Posts tagged supply

Is Abenomics Coming to a Halt?

Abenomics

Abe Shinzo, the Japanese Prime Minister, advocates yen devaluation

Wall Street Journal: Abenomics Will Be Felt Beyond Yen

Hankook Ilbo(Korean): 아베노믹스 ‘거꾸로 효과'(Abenomics ‘Reverse Effect’)

Abe Shinzo had explicitly announced that he would artificially devalue yen in the hope that this will help its export-dependent economy. His idea was that devaluation of yen against other currencies, especially USD, would improve price competitiveness of Japanese products overseas. This announcement was quickly criticized by many nations dependent on export such as Korea and Germany.

The Japanese government said that it would pump ‘infinite’ amount of money supply in the economy until it reaches its target inflation rate of 2%, thus achieving the devaluation of yen. Wall Street Journal expected that the inflation rate would make it less attractive for Japanese households to save and invest their money else where or simply use them to go on shopping. “Deutsche Bank said in a note Wednesday, spurring a “meaningful reallocation” of these deposits into offshore assets.” Therefore, Abe’s policy should have helped to vitalize the consumer sector of Japanese economy and at the same time increase its export to foreign countries.

However, Hankook Ilbo, a Korean newspaper, has published an article that Abe’s devaluation of yen is actually having a reverse effect on Japanese economy. According to the report published by Japanese Ministry of Finance in February 20th, 2013, exports decreased 9.4% compared to the previous month, while imports increased 8.2%. This resulted in 1.63 trillion yen deficit.

The newspaper analyzed that the main reason for this deficit is the rising prices for the energy imports due to the yen devaluation. The nation has been importing more of energy supplies such as LNG, oil, and naphtha, as it tried to diversify energy usage and reduce nuclear power following the Fukushima Nuclear Accident. According to Hankook Ilbo, “If Japanese firms fail to significantly recover from this deficit, Abenomics will be hit hard.”

In addition, many Japanese firms are showing their reluctance in raising wages for workers, which is very important for Abenomics to work in order to revive the real economy. They believe that devaluation alone will not simply rejuvenate the economy. Many Japanese companies have been outsourcing their factories overseas and it would be very hard to retrieve all those back to Japan in very short period.

Of course, it has only been several months, so it will be hard to tell whether Abe’s yen devaluation is doing well for the Japanese economy. But, I think that, from reading these articles, it would be better off for a Japanese economy to appreciate yen due to significant the increase in the energy import. The devaluation certainly is doing no good for Japanese economy and disturbing other export-driven economies such as Korea, Germany and etc.

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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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How can demand/supply side policies help variety of people?

How should the government implement demand/supply side policy to help corporate leaders, unemployed workers and retired people? The government should utilize the policy that both stabilizes the inflation rate and lowers the unemployment rate to help all of these people. There aren’t any absolute solutions to these problems all simultaneously, yet there are always ‘best’ solutions.

The government could nullify the labor union’s power and make the wages flexible. By lowering to wages to an apt level, there will be surplus of money that can be used to employ a number of people. Also, the money that’s left could be used to increase the pension of the retired people. People who were employed will be angry, however, it’ll give them a strong sense of job security by looking at numbers of people coming in.

In order to protect the working population from the inflation, the government should implement the monetary policy in order to cut down money supply. By cutting down money supply, it’ll significantly decrease the inflation rate  to stable state. Also, the government could increase the interest rate in order to curb inflation.

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How can Monetary Policy help people represented by Silver Cougars?

Angela Soracco of Silver Cougars of America has sent a letter quite concerned about the current inflation of 9%. Silver Cougars of America is an organization of senior citizens and they are being heavily relaint on Social Security day by day. How can the government implement monetary policies to help old seniors to lay off the inflation burden?

There are two ways to control the inflation. First is to increase the interest rate and second is to cut down the money supply on the market. First of all, by increasing the interest rate, many people will tend to save their money and not spend. This will lower the demand-pulled inflation to some degree. Also, by cutting down the money supply flowing through the market, the value of the currency will go up and therefore it will lower the inflation rate.

Nonetheless, there is one serious drawback to this policy. It will aggravate the negative economic growth and skyrocket unemployment rate in return. So, there is a trade off. Governments would look at the opportunity costs of implementing this policy and consider whether it will be worth of a try or a bad choice.

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