End of Unit Test Reflection

I did decently on the end of unit test.

Burundi

Failed States Index

Burundi

Low Per Capita Income

Burundi currently holds the world’s lowest GDP per capita value. Burundi’s GDP per capita clocks in at $162. The country is landlocked, it is found deep within the African continent. Much of Burundi’s low GDP per capita is attributed to landlocked geography. Burundi is a resource-poor country with an underdeveloped manufacturing sector. The economy is predominantly agricultural with more than 90% of the population dependent on subsistence agriculture. Economic growth depends on coffee and tea exports, which account for 90% of foreign exchange earnings. The ability to pay for imports, therefore, rests primarily on weather conditions and international coffee and tea prices.

 

High Population Growth

Burundi also ranks fairly high in birth rates per 1,000 people. Burundi ranks #13 in the world in terms of birth rates. Their birth rate per 1,000 people stands at 45.44.

 

High Unemployment and High Underemployment

Most people in Burundi survive on subsistence farming.

 

Over Dependence on Primary Sector

Burundi is fully dependent on their agricultural exports to survive. Lack of access to financial services is a severe problem for the majority of the population, particularly in the densely populated rural areas: only 2 percent of the total population holds bank accounts, and less than 0.5 percent use bank lending services. Burundi also lacks any manufacturing industries.

May, 2006, Paper 1, #3a “Explain why an improvement in a country’s terms of trade does not always lead to an improvement in its balance of payments on current account” & #3b “An economy is currently experiencing a deficit on the current account of its balance of payments. The government is considering either allowing the exchange rate to fall or reducing aggregate demand”

Demands of the question:

The question should be tackled so that there are 25 minutes allocated for part “a” while the remaining 35 minutes should be allocated for part “b”. In order to score well in these questions, appropriate diagrams should be included for part “a” and “b”. Make sure to explain how improvements in a country’s terms of trade do not always lead to an improvement in a countries balance of payments on current account. Also, give pros and cons of allowing exchange rates to fall or reducing aggregate demand.

Definitions:

Terms of Trade – the rate at which one country’s goods exchange against another.

Balance of payments – the value of all the transactions between the residents of a country with the residents of all other countries over a given time period.

Deficit – Revenue from export of goods and services and income flows is less than the expenditure on the import of goods and services and income flows over a given time period.

Exchange rate – value of one currency expressed in terms of another.

Aggregate demand – total spending in an economy by consumers.

Triple A Notes:

“To simplify the terms of trade, let’s say that we export one good and import just one. Obviously not an exciting situation, but it helps us see how we measure the terms of trade. To make it more interesting, let’s say we export beer and import wine. If 2 units of beer exchange for 1 unit of wine (an exchange ratio or rate of 2/1), then the price of beer will be half that of wine. In other words we can buy 1 unit of wine for every 2 of beer that we export. The terms of trade is therefore 1/2 and we measure it from the formula: price of beer/price of wine (export price/import price). So, the terms of trade is the rate at which one country’s goods exchange against another.

In the real world we export and import a lot more than just wine and beer and goods are rarely exchanged in physical units. International trade is usually carried out through the use of prices. In practice, therefore, the terms of trade is expressed as the price relationship between a country’s imports and exports.

This is usually expressed as an index. This means that any price changes are measured as a percentage change against a base year.”

Consequences of a change in terms of trade – balance of payments and economy

Changes in the terms of trade will have a significant impact on an economy. For example, many developing countries are very dependent on exports of primary commodities – minerals, agricultural commodities like coffee etc. If prices of these commodities on world markets fall (as has been the case in recent years) then they face a deterioration in their terms of trade. They are earning less from the same volume of exports and this means that they cannot afford to import as much. Their standard of living has fallen, not because of anything they did, but simply due to the vagaries of world markets.

This shows us the main impact of changes in the terms of trade – the effect on the standard of living.

• An improvement in the terms of trade may improve the standard of living in a country – the same volume of exports will buy more imports.
• A deterioration in the terms of trade may reduce the standard of living as more exports have to be sold to pay for the same volume of imports.

However, we also need to take account of the impact on competitiveness of these price changes. If the terms of trade has improved, then this means that export prices have increased more than import prices. This may indicate a deterioration in competitiveness and in the medium term may lead to a fall in export demand. How much export demand falls will depend on the price elasticity of demand for exports. This may adversely affect the balance of payments.

In the same way, a deterioration in the terms of trade may indicate an improvement in competitiveness. This is because import prices have risen more than export prices, perhaps showing that exports are more competitive. In the medium term demand for exports may rise and lead to an improvement in the current account.

So, analysing the terms of trade is not a simple matter. Prices of imports and exports will constantly be changing according to supply and demand and the average changes in these prices will show up in the terms of trade. An improvement in the terms of trade may well be good news for exporters, but are they perhaps less competitive in the medium term as a result? For developing countries that are very dependent on a narrow range of primary exports, the terms of trade will be crucial to their ability to grow and to fund essential imports.”

Elasticity of demand for imports and exports

A favourable movement in the terms of trade may have an unfavourable effect on the trade balance, while an unfavourable movement in the terms of trade may favourably affect the trade balance. This is because the terms of trade records relative price movements of exports and imports, while the current account of the balance of payments is concerned with export and import values (price x quantity bought / sold).

The impact of a change in the terms of trade on the trade balance will largely depend on the price elasticity of demand for exports and imports.

An improvement (favourable movement) in the terms of trade may worsen the trade balance – this will occur when the demand for exports and imports is price elastic.

An improvement in the terms of trade means that the price of exportsincreases relative to the price of imports.”

The overall impact on the balance of payments of a change in the terms of trade depends on the combined price elasticities of demand for imports and exports. So:

• An improvement in the terms of trade will worsen the balance of payments if the demand for exports and imports is price elastic, andimprove it if demand for exports and imports is price inelastic.
• A deterioration in the terms of trade will worsen the balance of payments if the demand for exports and imports is price inelastic andimprove it if demand is price elastic.

Given that the developing countries’ demand for exports and imports is relatively price inelastic, they have faced ever worsening balance of payments situations in response to their deteriorating terms of trade.”

Diagrams:

– Diagrams that show elastic and inelastic demand

– Diagrams that show an increase in supply for a currency

– Diagrams that show decrease in aggregate demand

Evaluation suggestions:

Diagrams

 

The diagram above shows that the United States has absolute advantage in the creation of shoes and cloth. But, despite this, the Philippines has a comparative advantage in producing shoes since they give up less cloth to make each pair versus the United States. The Philippines should specialize in cloth while the Philippines should specialize in shoe production.

 

The diagram above depicts free trade in automobiles. In this situation, automobiles are produced locally at the price of PE. Institution of free trade will result in the quantity Q1Q2 of automobiles to be imported into the country at the price of PW. Domestic production of automobiles is represented by Q1.

 

The diagram above depicts a situation where a subsidy is provided to a local firm, in this case, a producer of automobiles. The subsidy that is provided by the government will shift the supply curve of the producer downwards. The price of their automobiles will stay the same but they will be given help as imports of automobiles will be cut from Q1Q2 to Q3Q2. Domestic production will jump from Q1 to Q3.

 

The diagram above depicts a situation where tariffs are placed upon automobile imports entering a country. The price of these imports will rise from the world price and as a result imports will fall from Q1Q2 to Q3Q4. Domestic production will receive an output boost from Q1 to Q3.

 

The diagram above depicts the "J-Curve Theory". The theory suggests that in the short term, for the first while, even if the Marshall-Lerner condition is fulfilled, a fall in the value of a currency will lead to the worsening of a country's current account deficit before any improvement is seen in the country.

 

The diagram above depicts an increase in demand for the yen in terms of the US dollar. Factors such as increased interest rates in Japan may have caused this demand increase from D1 to D2. The value of the yen will appreciate as a result of this increase in demand.

 

The diagram above depicts an increase in supply of the yen in terms of the US dollar. Factors such as increased interest rates abroad could have led to an increased supply of Japanese yen. Japanese people are rushing to unload their yen unto the foreign money markets. The increase in supply from S1 to S2 results in a depreciation of the currency.

Definitions

Factor endowments – any means of production that a country has available to them to produce goods and services.

Specialization – when a country specializes in the production of goods and services where they have a comparative advantage in production.

Absolute advantage – an instance where a country is able to produce more than another country using the same means of production.

Comparative advantage – an instance where a country is able to produce at a lower opportunity cost than another country.

Free trade – international trade that takes place without any trade barriers.

Tariff – a tax that is placed upon imported goods to protect local companies from international competition and to generate revenue for the government.

Quota – a limit that is placed on the amount of imported goods and services that can enter a country.

Subsidy – money paid by a government to a firm which is done to encourage the output of the firm and also to give it an advantage against firms from overseas until it can compete on the international markets.

Balance of payments – the value of all payments made between the residents of one country with the residents of another country over a given period of time.

Balance of trade – the revenue received from the exports of goods with the expenditure on the imports of goods removed over a given period of time.

Current account – measure of the flow of funds from trade in goods and services including profit, interest, dividends, foreign aid, grants, and remittances.

Capital account – measure of the buying and selling of assets between countries. These assets that are bought and sold are separated into assets that show ownership and assets that show lending.

Current account surplus – a situation that exists when the revenue from the export of goods and services and income flows included is greater than the expenditure on the import of goods and services including income flows over a given period of time.

Current account deficit – a situation that exists when the revenue from the export of goods and services and income flows included is less than the expenditure on the import of goods and services including income flows over a given period of time.

Marshall-Lerner condition – a condition which states that a depreciation or devaluation of a currency will only result in an improvement in the current account balance if the elasticity of demand for exports and the elasticity of demand for imports is more than one.

J-curve – a theory that suggests that even if the Marshall-Lerner condition is fulfilled, a depreciation or devaluation of a currency will lead to a further worsening of the current account deficit before long term improvement occurs.

Exchange rate – the value of a currency expressed in the terms of another currency.

Fixed exchange rate – an exchange rate system where the value of a currency is fixed to either the value of another currency, the average value of a group of currencies, or to a commodity.

Floating exchange rate – an exchange rate system where the value of a currency is determined by the demand and supply of the currency on international markets.

Depreciation – a fall in the value of a currency in terms of another currency in a floating exchange rate system.

Appreciation –  a rise in the value of a currency in terms of another currency in a floating exchange rate system.

Devaluation – a fall in the value of a currency in a fixed exchange rate system.

Revaluation – a rise in the value of a currency in a fixed exchange rate system.

Call of Duty: Black Ops, One Month Later

I’ve been playing Treyarch’s Call of Duty: Black Ops since its release on November 9th of this year. I’ve greatly enjoyed the time that I’ve invested in the game and I honestly don’t think that I’ll be playing any other game for a very long time. I think that Black Ops is polished enough to keep me busy for the next few months. The game feels and plays great and obviously, millions of other people feel the same way, the sales record of the game can attest to this.

One month later, the game is still selling like hot cakes. There really seems to be no immediate drop off in demand yet. The game raked in nearly $650 million in five day sales, this completely smashes the previous record set by Modern Warfare 2 at $550 million. The game is nearing 20 million copies sold, analysts expect the game to hit this figure by the time January comes along. Though the game is selling quickly currently, I believe that this will die out fairly soon, sometime after January most likely as most consumers will have the game by then.

$650 million in five days.

Spain, held hostage by the Euro

Back in 1999, when the Euro was introduced, Spain was one of the first and foremost advocates of instituting a single currency that would rule over an entire continent. For the first few years after the institution of the Euro in Spain, their situation seemed to go wonderfully. The Spanish economy experienced rapid growth as investment from all over Europe were pouring into Spain. Also, private sector spending was booming and this also attributed to Spain’s growth. Spain was running a budget surplus and at the same time, Spain was also trying hard to keep its banks in check through stiff regulation.

Nowadays though, Spain can’t seem to catch a break. Spain is on the brink of experiencing a massive debt crisis. Spain’s debt crisis spurred from the bursting of the property bubble several years back. When the bubble burst, Spain was left with an industry hurt by costs that made it uncompetitive with industries of other countries.

Spain could get rid of their possible imminent debt crisis by leaving the Eurozone but the repercussions of leaving on other countries in the Eurozone would be huge and catastrophic. Leaving the Eurozone would create a banking crisis in Europe as people will rush to move their money elsewhere out of Spain. In effect, Spain can’t leave since the fates of other small countries in Europe are essentially in their hands.

If Spain never adopted the Euro, they would not be experiencing a debt crisis right now.

Should Spain leave the Eurozone or stay?

Hope might be in sight for the UK: The Marshall-Lerner Condition and the J-Curve

Britain’s trade gap is widening more than expected in March as imports shot up five times faster than exports, this has caused the British government to begin doubting its hopes that the country will experience an export driven economic recovery. The United Kingdom’s deficit on trade in goods rose from 1.2 billion pounds to roughly 7.5 billion pounds in the span of a few months. Businesses have been saying that the orders have been improving but, the weak British pound is raising costs for importers but not providing any significant boost for the export of goods or services coming from the United Kingdom. Analysts also predict that their situation will be made tougher by the financial troubles the eurozone is experiencing, this will have a negative effect on demand for exports from the UK.

All is not lost for the United Kingdom fortunately, the Marshall-Lerner Condition and the J-Curve is providing some hope for the economically struggling power. The Marshall-Lerner Condition the condition states that the current account will improve after a depreciation if the sum of the price elasticities of demand for imports and exports is greater than 1. The further above 1 the sum of the elasticities is, the greater the improvement in the current account will be. The condition does not hold in the short run though, the UK is most probably at the low point of the J-Curve which accompanies the Marshall-Lerner Condition, but, in the middle to long run, things will perk up. People simply need time to adjust to the increase in import prices and the decrease in locally produced goods.

Tension between US and China concerning possible Chinese currency manipulation

The past several years has seen increasing tensions between China and the United States. These tensions have arisen from threats of a possible impending currency war between both powers as the United States, under Barack Obama’s administration, has claimed that China unfairly manipulates its currency to gain an unfair trade advantage. Just last month, President Barack Obama participated in the G-20 Summit in Seoul, Korea with one main goal in mind, to limit China’s and other countries’ ballooning current account surpluses.

Besides the fact that the Chinese and Americans are partners on many fronts including dealing with the economic crisis. But, over the years, the dispute between China and the United States has escalated because both countries are hurting each other in different ways economically.

On one hand, the Chinese want the United States to tame its sky rocketing debt as Chinese holdings of U.S. Treasury debt is peaking at almost 1 trillion dollars. In 2009, this figure hit roughly $850 billion. Though some statistics show that it has decline during the second half of 2009, many analysts say that the economic giant, China, owns much more Treasury securities than official statistics indicate. China simply wants the United States to decrease their ballooning debt figures.

On the other hand, the United States argues that there is an increasing trade deficit between both countries that is favoring the Chinese and hurting the Americans. China’s current account surplus with the U.S. in 2010 is expected to run to $250 billion which is far more than what any other country has with the United States.  Countries that have large current account surpluses save more than they can invest in their home country than invest their funds abroad. Countries that run a current account deficit save less funds for investment needs and spend it all to attract investors from abroad. Since China is running a large current account surplus, it is investing much of its funds in the United States. This can be seen as an upside because it provides Americans with more capital that they can use making them more productive and helping them earn a higher wage. But, despite this, China’s investment in the U.S. is also not good for the country.

As a result of this current account surplus, the United States has accused China of manipulating its currency. Indeed China is manipulating its currency as it is “pegging” its value to the dollar but the American did it too in the 1940s fixing its currency to other nations, if they weren’t accused of unfair trade practices then, people argue that the U.S. doesn’t have a right to accuse others of currency manipulation.

Both countries though are hesitant in really becoming aggressive to get their way. China and the United States are both heavily reliant on each other for their economies to thrive and survive. Though China is owed billions upon billions of dollars by the Americans, they are hesitant in asking for it back as it is American demand for Chinese-made products that has been a major driver of Chinese economic growth over the past decade. The Americans on the other hand are indebted to the Chinese and are hesitant to aggressively deal with the current account surplus plus problem as they are indebted to China, literally, nearly $850 billion loaned to the United States.

At this point, the United States wants China to print fewer Yuan to increase its value, what the government fails to realize is that getting the Chinese to limit the printing of the Yuan will not increase the price of Chinese goods or bring a change to the US’ current account deficit. China and the United States need to watch their actions or else their trade wars will spill over to the global currency markets and affect countries’ exporters.

BEST FRIEND'S FOREVER!

 

Review on Balance of Payments/Balance of Trade Assessment

I did very poorly on the recent assessment on the topics concerning international economics. I will  say this right now though, I am fairly confident on my grasp on this topic we are studying in IB HL Economics. Though my grade does not reflect a student who has a firm grasp on the topic at hand, the reason for my low grade is lack of time management. I spent too much time explaining each and every little detail that I’ve come across in this topic. By the time I got done explaining all the concepts concerning exchange rates, I simply had no time left to get to the balance of payments part of the question. Because of this, I lost four marks, my saving grace was all the other details I had written earlier during the assessment.

 

In future assessments like these, the long response, I will make sure to allocate my time wisely.