Priyanka's Econ Blog

Terms of Trade of India December 8, 2010

Filed under: Section 4 — priyanka821 @ 12:31 am

Terms of Trade are measures rate of exchange of one good or service for another, when two countries trade with each other. The figure above demonstrates the change in India’s terms of trade since 1995. When the terms of trade are more than 100, the terms of trade is known as favorable. This is because the country can now buy more imports with less exports. The converse is true for unfavorable terms of trade; the value would be lower than 100.

As we can see, India had its most favorable terms of trade in 2008 at a value at about 128. However, in 2009 the large fluctuation occurred decreasing the TOT value to 91. India has had a lot of fluctuations in its terms of trade over the last decade.

 

 

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” Hope might be in sight for the UK: The Marshall-Lerner Condition and the J-Curve” December 6, 2010

Filed under: Section 4 — priyanka821 @ 1:50 am

In March of 2010, U.K.’s imports shot up and therefore, there is doubt about its export driven recovery. The UK government is hoping to reduce its deficit by increasing its exports dramatically. However, as we know due to the Marshall and Lerner conditions, this will depend greatly on the price elasticity of demand of the exports and imports along with time.

The exports or imports are tractable if they are elastic because, a small change in price will cause a drastic change in quantity demanded. The Marshall-Lerner conditions state that: a deprecation, or devaluation of a currency will only lead to an improvement in the current account balance if the elasticity of demand for exports and imports is greater than one.  The current account balance will take the shape of J-curve. This means that initially, their deficit will increase because imports will be more expensive as the value of the currency has decreased.

Furthermore, exports will not increase immediately as other people would not know that the country (UK’s exports) have become cheaper. However, in the long run, the deficit will decrease because their imports will decrease as consumer’s will buy less of them as they will be expensive and exports will boost as they are relatively cheaper for other nations to purchase. UK will experience a surge in its deficit initially, but in the long run, the deficit will reach towards 0.

Figure 1: How the deficit will be reduced explained by the J-Curve.

Figure 1 shows that the initially, the deficit will increase. This is seen in the figureas the current account line goes further down. Until the minimum point, the Marshall-Lerner Condition is not being met. This is explained earlier, as the world does not know about Britain’s cheaper exports and they may be in a contract with other nations. Furthermore, if the currency becomes weaker, then the imports are more expensive and it is not likely that the British consumers will find substitutes for their imports immediately. However, after the initial worsening of the situation, the conditions will become better. This is indicated by the rise of the current account, and this only occurs when the Marshall-Lerner Condition is met and the price elasticity of the imports and exports combined is greater than 1.

The immediate change in circumstances will not occur and this is reflected in the article UK’s trade gap widens unexpectedly. The Marshall-Lerner Condition and J-Curve is explains, ” hile many businesses say overseas orders have been improving, the official data underlined worries among economists that, for now at least, a weak pound is raising costs for importers but not yet providing a significant boost to exports.”

 

China surplus (via Kevin’s Econ Blog)

Filed under: Section 4 — priyanka821 @ 1:03 am

Great work Kevin!!! I like the way you were concise, your writing was easy to follow.

The Chinese current account has been in the surplus for more than 10 years now, and it has seen dramatic spikes over the past 5 years. The surplus was at its peak 1 year ago, when it was around 440 billion US dollars. However, the surplus has been decreasing over the past few months, and is currently around 70 billion, after falling to a minimum of 54 billion on March. … Read More

via Kevin’s Econ Blog

 

China & U.S. Currency (extended response)

Filed under: Section 4 — priyanka821 @ 12:56 am

What free-trade aims to do is make the global market more efficient. Over the last few years, China has surged, and become the world’s #1 exporter yet its currency still remains devalued. Furthermore, it overtook Japan and became the world’s second largest economy. How does China keep its currency so undervalued? The United States accuses China of artificially devaluing their currency by printing money and increasing the yuan’s supply on the currency market. This affects many countries, such as the U.S., Japan and the Eurozone in a negative way. China used to have a fixed currency system which meant that the government fixed the value of Yuan to another currency or commodity, in this case the U.S. dollar . The fixed currency system requires a lot of government intervention. As of July 2005, China’s currency is determined by a managed currency system which can be defined as limits the government sets for how much a currency can appreciate (rise in value of a currency in a floating exchange rate system) or depreciate (decrease in value of a currency in a floating exchange rate) before the government intervenes on the foreign currency market. The U.S. finds the yuan’s “rigidity” a problem.  The U.S. and China, the world’s largest economies, may be at the start of a trade-war which will not only be internecine to both economies, but also to other economies around the world.

 

The balance of payments is an account of a country’s financial transactions with the rest of the world. A section within the balance of payments is the current account, which measures the trade in goods and services and net investment income and transfers. A country can be in either a current account surplus or current account deficit. A current account surplus exists where the revenue from teh export of goods and services and income flows is greater than the expenditure on the import of goods and services and income flows over a given period of time. A current account deficit is just the opposite; it is where revenue from the export of goods and services and income flows is less than the expenditure on the import of goods and services and income flows over a given period of time. Currently, China is in a current account surplus and the U.S. is in a current account deficit. The Chinese surplus means that they are more likely to invest in the U.S. As we know, China has bought many U.S. treasury bonds. U.S. has a deficit to China, about $250 billion and it is the largest debt it has. This investment is good for the U.S. because they cannot invest in their own economy as they are running a deficit. The Chinese investment is helping the U.S. be more productive.

A country running a surplus would generally want an appreciating currency to decrease their surplus and reach 0. However, this is not the case with China as an appreciating currency means that people are more wealthier, and therefore will buy more imports, and it will be more expensive for exporters to sell their products to other countries. China wants to continue its economic growth and therefore do not want this appreciating currency. So, the government intervenes in the foreign exchange market to devalue (intentionally decrease the value) of their currency.

Figure 1 shows how the Chinese government can artificially depreciate its currency using its foreign currency reserves. By buying other currencies and thereby putting more yuan on the foreign currency market, the government can shift the supply curve from S1 to S2. We can see that the yuan is depreciating as the quantity increases from Q1 to Q2 but price decreases from P1 to P2. This means that Americans can now buy more yuan for 1$.

This is good for China because it means that their exports will be cheap and therefore they will be gaining more revenue. This is good for U.S. consumers as they will be able to import Chinese products for cheaper. However, this is bad for the U.S. businesses as people will be using their money to buy cheap exports instead of the domestically/inefficiently produced products. This could potentially lead to shutting down of U.S. businesses and an increase in unemployment and inflation. The Chinese have been accused of making the value of their currency lower than its actual worth to prevent inflation in their country.

Even if the U.S. $ is strong and this means that consumers can buy more of imports, it is bad for their exporting industries. If this continues, the U.S. will have a larger debt. If the Chinese government suddenly decides to allow the exchange rate to reflect the demand for its currency accurately, this may lead to high inflation and therefore a decrease in standard of living. If the Chinese government appreciates the yuan slowly, exporting industries and the citizens will have more time to adjust.

Overall, I do not think that the U.S. has the right to tell China how to work its currency. They are getting the largest investment from China. Without this investment, many U.S. businesses may not be able to survive through the current economic down turn as the U.S. itself is in a large debt. Besides, the U.S. has already put protectionist measures against China. If China slowly lets the yuan appreciate, this may make the economic terms world-wide better.

 

THE SPANIARD’S PROBLEM December 1, 2010

Filed under: Section 4 — priyanka821 @ 10:05 am

 

Spain needs to devalue its currency. But it can’t because it is a part of the Euro zone. Initially, Spain experienced a lot of growth in its economy due to the Euro as funds poured in. Big is better but one size doesn’t fit all. This brought in a property bubble but when it burst, the Spain was devastated. However, at this point it would have been better if they did not join in the Euro zone.

Because Spain is in a recession, it is crucial for them to cut down interest rates and devalue their currency. The devaluation of the currency would mean increase in exports and decrease in imports to contract their deficit. However, this will affect other countries in the Euro zone. For example, Germany which is doing well would not want this. Furthermore, the central bank determines the interest rate. Spain wants a lower interest rate, but Germany does not want lowered interest rates as this would cause inflation in the country. What Spain can do is internal devaluation but this is hard to do without affecting the other nations significantly. One of the costs of it is it takes a long time, and this means numerous people will be unemployed for a long period. The Spanish government is unlikely to diverge from the Euro because this would cause a huge banking crisis.