Posts tagged analysis

Analysis on OECD Country Korea

Data source: World Bank, World Development Indicators

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
$3.69b $3.02b $8.90b $21.5b $63.8b $96.6b $264b $517b $533b $845b

I have researched about Korea, one of OECD countries, on its GDP. The graph above is the ‘norminal’ GDP, which doesn’t take account for the inflation/deflation.

As you see, Korea had significant economic growth since 1975. Backed up by government’s economic reforms, Korea experienced an exponential economic growth. The chart above shows the norminal GDP since 1960 to 2005.

Korea has experienced near-bankruptcy in 1997 due to lack of foreign currencies. As you can see in the graph, the GDP plunged down from $517b to $345b. It was because they had virtually no foreign currencies (especially USD). Korean government could not pay off debts that accumulated during trades with foreign countries. They only had $2.0 billion, which was too short to pay the debt of $19.5 billion. It did have money to pay of its debt by Korean currency Won, but the lenders would not accept the weak, invaluable Korean currency at the time.

Nevertheless, the government had succeeded in paying off all the debt at 2001, and the economy recovered. This could be seen from the graph that the GDP had recovered to the previous GDP of 1995.

In 2007, Korea’s GDP hit $1.05 trillion due to increased exports. It was the year that Korea exported so much that it dramatically lifted up its GDP by significant degree. However, as 2008 global economic recession started, the GDP plunged to $929 billion due to decreased exports.

So, this was the short analysis of Korean GDP from 1960’s to 2008. Before 1960’s, the GDP of Korea was not recorded because the country’s economy was devastated by wars. So it GDP before 1960’s does not mean anything significant.

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
$13,300 $16,100 $19,400 $19,400 $17,800 $19,200 $22,600 $24,500 $25,000 $25,800

The GDP per capita of Korea has been increasing since 2000. It has almost been doubled compared to 2000 and 2009. This means that Korean people’s wealth have been double in 10 year time. In my opinion, this is rather astonishing. With increased GDP per capita, many companies would be shifting their markets to Korean domestic market because of doubled wealth of each person. The developed domestic market will solve many of Korean companies’ dilemma of too much dependency on foreign markets especially US market, which is the biggest market of the world.

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
10% 9% 5.8% 6.2% 3.1% 4.6% 4% 4.8% 5% 2.2%

GDP real growth rate for Korea has been declining. As you see in the graph, its showing the declining trend for Korea’s real growth rate. This low real growth rate is the concern for Korea right now, however, many experts consider this a temporary consequence of global recession.

“Year”,”Value”
“2000”,”13300″
“2001”,”16100″
“2002”,”19400″
“2003”,”19400″
“2004”,”17800″
“2005”,”19200″
“2006”,”22600″
“2007”,”24500″
“2008”,”25000″
“2009”,”25800″
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Analysis on Japanese Crisis

Japanese Economy is in Deep Coma

Times Online: Click Here

According to Bronwen Maddox on Times Online, Japanese Crisis resulted from extremely inefficient bureaucracy culture, lack of risk-taking, aging population, and bad governmental budget.

The article states that Japanese government (local and central) have debt over 180% of Japan’s GDP. That means, the Japanese government has to pay almost double the country’s GDP to the lenders, who are mostly Japanese citizens. So, the Japanese government is carrying the unexpectable time-bomb of national bankruptcy. Japan is the second highest in debt percentage to GDP in the world, after Zimbabwe’s 200%. However, Zimbabwe’s GDP is so infinitesimal compared to the world’s second biggest Japanese GDP. So Zimbabwe could get support from other countries, but Japan will not be able to survive the misery even if there were some supports from other countries.

The main reason for Japan’s enormous debt is the Japanese government’s bad planning for budget. According to the article, over 45% of the governmental spending was borrowed from Japanese people’s savings. This kind of spending started from 1992, so this debt accumulated for 20 years until the debt almost went up to twice the country’s GDP. United States had deficit governmental spending just like Japan, however, Obama passed the Budget Plan for 2010 to minimize the deficit and ultimately get rid of the debt. Japan is not taking any actions to minimize and get rid of debts they are carrying. Instead, the new government is increasing the deficit almost forced by its populist economic policies. If the new government does not cancel its policies and sketch a new way to get out of this misery, Japan will face more serious problem than ‘lost decades’ : a bankruptcy.

There why are Japanese government spending so much money? My answer to this question was that Japanese people did not want to use money. That is why the Japanese government has to release money to the paralyzed Japanese market. I have heard and read that many Japanese people had lack of confidence in their futures because of the prolonged economic recession in Japan (lost decades). Even if they have one of the highest GDP per capita in the world, they do not use money in fear of another economic recession. This is called leakage in economic term. So Japan is suffering from deflation because of very very low demands in domestic market. Japanese domestic markets do have money to spend, however, people simply chose not to and save it. That is why Japanese companies are having a bad time in the domestic market. To get back to the point, the Japanese government has to release money in order to get the domestic market going, or else, it will collapse.

This lack of confidence or fear about future is devastating to the economy. This once happened to Korea when it was near national bankruptcy in 1998 during the economic crisis in Asia. People feared for the future and they stopped spending but saving. This had rather devastating effect on the Korean economy. So the government had made up the mind to get help from IMF, the international monetary fund, and cold-heartedly let the lazy banks or companies to go bankrupt. The government has forced many companies and economic figures to reform. The economic reform has resulted in tons of people without jobs, however, Korea managed to get out of the trouble until 2000, which only took them 4 years to overcome the trouble.

Japan, in the other hand, did not take such daring measures to overcome the economic crisis, which started from 1992. As a result, Japan has suffered from two lost decade, and ‘is’ suffering from another losing decade. The Japanese government was not determined like the Korean government so that the economic crisis of Japan has lingered around since 1992, almost 20 years from now.

There is another factor that is aggravating the crisis in a long term. It is the low birth rate. Japan has the birth rate of 7.64 out of 1000 population, which ranks 221th in the world. It was estimated that in 20 or 30 years, there will be 45% of Japanese population with old people over 65. This will reduce governmental income from taxation and aggravate the responsibility the young people have to carry out. Thus, it will have unenthusiastic young people and there will lack of labor in the market. Every economically active young person (at 25-30) will have to take care of 2 elders. This will give disincentive to the young people to get a job. Also, it will discourage the young people not to have babies because it’ll be even more burdensome. Thus, the low birth rate gets worst. The Japanese government has to do something to give incentive for the young people to have babies. Or else, the national will fall into the abyss of low birth rate and ultimately ‘extinction’ of Japanese people.

In sum, the Japanese government has to do something. The Japanese government should first pass a new budget plan in effort to minimize the deficit, and they should pass a new law to encourage young people to have babies. Also, they should get rid of the culture of bureaucracy. Or else, Japan will confront the irremediable problem of bankruptcy.

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“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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Scrappage sees UK car sales surge

BBC News Article: Click Here

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In UK, there has been a tremendous increase in their car sales. “The Society of Motor Manufacturers and Traders (SMMT) said 168,942 new cars were registered last month, an increase of 31.6% compared with October 2008.”

There are several reasons to how the UK car sale surged:

  1. There was a government policy in increase VAT for old cars starting from next year 2010. Many costumers wanted to avoid this, so there has been an increase in car sales.
  2. There was another government policy in supporting old car owners to buy a new car. The government has supported these owners up to a £2,000 discount for replacing 10 year or more cars. This cost was said to be shared between the government and automobile producers.
  3. Consumer’s purchasing power has increased sharply, which led to more spending such as buying a car. This was due to reduced mortgage interest payment, lower utility bills and a moderation in inflation.

Looking at these 4 reasons, it is clear that government role in increase of car sales was pivotal. Many people criticize about government supporting for companies with deficit. However, government support is sometimes effective. Also, government policies in reducing mortgage interest payment, increasing VAT, and etc. was a good approach in lifting up the crumbled car industry.

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Advice for JAL

ja-704j-japan-airlines-jal-boeing-777-246-er

Just like British Airline, Japan Airline is in a big mess of deficit. Due to global economic recession, the demand for high service, high price seats went down as well as Japan Airline’s profit went down. Here are some of my advice for JAL:

  1. They should cut off high price seats such as business class and 1st class seats. Due to global economic recession, the demand for those seats have went down. Conversely, the demand for lower price seats such as economic seats went up.
  2. They should lower the price as much as possible. As the demand for high price seats went down, Japan Airline must make the seats available for a low price in order to ‘survive.’
  3. They should lower the labor cost. This might lower the quality of airline service, however, it is inevitable during the recession.
  4. They should get rid of unprofitable air-routes. By getting of those unprofitable, money-eating routes, it will significantly help Japan Airline financially. Instead, they should look for cheaper, but effective routes.

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Lehman Brothers’ Collapse

lehmanus_1477587c

“Lehman Brothers Holdings is closing its doors with more than $600 billion of debt — the biggest bankruptcy in U.S. history.” – Market Watch.

Lehman Brothers was one of the biggest global financial-services firms. The collaspe and its bankruptcy has shocked invester from around the world, provoking fluctuating stock market.

How has Lehman Brothers owed debt of $600 billion in the first place?

“This crisis is clearly deeper than anybody had imagined only a short time ago,” says Peter Stein, an associate editor at the Wall Street Journal in a CNN article.

During the attacks in September 11, 2001, it had its offices destroyed leaving them with great loss. Also, Lehman brothers were exposed to unsecured mortgages, and they had terrible debt caused by credit-crunch.

So these critical problems piled on until there was an economic crisis in 2008 to 2009 which exploded Lehman Brothers. So Lehman Brothers had problems that pervaded so deeply it eventually collapsed when there was an economic crisis which had ‘exploded’ Lehman Brothers.

Resources:

Watch Market: Lehman folds with record $613 billion debt

CNN: Lehman Brothers collapse stuns global markets

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Opportunity Cost

  1. Reservation price is what the price in your mind you are willing to pay for making some decision.
  2. Economists use cost benefit analysis to make decisions.
  3. Utility is enjoyment or satisfaction you get from making economic decisions.
  4. Opportunity cost is a potential cost that is caused by making a decision. It is the next best alternative decision.
  5. People tries to maximize their utility.

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