­‐skilled worker, in the Singapore example, increase supply more than demand, causing wages to decrease. Skilled workers, on the other hand, find their wages increasing as the growth in demand for them outstrips supply. §ooo§§This worsens inequity more significantly for small and open economies who are more reliant on foreign workers. Remittance of wages by foreign workers may also worsen BOP CA through outflows via the income balance/ invisible balance in the current account. Larger dependence on FDI flows may worsen BOP CA of small and open economies more significantly: Repatriation of profits may worsen BOP CA through outflows via the income balance/ invisible balance in the current account. Might be a problem for countries managing their exchange rates as this reduces the size of trade surpluses and thus reduces the rate of accumulation of foreign reserves à less ability to manage exchange rates thus worsening economic instability. Currency might depreciate. For small and open economies that are highly reliant on imports, this may lead to import cost push inflation as depreciation makes foreign intermediate and final goods and services more expensive in domestic currency terms. [Support using AD-­‐AS diagram]. Anti-thesis: Large and less open economies may benefit more than small and openeconomies: