Macroeconomics is the study of the decisions and performances of an entire economy, and the multiplier effect is something that governments need to think about when intervening to shift aggregate demand. Aggregate demand is the total demand for all goods and services in an economy. The multiplier effect is an effect that says an initial expenditure injection into the business cycle will multiply as it provides money for consumers to consume and contribute into the market and shifts the aggregate demand, thus increase the national income of the nation. The effect also states that the resulting benefit will be a multiple of the initial amount injected.

The formula to find the multiplier is:

The resulting final amount /initial injection into market

The value of the multiplier also depends on the marginal propensity to consume (MPC), the portion spent of each additional income from the injection. This is figured by dividing the total amount of additional income by the amount consumed from the additional income. The higher this number, the higher the value of the multiplier will be.

The diagram above explains the benefits of the multiplier effect as the AD shifts from government injection. At first the economy is at a GDP of Y1, at price P1 and with AD1. The initial injection shifts the AD curve from AD1 to ADg, and increases the GDP from Y1 to Yg. Then, in the long term the injected expenditure further multiplies as it provides additional income to labor, money for capital investment, and further consumption. This shifts the AD curve from ADg to AD2, and increases the GDP from Yg to Y2. The multiplier is Y1-Y2/Yg-Y1.

Reflecting on my performance from the End of Unit test, I did extremely well compared to what I predicted. I obtained a 24/25, resulting as 98%. I believe I obtained this score because I was confident in exchange rates, and studied the advantages and disadvantages of each exchange rate beforehand.

The improvements that I need to make are:

• Label units on axes – price of yuan in $, than just yuan/dollar
• leave space of start on new page when answering different questions
• define terms although they were defined in previous problem
• Use examples for specific situations
• write out acronyms (exp. WTO)

Thank you Ms.Q for taking your time to grade our tests, as well as visiting my blog to comment on my blog post. Your comments on my test were very understandable and easy to read, and helped me reflect on my performance.

Bangladesh is well known to be an overpopulated, poorly governed country in poverty.

It has a GDP per capita of $429.26 per capita (2006), and a HDI (Human development Index) of 0.52.

The Gini index is 33.4, showing that its income is distributed in equally. Despite this, their unemployment rate is 2.5% fairly good compared to other developing countries.

It’s population growth rate is 2.022%, with a fertility rate of 3.08 children per woman. Because of the overpopulation, it’s poverty population is 3.49% of the world’s poor, 5th out of 80 nations and the percentage of the population below the poverty line is 45%.

Bangladesh has a low per capita income and poverty population that shows no improvement. Also its population is ranked 7th in the world at 147,365,352. The dependency ratio per working-age population is 0.64, saying that there are 6.4 dependent people per 10 working class.

Here is a footage from AFP about Bangladesh’s poverty:

The demands of the questions is  to explain “why economic theory suggets that countries should specialize and trade with each other” using comparative advantage in 20 minutes. You need definitions, diagrams and explanation of comparative advantage, and  real life examples of specialization. The steps in the diagram must be clearly explained to show the benefits of specialization in the diagram, and relevant real life examples should be used to effectively explain the reasons of international trade.

2. Definition

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

Free trade: International trade that takes place without trading barriers (tariff, quota, subsidy)

Comparative Advantage: A country has comparative advantage when they are able to produce a certain output with less opportunity cost.

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

3. Triple A

• Different factor endowments – some economies are rich in natural resources while others have relatively little. Trade enables economies to specialise in the export of some resources and earn revenue to pay for imports of other goods.
• Increased welfare – specialisation (where countries have a comparative advantage 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.
• Comparative advantage exists when one country is able to produce a good more cheaply, in comparison to other goods produced domestically, than another country.
• Comparative advantage is a principle of economics which states that trade between two countries will be mutually beneficial as long as their domestic opportunity costs of production differ.

• Consumption increases through specialisation and trade compared to a situation of self-sufficiency.

4. Relevant PP Slides

5. Evaluation suggestions

Evaluation not needed.

The inflexibility of the Chinese Yuan has been a problem for the world, especially the United States. The United States claim that China is manipulating their currency through exchange rates to gain the advantages of low costs in exports, causing the suffering of suppliers in the United States that cannot compete with such low prices. Several articles relating to this topic show concern to the current account surplus China is gaining, undervalued Yuan, and the weak attitude of the U.S. towards China.

An exchange rate is the price of one currency in terms of another currency. China originally had a fixed exchange rate that does not fluctuate from the demand and supply of the currency, but in 2005 they discontinued this system and changed to a managed exchange rate. A managed exchange rate fluctuates from the demand and supply of the currency but can be manipulated by the government to stay at an accepted range of value. From this system, China is able to manipulate its currency to gain the advantages of a devalued currency.

The United States is currently accusing China for keeping its Yuan value extremely low compared to what expectations say from China’s extreme number of exports into the U.S. From an economics point of view, the high number of exports by China should cause an appreciation in the value of the Yuan.

The depreciated Yuan will cause a surge in the exports from China due to the cheap prices of the products. Thus the quantity of yuan demanded by American importers will increase, causing a shift in the demand  from D to D2. This should cause the value of Yuan to appreciate from P1 to P2, which in the long term will decrease the exports and increase imports to balance out.

Despite these predictions, the Chinese Yuan has not appreciated and has stayed at its initial value. A current account surplus is when the revenue gained from exports is greater than the expenditure from imports. China, because of its cheap Yuan, continues to gain the advantage in international trading with a great number of exports into nations such as the United States. While China gains from their trading relationship with the US, the United States have fallen into a pit of current account deficit where it imports a great amount of goods from China while not exporting much to the world. We can say that China has kept its yuan low by keeping a great supply of Yuan on the market and buying US debts. From circulating the Yuan in the market, China is able to manipulate the value of its currency and keep its advantages as shown in the graph below.

There are various consequences of a weak, strong yuan and dollar. The weak yuan has given advantages to the exports of China with low prices outdoing the producers in the United States,  increasing its current account surplus. The high current account surplus indicates a high amount of exports but also indicates the low standards of living due to the small amount of imports into the nation. The United States are unable to export goods as much as China because of the manipulated Yuan that does not balance out and keeps at a low value, thus is increasing its current account deficit by importing vast amounts from China. If China is prevented from this manipulation the Chinese Yuan will appreciate due to the increase in demand of Yuan, which will decrease the exports in the long run and balance the amount of export done by China and by the United States.

BBC states, “if China had been designated as a currency manipulator, it would trigger negotiations between the two countries and could lead to economic sanctions if the US took a case before the World Trade Organisation.” The manipulation of the yuan causing an inability for the United States to improve their current account deficit is an issue to the WTO as well as the world, and may affect the international accessibility of Yuan which China wishes to achieve.

According to the Marshall-Lerner condition, the optimistic analysts are correct. The Marshall-Lerner condition says that if the elasticities of demand for imports and exports add up to greater than 1, the current account balance will worsen in the short run but improve in the long run.

The slow reaction of importers of UK products can be explained in the J-curve, which says the Marshall-Lerner condition does not hold in the short run but holds in the long run. In the short run, information does not spread easily and exporters cannot adjust to the sudden fall in currency thus the deficit increases despite the estimated effect of the weak pound. The J-curve shows how this works:

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, … Read More

via Dominic's Econ Blog

If one brings up the topic of a single currency, most probably he/she is talking about the Euro. As the official currency of the eurozone consisting of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain, it stands as the second most traded currency in the world after the U.S. dollar. There are certain pros and cons that result from a single currency:

Pros

• Elimination of costs when converting currencies
  
• price transparency
  
• increased competition and efficiency
• inward investment
• elimination of exchange rate uncertainty
  
• encourages trade

Cons

• one policy does not fit all problems in nations using currency
• changes of interest rate in European Central bank may negatively affect certain nations while benefiting others
• Policy effects may differ from predicted
  
• Transition costs (short term when moving to single currency)

The Spanish Prisoner – NY Times

In the article, The Spanish Prisoner, Paul Krugman discusses the struggles Spain is currently facing and why Spain should not have abandoned its own currency.

Spain’s history has a similarity with the United States of going through “huge property bubble”, and falling into high unemployment when the bubble burst. Spain did not realize the surge of prices and wages compared to other eurozone nations during the bubble, and when the bubble burst Spanish industries were only left with high costs that discouraged competition with imports. Krugman states that if Spain still had their own currency at this state, they should have been able to recover from this by allowing its currency to depreciate and raise competition. But because Spain had already adopted the euro, they could only preform “internal devaluation” to lower their wages and prices to adjust will surrounding eurozone nations.

“Should Spain try to break out of this trap by leaving the euro, and re-establishing its own currency? Will it? The answer to both questions is, probably not.”

According to the article, Spain should have never adopted the euro in the first place but leaving it right now will create a catastrophe. Spain is currently a “prisoner of the euro”, and is walking up a slow path towards reducing its deficits.

I was fairly satisfied with my grade from the extended response, and found that I understood most of the concepts in 4.5, 4.6 than I thought I did. My extended response lacked clarity of ideas, since I rushed into writing balance of payments first without paying attention to what the question asked. I also need to improve on my word choice because I used “currency” instead of “exchange rates”, which may cause a difference in the meaning of my responses. Because I understand that my knowledge about balance of payments are still very shallow, I should review on Triple A.

Spain’s Deficit to Exceed Greek Gap; EU Says Warns on Growth

Spain has kept in the negatives for its balance of payments since 1987, and currently is the 2nd country on the list after the United States of the largest current account deficit. Although their deficit seems small compared to the United States with a bulging -$731,200,000,000.00, Spain suffers at -$74,470,000,000. Although the deficit has finally decreased in 2009, Spain still experiences a great deficit.

According to tradingeconomics.com, Spain currently experiences a deficit of -5.064% in terms of its GDP.The percentage of GDP that the deficit had been covering was in the 5-10% range from 2004, but the forecast says the deficit will fall to below 5% and decrease as Spain is predicted to recover from this deficit.

The article states Spain’s deficit will exceed Greece in the year. Spain continues to follow a long term deficit, and from this a decrease in EU’s growth is predicted as a number of EU nations are in a great deal of current account deficit.