Posts tagged currency

Diagrams: AD/AS + Section 4

The increase in the aggregate demand from AD1 to AD2 increases both price level and real output from P1 to P2 and from Q1 to Q2 respectively.

Aggregate demand could be increased by many factors. First of all, reduction in taxation could increase the consumption. Secondly, the reduction in interest rates will most likely shun away consumers to save their money but spend them. Also, due to the low interest rate, there will be less burden to borrow money. Therefore, this would both increase the consumption and the corporate investment. Thirdly, increase in government spending would increase the aggregate demand because it is one of the factors that comprises of the aggregate demand. The governmental spending boosts up the consumption in products and increases the earning/income in the sector. Finally, the improved competitiveness could also increase the aggregate demand as the opportunity cost in production would decrease. In addition, the increase in the competitiveness could also boost up the export, which also increases the aggregate demand.

The decrease in the aggregate demand from AD1 to AD2 decreases both price level and real output from P1 to P2 and from Q1 to Q2 respectively.

Decrease in aggregate demand is caused by many factors. First of all, the increase in the taxation could decrease the consumption. Secondly, the increase in the interest rate could allure consumers not to spend money but to save them. In addition, the high interest rate would attract lots of money in to the bank, draining the money out of the market. Also, the high interest rate decreases the corporate investment. Thirdly, decrease in the governmental spending would also decrease the aggregate demand. Finally, decrease in the competitiveness could also decrease the aggregate demand by increasing the opportunity cost associated with the production. In addition, loss in competitiveness could also lead to decrease in export, which also decreases the aggregate demand.

Increase in the aggregate supply from AS1 to AS2 increases real output from Q1 to Q2 but decrease the price level from P1 to P2. This is desirable as the price level is decrease and the real output has increased.

Increase in the aggregate supply could be caused by many factors. First of all, reduction in indirect taxation could lead to increase in the aggregate supply. As the taxation is reduced from the price of the product, the producer could manufacture products at much lower opportunity cost and gain price advantage. Secondly, the reduction in wages of the employees would lead to cut in the production cost and therefore gain price competitiveness. This way, the manufacturer could sell more products at much cheaper price, increasing the aggregate supply. Thirdly, the reduction in price of raw material also leads to the increase in the aggregate supply due to the cut in the production cost. Finally, favorable weather conditions could help industries that depend on the weather to produce more. Therefore, this would also increase the aggregate supply.

The decrease in aggregate supply from AS1 to AS2 decreases real output from Q1 to Q2 but increases the price level from P1 to P2. This is the worst scenario as the price level increase and the real output decreases.

There are many factors affecting the decrease in the aggregate supply. First of all, the increase in the indirect taxation could lead to increase in the cost of production. Therefore, the producer would only be able to produce less products than he/she used to produce. Secondly, the increase in the wages could also lead to the increase in the opportunity cost and the production cost. This would also increase the aggregate supply. Thirdly, the increase in the price of raw materials also increase the production cost that aggravates the decrease in aggregate supply. Finally, adverse weather conditions could ruin the production of industries that depend on the weather. So, this would also worsen the decrease in the aggregate supply.

Japan and China are in a comparative advantage to each other. Japan produces more automobiles at QA2 than what China’s producing at QA1. However, China produces more break pads at QB2 than what Japan is producing at QB1. In conclusion, Japan has a comparative advantage in automobiles over China, however, China has a comparative advantage in break pad over Japan. In these countries were to initiate FTA, they would both have loss and gains.

In this diagram, India is at absolute advantage over Fiji Island. India produces clothes at QC2 which is way more than what Fiji Island is producing at QC1. Also, India produces more hats at QH2 that is more than what Fiji Island is producing at QH1. In conclusion, as India produces more products in both items, India is in an absolute advantage over Fiji Island.

This economy is in a free trade with the world without any trade barriers. The price dropped from Peq to Pworld.  Also, the quantity demand increased from Qe to Q2. This means that only consumers until Qe were able to buy a product, but now consumers until Q2 are able to buy the product they could buy before. From Q1 to Q2, it indicates the amount of imported goods and services. However, the domestic production decreases from Qe to Q1 to the price-competitive world providers. In conclusion, the consumers benefit the most from this situation.

In this economy, it imposes tariffs on imported goods. The tariff increases the price from Sworld to Stariff. This decreases the quantity demand for the product from Q2 to Q4. This means that consumers from Q4 to Q2 no cannot buy the product because of the increased price. Also, the deadweight loss occurs due to inefficient domestic producers entering the market. The amount of imported goods decreased from (Q2-Q1) to (Q4-Q3). This is a great loss for the world providers because they are losing the market share both ways from left and the right whereas the domestic providers are only gaining by one side from the left. The government also gains revenue from the tariff imposed on the imported goods.

In this economy, quota is imposed on the economy. The quota increase the price from Sworld to Stariff. This decreases the quantity demanded from Q2 to Q4. This decreases the imported good to the market from (Q2-Q1) to (Q4-Q3). Also, the foreign producers that avoided the quota benefits greatly by the windfall gain. However, there will be a deadweight loss caused by the inefficient producers. In addition, the government will gain nothing from this situation because they are not imposing a tariff.

In this diagram, the government is subsidizing the domestic industries to fight off the competitive foreign providers. The subsidy shifts the supply curve for the domestic providers from Sdomestic to Sdomestic+subsidy. This allows the domestic providers from Q1 to Q3 to re-enter the market. In the other hand, the imports decrease greatly by (Q3-Q1), which was taken from the domestic providers that are subsidized. The consumers are not hurt in this situation because there is no decrease in the quantity demanded, which means there was no increase in number of consumers who are not able to buy the product. Also, unlike the tariff and quota situation the importers do not lose by 2 ways but by only 1 way (from the left).

The fixed exchange rate could cause shortage of the quantity of the currency. As the demand for the imported goods increase, people would need more of the currency to buy another currency. This is why the supply curve should move from S1 to S2. However, due to the fixed exchange rate, the shortage in supply of the currency occurs.

Fixed exchange rate could cause the surplus in the supply of the currency in the market. As the demand for the exports increase overseas, the foreigners would demand more of the currency to buy the exports. This is why the demand curve should move from D1 to D2. However, due to the fixation in exchange rate, the surplus of currency occurs.

Floating exchange rate well suits the demand and the supply of the currency. Also, it does not have the problems of surplus/shortage of currency that fixed exchange rate systems have. The currency is demanded at the quantity of Q and the value of the currency in terms of another currency is at P.

Demand for the currency could be increased from the increased demand of exports. If foreigners are attracted to the exports, they would demand more of the currency to buy the exports. Therefore, this would increase the demand for the currency from Q1 to Q2 increasing the value of the currency in terms of another currency from P1 to P2. This is called appreciation of the currency as the value of the currency increased.

Demand for the currency could decrease by the lack of interest in exports. The foreigners would not demand less of the currency, decreasing the demand curve from D1 to D2. This decreases the quantity demanded for the currency from Q1 to Q2 and decrease the value of the currency in terms of another currency from P1 to P2. This is called the depreciation of the currency as the value of the currency has been decreased.

The increase in the supply of the currency could be caused by the increased interest in the imports. The consumers would need more of their currency to buy another currency to buy imports. This would increase the supply curve for the currency from S1 to S2. This increases the quantity demanded for the currency, however, it depreciates the currency from P1 to P2.

The decrease in the supply of the currency could be caused by the decrease in the interest for the imported goods. As consumers would demand less of their currency, the supply curve would shift from S1 to S2 decreasing the quantity demand for the currency but increase the value of the currency in terms of another currency. This causes the currency to appreciate.


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Spanish Currency in Jeopardy (via Bobby’s Blog)

I thought that this blog post had an insightful analysis on the Spanish currency exchange rate and how the exchange rate is affecting the current account of the Spanish economy. According to the blog post, Spanish are experiencing double-digit deficit in their current account. In addition, the author analyzes the Spanish dilemma over whether they should stay or defect from Euro.

Spanish Currency in Jeopardy At this time, Spain, as part of the PIGS, countries that have double digit deficits in terms of current account in GDP, is suffering greatly. According to the article by Paul Krugman, the only solution Spain has formulated in order to recover from the deficit is to abandon the euro currency. By doing so, they will be free from Germany, a country that is doing relatively well in light of the current recession. Unlike Spain, it is currently experie … Read More

via Bobby’s Blog

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U.S. vs. China: Currency and Trade Dispute

Historically, China used the fixed exchange rate for their currency Yuan over almost 50 years. Of course, China has discontinued its inflexible practice from the start of July of 2005. Instead of the fixed exchange rate, they employed a flexible exchange rate system. However, it wasn’t 100% flexible or floating because of the Chinese government’s intervention in the currency exchange market. What the government would do is that they would use their reserves of currencies to ‘manipulate’ or manage the currency exchange rate to be at a certain level. Exchange rate is a ratio between the value of two currencies and it is a method to translate the value of one currency into another.

China armed with undervalued currency and its huge industrial factories and infrastructures, it gains enormous amount of surplus in current account against United States. The surplus in current account means that the country is exporting more than it is importing. Therefore, China is gaining lots of US dollars from the trade. If you look this at the American point of view, US is losing in terms of current account against China. US is importing more than it is exporting. The imbalance in the current account in both cases (surplus and deficit) could create some problems. For deficit in current account, the country will experience in large amounts of payments losing to the foreign country. So US will be losing lots of its payments and interests to China. For surplus in current account, it is considered ‘desirable’ compared to the deficit in current account, however, it could mean that the country is not experiencing the highest possible standards of living. Also, it could be seen as economy’s under-performing. Also, it exerts pressure on the exchange rate to appreciate the currency of the country.

As you could see, the fixed exchange rate could cause a problem of shortage in the currency supply. This would generally push the exchange rate upwards, but the fixed rate block this. Therefore, the shortage in the supply of the currency occurs.

What would have happen if the Yuan got stronger and appreciated? It would decrease the exports of China dramatically. Conversely, it would increase the imported goods to China. This will ‘fix’ the imbalance and lower the surplus in current account against United States. In the point of view of Americans, this will increase their exports to China and decrease the imports due to increase in the price. This would be beneficial for both countries’ balance of payment, however, China refuses to appreciate their currency. It is because the weak Yuan stimulates exports to US and this is the key engine for China’s enormous economic growth. They think that the surplus in the current account is a good thing, however, as it was mentioned there are problems with it also.

In conclusion, China’s currency policy is creating an imbalance in the trade between United States and China. Also, it is creating the imbalance in the balance of payment. It would be idealistic if China gave up their under-evaluation policy. However, it will increase the unemployment rate in China as the exports decrease and the number of workplaces in China decreases. Conversely, this will be beneficial for United States for it will lower the unemployment rate by the increase in exports and increase in the number of workplaces.


Council of Foreign Relations – Confronting the China-US Economic Imbalance

Wikipedia – Fixed Exchange Rate

Graph from Triple AAA Reading – Fixed Exchange Rate

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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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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.


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US vs. China – Currency Dispute

New York Times: Click Here

BBC News: Click Here

According to New York Times, the Obama administration is pressuring China to stop the devaluation of yuan, a policy that fuels its persistent trade gap with the United States.

Obama administration claims that China is artificially manipulating its currency to boost up its export to US. However, Chinese premier Wen Jiabao has denied that its currency is artificially devaluated.

Why are United States and China growling at each other for this issue? It is all about trade: Export and Import.

As many of you know, China is one of the biggest exporters. You may at least have a random product that is made from China. China gets all the ‘income’ or money from exporting its goods to other foreign countries, especially United States. So it is important for China to have yuan to USD exchange rate lower in order to export a lot of their stuffs to United States. It makes their products cheaper, so they gain a great price advantage over United States.

In United States point of view, this could be disturbing to them. Obama administration has promised to make like 2 million job places for its people. However, excessive import from China is one obstacle to their economic recovery. Also, United States have lots of exporting companies that are losing the price competition to Chinese exporting companies. So, Obama administration is pressuring China to raise their exchange rate. Obama administration also fears that China is stealing American jobs.

As for China, there is no way that they are going to reevaluate their currency even if they are artificially manipulating it. The export is the main steam engine of China’s economic development so it will most unlikely give up on the low yuan. For United States, their ‘precious’ money goes into Chinese government’s pocket, which they think it should be used in order to recover their economy. They are importing more than what they are exporting to China.

In conclusion, I don’t think China will ever reevaluate its currency even if they are actually manipulating it. This dispute is just aggravating the US-Chinese relationship.

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