Priyanka's Econ Blog

Test Reflection Section 4 February 9, 2011

Filed under: Section 4 — priyanka821 @ 12:11 am

I am  pleased with my score for this test.  Section 4 was a struggle for me so I think I did very well on the final test. However, I still feel like I need to improve my organization because my paper was messy and at times hard to follow. I think I can avoid making this mistake in the future by using a few minutes in the beginning to plan the paper and write a short outline.

Thank you for the feedback and advice Ms. Q 🙂 !

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Evaluate a country’s decision to join a free trade area (FTA) January 19, 2011

Filed under: Section 4,Uncategorized — priyanka821 @ 12:29 am

This question expects the candidate to evaluate the advantages and disadvantages of joining a FTA and then come to a conclusion. This question cannot be answered by looking at only one side of the argument. This question should take about 35 minutes.

Definitions

FTA: Exists when an agreement is made between countries, where the countries agree to trade freely among the member of the group, but are able to trade with countries outside the FTA in whatever ways they wish.

Real Example: ASEAN which is a FTA consisting of Asian nations.

Bullets from 3A

  • Free trade is trade that occurs between countries without any barriers or hindrances
  • This means that firms are able to sell directly into a country as easily as the firms within that country are able to trade
  • The firm exporting into the country should not face any additional barriers, taxes, regulations or any other obstacles that prevent them selling their goods/services
  • Free trade at an international level means that this freedom is true for trade between all countries. In this way, countries gain the benefits from competition that exist where the national markets are free from barriers and restrictions
  • Economic theory tells us clearly that this is likely to deliver significant benefits, but it is far from being universally true
  • However, completely free trade may have a number of costs for some economies. These may include:
  • Adjustment costs – changes in comparative advantage may require adjustments in the structure of industry and these may take some time. While they are taking place there may be employment costs from the changeover.
  • Environmental costs – free trade may lead to firms relocating to where environmental and other regulations are most lax. This could cause long-term environmental problems.

To evaluate this question:

*Define free trade

*Give 2 or 3 of the strongest arguments FOR joining a FTA

*Give 2 strong arugments against it (protectionism)

*Define protectionism

*Come to a conclusion as to what the value of FTA is for a country


 

Evaluating China’s “Manipulation of its Currency” (via Kanika’s Economic Blog) January 12, 2011

Filed under: Section 4 — priyanka821 @ 10:19 am

I like the way you explained the background information of the issue. I also think the way you used the diagram and explained the reasons was very effective. Well done!

Evaluating China’s “Manipulation of its Currency” Relations between China and US have been unstable in the recent years. The US is particularly disappointed (according to the understanding of the US) in China’s manipulation of their currency. China moved its exchange rate system from a fixed to a managed currency exchange rate in 2005. A fixed exchange rate system is where one currency is fixed in the value against another. It involves the government working to keep the parity through invention … Read More

via Kanika’s Economic Blog

 

Definitions and Real-Life Examples for International Economics

Filed under: Section 4 — priyanka821 @ 9:55 am
Word Definition Real Example
Factor of Endowments Factors of production that a country has available to produce goods and services. Japan has a strong labor force.
Specialization Exists where a country specializes in the production of goods and services where they have a comparative advantage in production. They will then trade to get the goods and services in which they do not specialize. Japan specializes in the production of electronic goods.
Absolute advantage Exists where a country is able to produce more output than other countries using the same inputs of factors of production. China has an absolute advantage over Sri Lanka in its production of rice.
Comparative advantage Exists where a country is able to produce a good at a lower opportunity cost of resources than other country. Hawaii has a comparative advantage in producing pineapples over France.
Free Trade International trade that takes place without any barriers such as tariffs, quotas, or subsidies. In the EU there are no barriers to imports.
Tariff A duty tax that is placed upon imports to protect domestic industries from foreign competition and to raise revenue for the government. U.S. put a tariff on France’s Roquefort Cheese.
Quota An import barrier that set upper limits on the quantity or value of imports that may be imported into a country. EU has a quota for fish.
Subsidy An amount of money paid by the government to a firm, per unit of output, to encourage output and to give the firm and advantage over foreign competitors. Japanese government subsidizes rice farmers.
Voluntary Export Restraint A voluntary agreement between an exporting country and an importing country that limits the volume of trade in a particular product. In the 1980s Japan imposed a VER on their automobile imports to the U.S..
Infant Industry argument Proposes that new industries should be protected from foreign competition until they are large enough to compete in international markets. Brazil uses the Infant Industry argument to protect its automobile industries.
Dumping Is selling of a good in another country at a price below its unit cost of production. The U.S. claimed that Canada was dumping its wheat in the U.S.
Anti-dumping Is a legislation to protect an economy against the import of a good at a price below its unit cost of production. The EU put an anti-dumping legislation on shrimp.
Free Trade Area Exists when an agreement is made between countries, where the countries agree to trade freely among the member of the group, but are able to trade with countries outside the FTA in whatever ways they wish. ASEAN is a free trade area. Asian nations.
Customs union An agreement made between countries, where the countries agree to trade freely among themselves, and they also agree to adopt common external barriers against any country attempting to import into the union. The EU is a customs union.
Common market A customs union with common policies on product regulation, and the free movement of goods, services, capital and labor. Southern Cone Common Market (MERCOSUR) of Argentina, Brazil, Paraguay and Uruguay is an example of a common market.  So is EU.
Trade creation Occurs when the entry of a country into a trading bloc leads to the production of a good moving from a high-cost producer to a low-cost producer. When a country would join the EU.
Trade diversion Occurs when the entry of a country into a customs union leads to the production of a good moving from a low-cost producer to a high-cost producer. When a country would leave the EU.

War.

World Trade Organization An international body that sets the rules for global trading and resolves disputes between its member countries. It also hosts negotiations concerning the reduction of trade barriers between its member nations. Deals with the rules of trade for 153 countries.
Balance of Payments A record of the value of all the transactions between the residents of a country with the residents of all other countries over a given period of time. All countries have balance of payments.
Balance of Trade Measure of the revenue received from the exports of tangible goods minus the expenditure on the imports of tangible goods over a given period of time. The U.S. has a negative balance of trade with China.
Invisible balance Measure of the revenue received from the exports of services minus the expenditure on the imports of services over a given period of time. The U.S. outsources to India.
Current account Measure of the flow of funds from trade in goods and services, plus net investment income flows (profit, interest, and dividends) and net transfers of money (foreign aid, grants and remittances.) Every country has a current account.
Capital account Measure of the buying and selling of assets between countries. The assets are often separated to show assets that represent ownership and assets that represent lending. Every country has a capital account.
Current account surplus This exists when the revenues from the exports 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. China is in a current account surplus with the U.S.
Current account deficit This exists when revenues 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. U.S. is in a current account deficit with China
Expenditure-switching policies Policies implemented by the government that attempt to switch the expenditure of domestic consumers away from imports towards domestically produced goods and services. The U.S. put tariffs on cheese from France.
Expenditure-reducing policies Policies implemented by the government that attempt to reduce overall expenditure in an economy, including expenditure on imports. Tariffs or such that would reduce the expenditure on imports. U.S. imposed a quota on cloth from China.
Marshall-Lerner condition States 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. Raw materials do not have an elasticity of higher than 1 and therefore they would not affect the current account much.

 

J-Curve The theory suggests that in the short term, even if the Marshall-Lerner condition is fulfilled, a fall in the value of the currency will lead to a worsening of the current account deficit, before thins improve in the long run. No example.
Exchange rate The value of one currency expressed in terms of another. $1=1.20 yen
Fixed exchange rate An exchange rate regime where the value of a currency is fixed, or pegged to the value of another currency or to the average value of a selection of currencies or another commodity like gold. Hong Kong to the $ U.S.
Floating exchange rate An exchange rate regime where the value of a currency is allowed to be determined solely by the demand for and supply of the currency on the foreign exchange market. The U.S. $ is a floating exchange rate.
Depreciation A fall in the value of one currency in terms of another in a floating exchange rate system. If the yen depreciates to the $ then 1 yen is now wroth less in terms of $.
Appreciation An increase in the value of a currency in a floating exchange rate system. If the yen appreciates to the $ then 1 yen is now wroth less in terms of $.
Devaluation A decrease in the value of a currency in a fixed exchange rate system. If the Hong Kong $ decreases in value against the U.S. $.
Revaluation An increase in the value of a currency in a fixed exchange rate system. If the Hong Kong $ increases in value against the U.S. $.
Purchasing power parity theory Theory states that under a floating exchange rate system, exchange rates adjust to offset differential rates of inflation between countries that are trading partners in order to restore balance of payments equilibrium. The big mac in different countries costs different.
Terms of trade An index that shows the value of a country’s average export prices relative to their average import prices. Developing countries were considered to be at a disadvantage regarding terms of trade. This is because exports are more often raw goods or commodities with lower prices than the manufactured goods imported from more developed counties.
Deteriorating terms of trade/adverse terms of trade Exists when the average price of exports fall relative to the average price of imports. Since 2004 the US has annually spent over $600 billion MORE on imports than it earned from the sale of its exports.
Elasticity of demand for exports It is a measure of the responsiveness of the quantity demanded of exports when there is a change in the relative price of exports. Luxury goods have a higher elasticity for exports.
Elasticity of demand for imports It is a measure of the responsiveness of the quantity demanded of imports when there is a change in the relative price of imports. Capital goods/raw goods that are needed in production of other goods will have a lower price elasticity.
 

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.

 

 

 

” 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