Archive for February, 2010

“Yabeやべ! I’m screwed” Toyota Recall – The Deep Root of the Problem

Toyota President Akio Toyoda bows

CNN Money: Click Here

Reuters: Click Here

Yabeやべ (Oh shit)! I’m screwed.’ That’s what Akio Toyoda, the Toyota president, might have said to himself on February 5th when he bowed apologizing for the safety issues regarding its gas pedal.

According to CNN Money, Toyota Motor Sales USA is recalling 2.3 million vehicles to correct a problem that could cause the vehicles’ gas pedals to stick. This recall will definitely affect Toyota’s reputation and its sales globally.

Now, lets get to the question of ‘how did Toyota get in this mess?’ There are several reasons why this recall happened, however, there is one core reason that led to this tragedy of Toyota.

December 21, 2009, Toyota announced that cut auto parts costs by 30 percent. According to media, Toyota canceled contracts between its auto parts partners in Japan and made new contracts with much cheaper auto parts partners (mostly outside of Japan). In my opinion, Toyota’s pedal problem was caused mainly by the cheap auto parts it used.

I do not think Toyota was dumb enough to forget that by using cheap auto parts it’ll create some safety problems. Then, why did Toyota use cheap auto parts? If you look deeply into the core of the problem, you can easily find out that it was an inevitable decision. It is deeply related to current recession world-wide and the low exchange rate of yen per 1 US dollar.

As you see on the graph, the exchange rate had been falling for 5 years. The red line shows the declining trend of yen to US dollar. It has fell from 124yen
(highest) to 86yen(lowest). As yen to US dollar got lower, Toyota experienced difficulty in exporting its cars to US because the car price became expensive in US. With the low exchange rate, it really was hard for Toyota to compete against other car makers such as Hyundai. Hyundai is a car maker based on Korea, however, it has been lucky because of the high exchange rate of Korean Won to USD. It was possible for this car maker to provide cars at much lower price compared to Toyota. So, Toyota was losing in price competition.

Toyota’s Stock Price in Yen

So, Toyota had to cut down its auto parts price by 30% in order to survive in this price competition. However, this was too much price cut, which basically caused the safety issues of Toyota cars. As a result, Toyota was forced to recall its 2.3 millions of cars by the US Congress. Also, the stock prices of Toyota fell from 4250yen to 3250yen. Notice how it fell after Toyota’s recall announcement from Jan mid to Feb mid. 4250 yen to 3250yen is certainly a great loss to many investors.

In conclusion, Toyota’s pedal problem was caused by using cheap auto parts. It may have been bitter lesson for Toyota to not to use cheap auto parts to the degree it hurts the car’s safety. Looking at Toyota’s Stock Price graph, I think many Toyota investors would be whining because of their loss.

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The Great Pacific Garbage Patch – Negative Externalty of Industrial Society

Digital Journal: Click Here

According to the video, there is a massive garbage patch double the size of Texas floating around the Pacific Ocean polluting/killing the marine life that inhabits the ocean. 80% of the garbages that consist of this massive ‘garbage island’ are plastic, which are said to be 100% non-biodegradable.

This is another great example of negative externality along with Global Warming. These trash actually accumulated since the 1940’s when plastic became the common means of manufacturing goods.

At the time, people did not know that plastics can last thousands of years and cause environmental problems. So, the price for the products made out of plastic did not reflect the environmental cost to the society. As a result, this Great Pacific Garbage Patch is roving around the ocean  contaminating the marine life and causing much more problems.

Picture by Wikimedia Commons

In conclusion, markets should now recognize these hidden negative externalities and reflect them on the prices. This could be said to be a environmental problem, however, it is also economical (or rather financial) problem. It’ll take trillions of dollars to completely clean these garbages polluting the Pacific Ocean. I bet no government will be willing to pay for this clean-up. It is time international organizations such as United Nations to take action and force its members to tax on polluting firms and subsidize the firms developing environment-friendly technology.

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Market Failure – Brief Slides

A satiric picture of how free markets can result in failed markets.

Voicethread Slide: Click Here

Reasons For Market Failures

  • Positive and negative externalities: Market will fail if it excludes the externalities involved.
  • Lack of public goods: If the price is very low, there would be short in supply of the product for the market. So the supply of the product would not be efficiently allocated to the customers
  • Under-provision of merit goods
  • Over-provision of demerit goods
  • Abuse of monopoly power: If only one firm has a monopoly on a product, it will prevent other firms from joining in the market. As a result, no other firms will join in, therefore the firm increases the price of the product. As price goes up, customers will not buy the product of the firm, therefore decreasing in supply demanded. This results in high price with low supply allocated to the market.
  • Inequality

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Externalities in Real Life

Global Warming is an example of negative externality.

BBC News: Noise pollution on the increase

BBC News: Schoolies week in Australia causes binge drinking worry

Externalities are costs (negative externalities) or benefits (positive externalities), which are not reflected in free market prices. For example, as a result of manufacturing of products, the CO2 levels in the atmosphere increase and therefore results in global warming. So global warming is an negative externality.

In the class, we have looked at the videos about real life externalities. In the videos above in the links, they reported the negative externalities caused by noice pollution and binge drinking.

In the first video, some teenagers were having a party at the house where the sound-proof system was poorly installed. As a result of this boisterous party, neighbors had to suffer a noise pollution. This is one of the negative externalities. The another is that the policemen had to go to the reporter’s house to find out what the problem is and go to problem-making teenager’s house for warning. Boisterous party of teenagers had negative externalities of upset neighbors and the time of the policemen. Some might say that it is policemen’s job to solve these kinds of problems, however, in the video over 300% of calls to police office increased because of the noise pollution. So, it has cost policemen’s time to solve other problems. So the policemen would not have time to stop other crimes from happening. Overall, teen’s noisy party has cost the society a lot, more than their upset neighbors.

In the second video, it reported that teenagers binge drank after their examination as a ceremony. Teenagers were having fun, however, it has cost the society some negative externalities. For example, policemen and volunteers were patrolled in order to prevent some teens from alcoholic poisoning. It has cost policemen’s and volunteer’s time and energy in keeping eye on these teens. Also, the teens probably littered and did not pick up the trash at the beach. This would also cost the local government money for employing people to clean the mess.

In sum, there are many externalities to what we do. This is not limited to economic transaction. There could be externalities from anything we do. In my opinion about the teenager’s binge drinking, the government should just give disadvantages to the teenagers for drinking. For example, if a student gets caught drinking, he/she can be sent to do 30 hours of service hours in alcoholic addiction support center as a punishment.

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UK economy ‘faces crisis’ warns former IMF economist

BBC News: Click Here

“The UK should be seen in the same category of countries as Greece and Spain, who are facing severe debt problems, a leading economist has said.”

Like any other countries, UK has borrowed tons of money to protect its economy during the recession. This has resulted in tremendous amounts of debts that UK will eventually have to pay in the future.

It is not bad to borrow money in order to recover economy, but it follows with some consequences if it is not properly planned out how it is going to repay its debt. It is a common sense, however, it is an essential rule.

Even if its economy recovers, tremendous amounts of accumulated debts would be another hindrance to economic prosperity. It could stimulate another global economic crisis.

Sometimes, it is appropriate for countries to borrow money to recover its economy. It could have an economic effect that covers the price of the debt. However, if countries borrow too much money, it could be a critical problem. Therefore, countries should look between the line where they can approximate the effect by borrowing and money and lessening the debt as small as possible. 

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G7 nations pledge debt relief for quake-hit Haiti

Earthquake crisis in Haiti could be a chance to recover economy

BBC News: Click Here

According to BBC News, the world’s leading industrialised nations have pledged to write off the debts that Haiti owes them, following a devastating earthquake last month.

“Some $1.2bn (£800m) of Haiti’s debts to countries and international lending bodies has already been cancelled.”

This earthquake crisis could be said to be a catastrophic setback for many Haitians. However, in my opinion, this could be a chance to recover their impotent economy. Many countries are trying to financially support Haiti by financial aids and cancellation of debts.

Haiti had about $1.9bn of debt was an impediment to economic development and growth. But, already, $1.2bn of its debt had been cancelled. I am very hopeful that Haiti’s economy will recover right after its reconstruction with many countries willing to support Haiti.

As a conclusion, this quake crisis could be a setback for many Haitians, but, it could be a chance for them to recover their economy.

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North Korea in for some currency chaos

North Korea has devalued its currency in a bid to curb runaway inflation. Photograph: Yonhap/EPA

BBC News: Click Here

The Independent: Click Here

Guardian: Click Here

According to BBC News, on 30 November 2009, a decree was issued announcing old North Korean banknotes would be swapped for new ones at a rate of 100 to one. North Korean officials announced that this redenomination was in order to “curb inflation and strengthen planned economy.”

However, this sudden redenomination did not quite work as North Korean government intended. In fact, it resulted in skyrocketing price of rice and inflation. According to a North Korean defector, the price of rice per 1kg rose from 20 Won to 600 Won over a month, which is about 3000% increase.

As a result, nearly all of the ‘markets’ in North Korea shutdown. There are black markets and government-approved markets in North Korea. These markets support approximately 30% of North Korean economy. Therefore, it could be said that 30% of North Korean economy is paralyzed.

Although many Chinese merchants trading with North Korea have food supply to sell, they are reluctant in selling because of the inflation. “For this reason, many North Koreans are dying because of starvation,” according to human rights organization. There was a case of few protests against the North Korean government for starvation.

In my opinion, North Korean economy is walking the same road as Zimbabwe, which suffered about 2200000% inflation. North Korea originally intended to “curb inflation and strengthen planned economy,” however it did not work. North Korea is left with two choice: either open up its economy to  South Korea, or let the economy collapse.

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Obama pushes new bank regulation

BBC News: Click Here

According to BBC News, US President Barack Obama has proposed significant new curbs on the activities of banks to try to prevent future financial crises. This would restrict banks to be more conservative when coming to investing.

As you know, the collapse of Lehman Brothers was a result of risk-taking investments. In my opinion, this new regulations is an appropriate step in recovering the economy fully. However, this regulation would be opposed by many banks who have been profiting from. “US stocks such as JP Morgan Chase and Bank of America fell sharply as the sweeping planned reforms were announced.” As you see, many investment companies like JP Morgan Chase and Bank of America were profiting a lot from risk-taking investments. Their stocks went down as this new regulation to curb risk-taking investments was announced.

In sum, I think that Obama’s new bank regulation is a necessary procedure in recovering the economy.

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US deficit ‘set to hit $1.35tn’

BBC News: Click Here

According to US congress estimates, US budget deficit is expected to reach $1.35 trillion in 2010. “In 2009, the US deficit hit a record $1.4tn – equal to 9.9% of gross domestic product (GDP) – and the highest since the end of World War II.”

I think the reason for this sky-rocketing deficit are the following:

  • an imbalance between revenues and spending that predated the recession
  • sharply lower revenues and higher spending in the recession
  • the costs of various federal policies implemented in response to the global downturn.

This also is what Congressional Budget Office (CBO) said was the reason.

World economy is slowly starting to recover, however, this was possible with borrowing money from banks. It may seem the economy is improving, however, this ‘deficit’ could be an economic bomb if they keep growing. As economy gets better, United States should have a new budget plans keeping the spending lower than the revenue to halt and minimize the deficit.

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China threatens sanctions over U.S. arms deal

Chinese Vice Foreign Minister He Yafei says the U.S.-Taiwan arms deal “severely” endangers China’s national security.

CNN article: Click Here

According to CNN, China has threatened to slap sanctions on American companies that sell arms to its rival Taiwan as part of a range of punitive actions Beijing is taking to protest the deal.

I will look at this article in economical point of view, not political. United States has chosen to sell its arms to Taiwan obviously for money, but has cost them sanctions from China. However, I do not think this as a disadvantage as United States doesn’t sell that much of arms to China. So even if they lose a market in China, it would not affect them so much. They did not have the arms market at China to start with. Also, even if United States tried to sell their products to China, I am definitely sure that China have enough technology to build and manufacture their own arms.

Unlike China, Taiwan depends heavily on United States for security arms. It does not have a high technology in military arms like China does. Therefore, it has to import military arms from foreign countries. However, many countries are reluctant in selling arms to Taiwan in fear of China’s diplomatic pressure. So Taiwan has depended on United States for longer than 50 years since the start of Cold War.

In my opinion, even if China politically and economically pressure United States, United States will never give up on this large market for exporting its arms. Though, this would aggravate the deep distrust between China and United States.

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