As a leader in the global market, Singapore engages in many trade agreements with foreign countries with foreign investments into the Singapore economy making up a huge percentage of our economy. The figures in 1999 alone for foreign investments were around $31 billion. If there were to be a decrease in these foreign investments, a chain of reactions would follow but before explaining these reactions, I would like to start off with the following equation: Ad = C + G + I + (X – M) Where C is consumption, G is government expenditure, I is investments, X is foreign export revenue and M is foreign import expenditures.
According to the aforementioned equation, by definition and in summary, when the foreign direct investment fall, so will the aggregate demand. In order to inject more cash into the local economy, the Singapore Government may choose to increase the total government expenditure. A fall in the Ad may be seen in the graph below: Referring to the graph above, one can see that a fall in aggregate demand causes the demand curve to shift to the left. With a falling demand, a surplus is created as suppliers are manufacturing more products than demanded.
They will rectify this decreasing Factors of Production, mainly employees to ensure they meet the demand. This will lead to higher cases of unemployment in Singapore as employers seek to get rid of excess workers. As lowered factors of production are brought about, the income for households proportionally fall. This will lead to higher savings in the household due to lower disposable income. Referring yet again to the equation, a fall in consumption will lead to a further fall in the Aggregate demand.
The government may then choose to increase its expenditure in order to keep companies badly affected by lowered export revenues afloat. In order to make these possible, governments may increase the taxes for each household. This will then lead to a similar chain of events as explained above where savings go up and there is lower consumption of goods, leading to a deadly cycle where producers will continually seek to get rid of excess labour and thus reduce the income of households. This will continue for some time till there is injection of funds into the economy. When the demand falls as shown by he graph with the leftwards shift of the demand curve, a new equilibrium is reached and the real national output (NY) is decreased from NY1 to NY2. Essentially, there is a decreased amount of export from Singapore, leading to a stunted economic growth and a lower GDP. A Balance of Payment deficit will also occur as the amount of money Singapore invests in foreign countries will exceed the amount of foreign investments in Singapore. To make up for this difference, the Monetary Authority of Singapore would print more money. By doing so, inflation would occur as money loses its value.
Many situations could occur here. Prices of consumables and other products will increase, leading to workers demanding a raise in wages as to afford the rising costs of goods. When companies agree to their requests, they essentially fuel the inflation crisis as banks will have to print even more money to meet with the wage rise demand, causing the Singapore dollar to lose its worth. Therefore, a decrease of foreign investments into the Singapore economy will have an effect on the Singapore economy with local issues like rising unemployment rates and higher inflation to far reaching consequences like a lowered GDP.