Posts tagged economics

Aids for Developing Nations

Map of Africa

Aids for developing countries could be beneficial for their economic growth. What the many of the developing nations have problem in common is the lack of security. If a nation’s security is bad, it is highly unlikely that people will work hard to achieve high economic development. One way the developed countries could help these countries is through stabilizing security either by sending police or UN peacekeeping forces. The major reasons why people become rebels is that the price of the necessities are very high and they have no work. By providing the necessities at low price, they could solve the major part of the security and the economy of the developing countries.

As soon as the security issue is resolved, the developed countries could send aids to the developing nations if the leadership of their country is reliable. If the large sums of money is squandered in the official’s ‘personal uses,’ then the likelihood that the nation will experience the economic growth is very slim. The developed nation must guide the developing nations to spend the financial aids to build on to the capital goods. In the short run, this will result in the increase in the imports and therefore the increase of expenditure, however, this will increase the productivity of the developing nation and increase the exports in the long run.

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Zimbabwe – Developmental Economics

Today, we have discussed about Zimbabwe’s economic situation and what were the barriers to Zimbabwe’s economic growth. There was many opinions about why Zimbabwe was still in suffering from economic difficulty.

One of the many barriers to Zimbabwe’s economic growth was its very high inflation of about 100,000 percent for its currency. It would require you millions of Zimbabwean dollars to just buy a pack of toilet paper. Also, it would require you to carry briefcase or even carts to buy rice and necessities for everyday life. One of the jokes that was mentioned in the class was that if a person rode a bus, the bus fee would increase even during when the person is riding the bus. This is how serious the Zimbabwe’s inflation is. So, inflation is one of the major reason why Zimbabweans are suffering from economic downturn.

I was surprised at how high the literacy rate in Zimbabwe was. In fact, it is about 90% for the whole population. It is quite surprising the fact they have very high literacy rate despite the economic situation. Generally, countries have low literacy rate if they have a bad economic situation.

Despite the high human capital, Zimbabwe’s economy is no better than those of other nations in Africa. Another major reason discussed in the seminar was that the corrupt leadership in Zimbabwe was hindering economic progress in Zimbabwe. Nugabe is a founding leader of Zimbabwe. He was one of the beloved leaders for liberating the Zimbabwean people from the white minorities. However, as years passed by, Nugabe got obsessed in maintaining political power. This has cost the economic situation in Zimbabwe, which has great potential to strive because of its high human capital and enriched resources. Also, he has oppressed the media, which has resulted in the vacancy of criticism against the regime.

In conclusion, Zimbabwe’s major barriers to economic growth were hyperinflation and political oppression. If Zimbabwe got rid of these barriers, it is highly likely that Zimbabwe will strive with its high human resources and its natural resources.

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Exam Review Blog Posts: Exchange Rates

Questions:

(a) Explain three factors which may cause changes to occur in a country’s exchange rate under a floating exchange rate system.

(b) Evaluate the likely impact on a country’s economic performance of a substantial depreciation of its exchange rate.

1. The question (a) is asking for three factors that affects the floating exchange rate system. Also, the question (b) is asking the test taker to evaluate on the effect due to the depreciation of the exchange rate.

2. Floating Exchange Rate: Where the exchange rate is floating (as are all major currencies in the world), it will be determined by market forces – that is supply and demand. As in any other market, the rate will change constantly to reflect how much of the currency is being traded. However, what determines the supply and demand for the currency? Let’s take the Baht (the Thai currency) as an example and look at the factors that affect supply and demand and therefore the equilibrium exchange rate. (Triple A)

3. Governments can use exchange rates to affect economic performance. A rising exchange rate, which is often linked to an increase in base interest rates, leads to exports becoming more expensive but imports falling in price. This would reduce part of the inflationary pressure within an economy. A fall in the exchange rate would lead to the reverse and might help domestic businesses export more. (Triple A)

4.

  • Floating Exchange Rate: the exchange rate system is affected by the supply and demand of the currency exchange market.
  • Depreciation of the Exchange Rate: this usually occurs when either the supply of the currency increases or the demand of the currency decreases.

5.

This is the diagram for the depreciation of the currency as a result of the increase in the supply of the currency from S1 to S2. The quantity of the currency increases from Q1 to Q2, however, the value of the currency in terms of another currency goes down. This is why the currency depreciates when the supply of the currency increases.

The currency can depreciate also when the demand for the currency decreases from D2 to D1. The quantity of the currency demanded decreases from Q2 to Q1 and the value of the currency decreases from $0.35 to $0.25. This is why the currency depreciates when the demand for the currency decreases.

As the currency depreciates, the exports will increase and the imports will decrease. This will balance of payment and decrease the current account. The country will be in the trade surplus, however.

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List of Definitions for Section 4

This is the list of economic definitions used in Section 4 (International Economics) with real world examples to have better understanding of the definitions. It would be faster if you use command-F (Mac) or control-F (PC) to find the definitions.

1. Trade – is an exchange involving goods, services, or currency.

2. Reasons for Trade – There are several reasons for why countries trade with each other.

  1. Different Factor Endowments – There are some economies that are rich in natural resources while others have comparatively little resources. Trade enables economies to specialize in the exports in resources and money to buy imports of other goods that they need but lack.
  2. Increased Welfare – specialization and trade allow countries to gain a higher level of consumption than they would do domestically and this leads to increased welfare and higher living standards.
  3. To gain Economies of Scale – with specialization and production on a larger scale than may be possible domestically, a country may be able to gain more economies of scale. This will lead to lower average costs and benefit consumers through lower prices.
  4. Diversity of Choice – trade enables people to access and approach diverse and variety of goods and services that may not be available only in the domestic market.
    • Real World Example: Korean consumers are able to buy Apple products from US and have wide variety of choice along their own electronics manufacturers Samsung and LG.
  5. Increased Competition – Increased competition helps domestic industries to have improvements in productivity and efficiency. In addition, it gives domestic firms better incentive and improve their products to compete against foreign firms.
    • Real World Example: As Apple introduced the iPhone, Korean phone manufacturers such as Samsung and LG began to make their own smart phones to counter the increasing Apple influence on Korean domestic market. Warc: iPhone threatens LG and Samsung in Korea
  6. Engine for Growth – increased trade helps domestic economies to grow and make improvements in living standards of the people.

3. Free trade – It is international trade free from any restrictions like tariffs, quotas or other protection.

  • Real World Example: Korea and EU signed the agreement to initiate FTA that will eliminate all the trade barriers imposed on the trade. ICTSD: EU-Korea FTA

4. Protectionism – it is a policy to protect domestic industries from fierce foreign competitions. It includes tariffs, quotas, embargo, and voluntary export restraints.

  • Real World Example: Japan has a heavy protectionism on their domestic rice industry. Japan imposes 341 yen per kilogram tariff on all imported rice. This raises the price of the imported rice to be way higher than the quota, effectively prohibiting the imported rice from hurting domestic rice industry. In addition, Japan subsidizes the rice industry and the taxpayers paid $2.8 billion in 1999 alone. Japan-101: Japanese Rice Trade Policy

5. Tariff – it is a tax on imports in order to protect domestic industries by increasing the price of the imports. This gives domestic industries equivalent comparative advantage to the foreign industries.

  • Real World Example: Japan imposes a tariff of 341 yen per kilogram on imported rice.

6. Quotas -it restricts the maximum amount of imports allowed into an economy. This reduces the amount of imports into the economy and increases the equilibrium price within the market.

7. Exchange Control – it limits the amount of foreign currency available for paying for imports. This reduces the amount of imports in the economy to protect domestic industries.

  • Real World Example: China has exchange control to regulate not only the value of their currency but also to regulate the amount of imported goods to be in Chinese domestic market. CABC: Chinese foreign exchange control system

8. Export Subsidies – it is a subsidy offered to domestic industries to allow exporters to export more products than the natural equilibrium point would allow. The benefits the foreign consumers with increased economic welfare and the decrease in the price of the imports. Tax payers would have to bear the burden, however, the domestic industries would enjoy more wages and job security. However, this could reduce the domestic exporters’ interest in domestic market and disregard the market. This could lead to an increase in domestic prices.

9. Voluntary Export Restraints (VER’s) – it is the voluntary quota set by the manufacturer.

10. Administrative Obstacles – governments could set trade barriers such as long, slow paperwork. This makes it hard for foreign firms to to compete with the domestic firms.

11. Health and Safety Standards – high health and safety standards for imported goods can make it difficult for foreign firms to compete in domestic market. This protects the domestic industries.

  • Real World Example: Japan only allows US beef that are aged below 20 months in fear of mad cow disease. Japan considers beef aged over 20 months as ‘highly dangerous’ of mad cow disease and prohibits them from the domestic beef market. Bloomberg: Japan-US Beef, Mad Cow Disease Concerns

12. Environmental Standards – high environmental standards also makes the foreign firms to compete in the domestic market. This protects the domestic industries.

13. Downward Multiplier Effects – protectionism could reduce the level could affect the country’s exports to be less competitiveness and decrease the exports due to decreased amount and the increased price of imports.

  • Real World Example: Korea has tariffs on imported chicken and this may have been the cause to the high price of domestic chicken in Korean market. The high price in chicken reduces the competitiveness of industries that rely on chicken as part of their production. For example, KFC’s would have great decrease in the competitiveness in the price of their chicken due to the high price caused by the protectionism.

14. Globalization -it is the integration of national economies into international economy trough trade, commerce, investments, and capital flows.

  • Real World Example: China is a communist country, but it has realized that it could benefit from the globalization and trade. So, China opened up its market and economy to the world and became an enormous part of the global economy.

15. Types of Trading Blocs

  1. Free Trade Area (FTA) – it is an area where there are no trade barriers. Sovereign countries must not implement trade barriers on the member countries of FTA.
  2. Customs Union – it is similar to FTA in that it is free from trade barriers. However, it is different in that countries are no longer fully sovereign over the trade policies. There is standardized trade policies that the countries must abide by to.
  3. Common Market -it allows free movement of factors of production such as labor and capital between the member countries without restriction.
  4. Economic Union – it is a developed trading bloc in the level of integration. The member states may have common economic policies, common currency, and common monetary policies.
    • Real World Example: EU is an economic and political union that has common economic policies and common currency as Euro.

16. World Trade Organisation (WTO) – it is an organization that intends to supervise and liberalize international trade. It penalizes countries implementing illegal trade barriers on the other country.

17. Balance of Payments – it measures the international trade performance of an economy and shows how well it is managing to match imports and exports of goods and services and the flows of investment in and out of the country.

18. Current Account – it records imports and exports of goods and services.

19. Capital Account – it records the flow of money into and out of a country for investment and other purposes.

20. Exchange Rate – it is the price of one currency expressed in terms of another.

  1. Fixed– the exchange rate of one currency is fixed in value to other currencies.
    • Real World Example: North Korea has a fixed exchange rate. However, the fixed exchange rate does not accurately reflect the market value of the currency as the market value for the currency is often 20 times lower than the fixed value for the currency.
  2. Floating – the exchange rate of one currency is completely dependent on the market mechanism of supply and demand of the currency.
    • Real World Example: Japan has a floating exchange rate. The government does not intervene with the exchange rate.
  3. Managed or Dirty Float – the exchange rate that is based on floating exchange rate, however, has maximum and minimum limits managed by the government.
    • Real World Example: China is implementing dirty float system for the exchange rate. It sets the maximum value to the exchange rate in order to artificially depreciate its currency and therefore export more to the world.

21. Dumping – It is to sell a product in another country at a price below its unit cost of production in order to decimate the domestic industry of that country.

  • Real World Example: Philippines once had a competitive agricultural industry. It was once famous for its efficiency to harvest crops 3 times a year whereas other agricultural industries could only harvest 1 time. However, as it opened up its market to the world, foreign agricultural industries started dumping their crops in Philippines domestic market. The domestic agricultural industries soon collapsed, and the foreign agricultural industries raised the price of the crops. Philippines’ economy significantly shrank and gave its title of Asia’s 2nd developed nation to other countries like South Korea, Taiwan, Hong Kong, etc.

22. Anti-Dumping – It is a legislation to protect an economy against imported goods that are sold at a price below its unit cost of production.

  • Real World Example: World Trade Organization (WTO) monitors firms dumping maliciously on foreign markets and penalize them as soon as they spot them on the action.

Resources:

  • Triple A Learning
  • Economics Glossary
  • Wikipedia

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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.

“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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Data Response: Trees

What are the external costs/benefits of trees?

(a) (i) Negative externality are the bad effects that are suffered by a third party when a good or service is produced or consumed.

(ii) Positive externalities are beneficial effects that are enjoyed by a third party when a good or service is produced or consumed.

(b) Graph 1: Negative Externality of Tree Branch

Branches falling in a neighbor’s yard could be considered a negative externality looking at several points. If branches from trees fall in a neighbor’s yard, the neighbor would have to take his/her time to clean the branches up. Many business people think of time as money. The time the neighbor has to take to clean up the branches could be converted to a monetary value. Also, the ‘labor’ of cleaning up the branches also could be converted to a monetary value. In addition, if a neighbor suffered psycologically by the constant falling of branches from his/her neighbor tree can be conpensated by money. However, many ‘modest’ or ‘ordinary’ neighbors would not complain about it fearing the relationship with his/her neighbor could get bad. As it is illustrated in the graph, the time, labor, and psycological suffering of falling branches is not reflected in the graph. So this falling of branches from the nieghbor’s tree could be considered a negative externality.

(c) Graph 2: Government Intervention to Stop Negative Externality

Government could intervene if a neighbor complains to the local authorities about this annoying branches. A government could put a tax on a neighbor’s tree for having these ‘significant’ negative externalities and put a curve of MPC up to MSC in the graph 1. Or, the government could persuade the neighbor to cut down trees or clean up the branches him/herself and move the curve of MPB down to MSB in graph 2.

(d) If a government taxes on the neighbor for the falling of branches, it eventually lower the number of branches falling on the poor neighbor’s garden, however there are some drawbacks. The neighbor getting taxed would have monetary loss for his/her tree’s wrongful acts. To explain this graphically, in the graph 1, the number of branches falling decreases, however, cost of branches falling increases. Therefore, it is hurting the neighbor of the wrongful tree. However, if the government persuades the person to either cut down trees or clean up the branches him/herself, it will both let both neighbors to benefit. The owner of the tree can still keep the tree and the neighbor would not have to suffer from the branches falling of the tree. As illustrated in graph 2, it both lowers the cost and quantity of falling branches. So the best way for the government to do is to persuade the owener of the tree to clean up the branches falling off from the trees.

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Data Response: Clean Coal

(a) (i) Negative externality occurs when the production or the consumption of a product creates external cost to the society. For example, consumption of cigarettes can result in high possibility of cancer and air pollution.

(ii) Welfare loss occurs when there is a negative externality in the market. There is a loss of welfare when this negative externality is not reflected in the price mechanism.

(b) Graph 1:

Coal fired power stations produce negative externalities such as air pollution and acid rain. As you see in the graph, external costs of air pollution and acid rain are not reflected on the price. The production of electricity by usage of coal should be on the curve MSC, which rightfully reflects the negative externalities of the production. Instead, the curve is on MPC, which does not reflect the negative externaltities. Therefore, this engenders the welfare loss which is colored black in the middle of the graph.

(c) Graph 2:

In order to solve this problem, the government must intervene to overcome this market failure. The best solution to overcome this problem is for the demand for such polluting energy to go down. As you see in the graph 2, as demand goes down, the product becomes much cheaper and the consumption lowers down lessening the negative externalities of air pollution. The government could advertise not to excessively use the energy produced by the coal. However, this sometimes this method would not work. If this method does not work, government should use the last method of taxation on the production of the electricity by coal. This method is less-desirable than the first method. Although the consumption goes down, the price for the electricity goes up. So this would hurt the consumers.

(d) If the government taxes on the power stations producing electricity by coal, it will raise the price up from P1 to P* in the graph 1. This method will hurt the consumers. However, if the government tries to persuade the consumers to lower their consumption of electricity by advertisement, it will both lower the price of the electricity and the consumption. The best way for the government is to persuade the consumers not to consume electricity too much. The method of taxation should be considered as a last resort.

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