Posts tagged US

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.

Resources:

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

Wikipedia – Fixed Exchange Rate

Graph from Triple AAA Reading – Fixed Exchange Rate

Advertisements

Comments (1) »

Plan to cut down US Public Debt failed

US Government’s Plan (1999) to Cut Down Public Debt

BBC News: Business: The Economy  US to buy back national debt

US Public Debt Data: Wikipedia file

I have found an interesting news article from 1999 about how US government was trying to cut down its public debts.

US government was planning to cut down public debts by paying the debts. The US government expected to decrease its debt of  $3,700 billion to $1,200 billion by 2009. However, as you can see from the actual data collected over 11 years, this plan wasn’t well executed.

The Actual Data of US Public Debt (1997-2008)

Instead of decreasing its debt to $1,200 billion, the debt increased to $10,000 billion. This suggests that the US government’s ‘plan’ to cut down its public debt was a poorly planned/executed policy.

According to U.S National Debt Clock, the US public debt is $13,621 billion or $13.6 trillion (Data Retrieved: 18 Oct 2010 at 12:38:23 PM GMT). I think that this increase in US public debt will someday have a detrimental effect not just on the US economy but on the economies around the world.

This blog post is an ‘add-on’ to the original blog post: Debt Time Bomb, Is It an Impending Death of Pax Americana?

Comments (2) »

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.

Comments (6) »

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.

Leave a comment »

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.

Leave a comment »

US deficit ‘set to hit $1.35tn’

BBC News: Click Here

According to US congress estimates, US budget deficit is expected to reach $1.35 trillion in 2010. “In 2009, the US deficit hit a record $1.4tn – equal to 9.9% of gross domestic product (GDP) – and the highest since the end of World War II.”

I think the reason for this sky-rocketing deficit are the following:

  • an imbalance between revenues and spending that predated the recession
  • sharply lower revenues and higher spending in the recession
  • the costs of various federal policies implemented in response to the global downturn.

This also is what Congressional Budget Office (CBO) said was the reason.

World economy is slowly starting to recover, however, this was possible with borrowing money from banks. It may seem the economy is improving, however, this ‘deficit’ could be an economic bomb if they keep growing. As economy gets better, United States should have a new budget plans keeping the spending lower than the revenue to halt and minimize the deficit.

Leave a comment »

China threatens sanctions over U.S. arms deal

Chinese Vice Foreign Minister He Yafei says the U.S.-Taiwan arms deal “severely” endangers China’s national security.

CNN article: Click Here

According to CNN, China has threatened to slap sanctions on American companies that sell arms to its rival Taiwan as part of a range of punitive actions Beijing is taking to protest the deal.

I will look at this article in economical point of view, not political. United States has chosen to sell its arms to Taiwan obviously for money, but has cost them sanctions from China. However, I do not think this as a disadvantage as United States doesn’t sell that much of arms to China. So even if they lose a market in China, it would not affect them so much. They did not have the arms market at China to start with. Also, even if United States tried to sell their products to China, I am definitely sure that China have enough technology to build and manufacture their own arms.

Unlike China, Taiwan depends heavily on United States for security arms. It does not have a high technology in military arms like China does. Therefore, it has to import military arms from foreign countries. However, many countries are reluctant in selling arms to Taiwan in fear of China’s diplomatic pressure. So Taiwan has depended on United States for longer than 50 years since the start of Cold War.

In my opinion, even if China politically and economically pressure United States, United States will never give up on this large market for exporting its arms. Though, this would aggravate the deep distrust between China and United States.

Comments (2) »