How a Decrease in Foreign Direct Investment Into the Singapore Economy Can Affect the Economy

Topics: Macroeconomics, Investment, Supply and demand Pages: 2 (585 words) Published: August 17, 2010
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...
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