Archive for April, 2010

Federal Reserve lowers its Interest Rate to almost 0%

BBC News: Click Here

According to BBC News, US Federal Reserve is planning to keep its main interest rate at zero level for an extended period of time. Federal Reserve said that they have dealt with inflation and it is now under control.

Why would the government want a near zero level interest rate? It is to boost up the consumption and get out of abyss of recession. If an interest rate is like 10%, it will promote people to put their money into banks and save. So it will discourage people to consume. For that reason, the Federal Reserve is lowering their interest rate in order to boost up the consumption and lift up the economy.

There is one problem that will make the decision point less. Even if the government lowered the interest rate, if people are still paying for the house debts, it would not boost up the consumption as intended. If people are dealing with house debt problems, they are most likely to have very low confidence in using money. Also, the low interest rate will actually do them harm because they are getting less money from the bank to repay the debt. So this problem defeats the purpose of lowering interest rates.

However, BBC News “noted that consumer spending had “picked up,” and there were improvements in the housing market.” It means that majority of the people have dealt with the problem and they are confident in spending. So lowering interest rate was an appropriate decision.

Federal Reserve, therefore, expects the rise in consumption and alleviation of the pain from recession. However, if the interest rate stays low for too long, it will create an inflation, again, and will promote risky-investments, which will do harm to the economy.

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Greek Bonds are Useless Junks says Standard & Poor’s

BBC News: Click Here

According to BBC News, global stock markets tumbled after Greece’s debt was downgraded to “junk” by rating agency Standard & Poor’s over concerns that the country may default.

As uncertainty of whether Greece will get financial support from EU and IMF to clear up its looming debt increases, many rating agency such as Standard & Poor’s has rated Greek bonds as junks, rubbish.

What does it mean when a rating agency says that now Greek bonds are ‘junk’? It means that it is now very risky to invest on. It is mainly because of Greek’s apparent lack of ability to pay its bills. So there is a higher chance that an investor will lose money for investing in a country falling into the abyss of ever increasing debt.

Greece’s finance ministry said in a statement that the downgrade “does not correspond with the real data of the Greek economy.” Greek finance ministry denies that the down-rating doesn’t reflect the real Greek economy, however, this incident showed investor’s distrust toward the Greek economy.

If Greece does not take action to reduce debt and get help from the EU and IMF, it may default.

What’s default and what happens if a country defaults?

Lets look into what the definition of default is. Default is simply announcing that you cannot pay the debt in the due date. It doesn’t mean that the government will go bankrupt and the debt wouldn’t go away. The debt will always be there and the investors/lenders will demand you to repay the debt whenever possible.

What are the consequences of a country defaulting? There are several effects to this. First of all, the currency of the country becomes a rubbish or a paper tower (or no better than a paper tower). Foreign investors will have distrust against the currency of the defaulted country and the value of the currency will drop significantly. As the value of the currency goes down, it makes the imported goods insanely expensive, which will lead to inflation and shortage of necessary goods. If a country has high food dependency on importing, many people will starve to death as there are simply shortage of food due to expensive importing.

People will loose confidence and the recession or more like disintegration of economy will be in a vicious circle. So by this stage, there is ultimately nothing a country can do to recover. So Greece should get help from EU and IMF quickly by giving them confidence that they can pay back the borrowed money.

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JAL receives far more early retirement applications than planned

The Japanese Kanji for Loyalty

Breitbart: News Article

According to Breitbart, Japan Airline (JAL) has received 4,000 early retirement applications, which far exceeded the intended amount of 2,700 applications.

JAL has been filed for bankruptcy protection by the Japanese government and has determined to cut down its employment cost along with other costs.

“JAL has indicated that its creditors have asked the airline to expand its group-wide job cuts from the originally planned 15,700 over the next three years. It is now considering a plan to cut 16,400 jobs from its current group workforce of 50,000 by the end of March 2011.”

According to Nihon Keizai Shimbun, as the future of JAL became vague, many of JAL employees have volunteered for an early retirement.

In my opinion, this showed one aspect of Japanese business culture. The employees are very very loyal to their company. Unlike other countries with boisterous labor unions, many Japanese workers accepted ‘voluntary’ retirement. However, I have sensed the feeling that not only Japanese worker’s loyalty has caused this. I think that there could have been some ‘forceful’ atmosphere during the ‘suggestion’ of voluntary retirements.

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Iceland Volcano Ash Disruption

BBC News: News Article 1, News Article 2

According to BBC News, shares in major European airlines have fallen as most UK flights remain grounded for a second day because of the volcanic ash in the atmosphere.

British Airways shares dropped down by 1.1% with many investors concerned about the loss from the stoppage. Meanwhile Germany’s Airline Lufthansa was down by 2.1% and Air France-KLM shares fell by 1.7%.

“For a large network carrier like BA or Lufthansa your talking about £10m a day – but that’s of limited commercial significance” said Douglas McNeill, transport analyst, Charles Stanley Securities.

While most of the airline industries are affected by this natural disaster, other industry such as pharmacy is suffering from the disaster also. Most of the drug exports/imports are heavily reliant on air freights. If this cancellation prolongs for over a week, it will definitely affect both airline and pharmacy industries severely.

Iceland volcano eruption stirred some health concerns, especially respiratory problems. World Health Organization said that it is not sure if this will cause serious health problems, however, it has advised people to stay indoors to avoid respiratory problems. It is also reported that there are some level of sulphur dioxide in the ash.

In sum, this volcanic eruption has caused several economic problem to health problems. If this prolong for over a week, European economies, including UK, will have difficulty due to canceled air flights.

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Data Response – Measuring National Income

1. Explain whether you agree or disagree with each of the following:

(a) You have just read in the news that GDP in your country increased by 4% this year over last year. You therefore conclude that the quantity of output produced increased by 4%.

  • I agree with the statement under the condition that there weren’t any inflation or deflation. If the inflation/deflation rate was 0% that year, the quantity of output has increased by exact 4%. However, if there were inflation/deflation, then the ‘actual’ quantity of output will be different.

(b) In the early 1990s, following the collapse of the Soviet Union, many eastern European and former Soviet Union countries experienced negative net investment for a period of time. This means there was a drop in their stock of capital goods.

  • I disagree with this statement. Negative net investment does not mean that there was a drop in stock of capital goods. Instead, it means that the rate of increase in stock of capital good has dropped.

(c) If a government wants a measure of its population’s income per capita it should use GDP per capita; if it wants a measure of the quantity of output produced per capita it should use GNP per capita.

  • I disagree with this statement. GDP per capita cannot be used to measure the population’s income per capita. They are different index. GDP per capita means the average amount of stuff one can produce and this does not necessarily mean the person’s income. Income per capita could be lower than GDP per capita. For example, you do not earn $10 dollars by selling $10 CD album. Instead, you earn money (income) from the margin. If you spent $5 to make that CD album, then your margin is $5. So the income per capita does not necessarily the same as GDP per capita.
  • If one wants to measure the quantity of output produced per capita then they should use GDP per capita, not GNP per capita.

(d) GDP per capita is a better indicator of a country’s welfare than total GDP, because it calculates the amount of output produced per person in the population.

  • I agree with this statement. Even if a country has $10 trillion as their GDP, like India, lots of people are under abject poverty. India’s GNP, instead, is way lower than its GDP. GNP is a better way of calculating a country’s welfare.

(e) The average American is 12.5 times richer than the average Russian, since US GDP per capita is 12.5 times greater than Russian GDP per capita, based on the dollar–rouble exchange rate. (The rouble is Russia’s national currency.)

  • I agree with this statement. GDP per capita could be used to compare wealth of individuals in two separate countries. However, there is one flaw to GDP per capita. It is the unpredictable exchange rate. If rouble gets weak against a dollar, then GDP per capita of Russia could go lower. In converse, if it gets strong, its GDP per capita will increase. So if two countries had a similar (10-20% difference) of GDP per capita, then it will be hard to compare the individual’s wealth in those countries.

2. Compare and contrast the problems involved in measuring economic growth and measuring economic development. (10 marks)

  • We should be clear in the definitions of two separate economic terms. Economic growth indicates the growth in GDP of a nation, normally, and economic development includes improvement in standard of living. Economic growth can tell you how an economy has grew in a country, however, the economic growth doesn’t necessarily lead to improvement of economic development. To say there was an economic development, there has to be several factors considered: life-expectancy rate, literacy rate, GDP per capita, and more.

3. Explain three possible limitations of using GDP as a measure to compare welfare between countries. (10 Marks)

  • First, nominal GDP’s do not calculate inflation/deflation rate. So, it is limited in comparing welfare between countries.
  • Second, exchange rate could alter the GDP of countries, therefore, it is limited in comparing welfare between two countries.
  • Third, GDP does not include other activities such as illegal drug dealing or NGO activities. This could have large portion of a country’s GDP. For example, the illegal drug dealing has 20% of US GDP.

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China bank lending falls sharply

BBC News: Click Here

According to BBC News, Lending by Chinese banks fell sharply in the first three months of the year after the government’s efforts to clamp down on new loans proved successful.

China has been suffering from unstable price control, and recently its inflation went up to about 3%. Controlling inflation is one of the key roles of Chinese government in order to maintain stable economy and acquiesce people’s complaints.

As you see, China’s inflation is pretty high right now. Chinese bankers knew that it was from excessive flow of yuan in their economy. So they simply reduced lending, and it effectively controlled the inflation getting out of control.

The article further on discussed about China’s recent trade deficit. The article analyzed that this deficit resulted from rise in volumes and prices of raw materials. However, ironically, China has hit $2.5 trillion of foreign exchange reserves. This is approximately 1/5 of  US GDP, which implies that Chinese economy is amusingly doing fine despite the recent trade deficit.

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Yuan Rise Harmful for Chinese Economy

Yi Xiaozhun says the currency has been turned into a political issue

BBC News: News Article 1, News Article 2

According to BBC News, allowing the yuan to strengthen against the dollar would hurt the Chinese economy in the short-term.

If yuan strengthens against the dollar, the Chinese firms or international firms in China will have difficult time exporting their products to foreign markets. Because Chinese economy and growth is heavily depended on its exports to foreign markets, especially US market, it is resentful toward the appreciation of yuan against US dollar.

The minister Yi Xiaozhun argued that if yuan value rises, the Chinese economy would suffer short-term economic depression. China has already experienced its first ever trade deficit of $7.2bn and if the appreciation of yuan takes place, this trade deficit would be aggravated. Some experts say that this could be a short-term phenomenon due to unplanned importing, however, it could be a serious problem for Chinese economy if yuan appreciates.

In sum, China will suffer economic depression if its currency, yuan, rises against US dollar. Thus, even if United States politically, diplomatically pressures China, China will never give up due to this its pivotal role in Chinese economy.

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