Transcript ECONOMICS

ECONOMICS
Johnson Hsu
July 2014
The global economy
1.
2.
3.
4.
Macroeconomic performance
Trade and integration
Development and sustainability
The economics of globalisation
World Trade
Organization
An international body
responsible for negotiating trade
agreements and ‘policing’ the
rules of trade to which its
members sign up. Trade disputes
between members are
settled by the WTO
Absolute advantage
 Where one country is able to produce more of
a good or service with the same amount of
resources, such that the unit cost of
production is lower
 refers to the ability of a party (an individual,
or firm, or country) to produce more of a good
or service than competitors, using the same
amount of resources
Example 1
Party B has the absolute advantage.
Party A can produce 5 widgets per hour with 3 employees.
Party B can produce 10 widgets per hour with 3 employees.
Assuming that the employees of both parties are paid equally,
Party B has an absolute advantage over Party A in producing
widgets per hour. This is because Party B can produce twice as
many widgets as Party A can with the same number of
employees.
Example 2
 One of your friends, Gina, can print 5 t-shirts
or build 3 birdhouses an hour. Your other
friend, Mike, can print 3 t-shirts an hour or
build 2 birdhouses an hour. Because your
friend Gina is more productive at printing tshirts and building birdhouses compared to
Mike, she has an absolute advantage in both
printing t-shirts and building birdhouses.
Example 3
 Suppose Gina wasn't as agile with the hammer
and could only make 1 birdhouse an hour, but she
took a sewing class and could print 10 t-shirts an
hour. Mike on the other hand takes woodworking
and so he can build 5 birdhouses an hour, but he
doesn't know the first thing about making t-shirts
so he can only print 2 t-shirts an hour. While
Gina would have the absolute advantage in
printing shirts, Mike would have an absolute
advantage in building birdhouses.
Reciprocal absolute
advantage
where, is a theoretical world of
two countries and two products,
each country has an absolute
advantage in one of the two
products
Comparative advantage
Where one country produces a good or
service at a lower relative opportunity
cost than others
Absolute vs
Comparative Advantage
 Comparative advantage can be described as the ability of a
particular country to produce a certain product better than
another country. A country will have an absolute advantage
over another country when it produces the highest number
of goods after the same resources are supplied to both of
them.
 While absolute advantage is a condition where the trade is
not mutually beneficial, comparative advantage is a
condition in which the trade is mutually beneficial.
 While cost is a factor involved in absolute advantage,
opportunity cost is the factor that is involved in
comparative advantage.
 Unlike absolute advantage, comparative advantage is
always reciprocal and mutual.
Relative opportunity
cost
The cost of production of one good
or service in term of the sacrificed
output of another good or service in
one country relative to another
What Is Law of
Increasing
Ans: Opportunity Cost?
The Law of Increasing Relative Cost, also know as, the
Law of Diminishing Returns is a term used in economics
which suggests that diminishing returns as a decrease in
marginal output of a production process is the single a
factor of production while all other factors are constant.
Though the marginal productivity of the workforce
decrease, the output increases, and the number of
workers exceed the number of available workspace.
Term of trade
The price of a country’s exports relative
to the price of its imports. The terms of
trade can measured using the formula:
Index of average export prices
------------------------------------- x 100
Index of average import prices
Trading possibility
curve
A representation of all the
combinations of two products that
a country can consume if it engages
in international trade. The TPC lies
outside the production possibility
curve, showing the gains in
consumption possible from
international trade
Factor endowments
The mix of land, labour and capital
that a country possesses. Factor
endowments can be determined by,
among other things, geography,
historical legacy, and economic and
social development
Factor intensities
 The balance between land, labour and capital required in the
production of a good or service
 Measuring factor intensity in the real world is not a simple
task. Numerous factors of production exist; a country's
abundant factor may depend on the countries being
compared, and an intensive factor may depend on the
industries being compared. For example, consider the laborto-land ratio among different countries by assuming that a
country's labor force is a constant fraction of its population.
Compare the population-to-land ratio (population density)
in the United States to that in the United Kingdom. Then
compare the ratio in the United States to that in Australia.
Do you expect the United States to be a net exporter of
agricultural goods because of its "abundance" or "scarcity" of
labor? Depending on how you compare the US to other
countries, it is hard to predict.
Labour-intensive
production
Any production process that involves a
large amount of labour relative to other
factors of production
Capital-intensive
production
 Where the production of a good or
service requires a large amount of
capital relative to other factors of
production
Heckscher-Ohlin theory
of international trade
 A theory that a country will export products
produced using factors of production that are
abundant and import products whose
production requires the use of scarce factors
 The model essentially says that countries will
export products that use their abundant and
cheap factor(s) of production and import
products that use the countries' scarce
factor(s)
Theoretical assumptions
of Heckscher-Ohlin
 Both countries have identical production
technology
 Production output is assumed to exhibit constant
returns to scale
 The technologies used to produce the two
commodities differ
 Factor mobility within countries
 Factor immobility between countries
 Commodity prices are the same everywhere
 Perfect internal competition
Infant industries
Industries in an economy that are
relatively new and lack the
economies of scale that would allow
them to compete in international
markets against more established
competitors in other countries
Profit margin
The difference between a firm’s
revenue and cost expressed as a
percentage of revenue
Dynamic efficiencies
Efficiencies that occur over time.
International trade can lead to
change in behavior over a period of
time that can increase productive
and allocative efficiency
Knowledge and
technology transfer
The process by which
knowledge and technology
developed in one country is
transferred to another, often
through licensing and
franchising
Licensing arrangement
An agreement that ideas and
technology ‘owner’ by one company
can be used by another, often for a
charge
Regional trading bloc
 Countries in a region that have formed an
‘economic club’ based on abolishing tariffs and
non-tariff barriers to trade, e.g. the European
Union, the North American Free Area and the
Association of South East Asian Nations
 is a type of intergovernmental agreement, often
part of a regional intergovernmental organization,
where regional barriers to trade, (tariffs and nontariff barriers) are reduced or eliminated among
the participating states.
Advantages and
Disadvantages of trade blocs
There are five major advantages of trade
bloc agreements: foreign direct
investment, economies of scale,
competition, trade effects, and market
efficiency.
The disadvantages, on the other hand,
include: regionalism vs.
multinationalism, loss of sovereignty,
concessions, and interdependence.
Primary
commodities
Goods produced in the primary
sector of the economy, such as
coffee and tin
Prebisch-Singer
hypothesis
 The argument that countries exporting
primary commodities will face declining
terms of trade in the long run, which will trap
them in a low of development as more and
more exports will need to be sold to ‘pay for’
the same volume of imports of secondary
sector or capital goods
 postulates that terms of trade, between
primary products and manufactured goods,
deteriorate in time.
Developed economies
 Countries with a high income per
capita and diversified industrial
and tertiary sectors of the economy.
Examples of developed economies
would include the USA, the UK,
Japan and South Korea
Developing economies
 Countries with relative low income
per capita, an economy in which
the industrial sector is small or
undeveloped and where primary
sector production is a relatively
large part of total GDP
Liberalisation
 Reduction in the barriers to
international trade, in order to
allow foreign firms to gain access
to the market for goods and
services that are traded
internationally
Transition economies
 Economies in the process of
changing from central
planning to the free market
Intra-regional trade
 Trade between countries in the
same geographical area, for
example trade between the UK
and Germany or the USA and
Canada
Inter-industry trade
 Trade involving the exchange
of goods and services produced
by different industries
Intra-industry trade
 Trade involving the exchange
of goods and services produced
by the same industry
Freely floating
exchange rate
A system whereby the price of
one currency expressed in
terms of another is determined
by the forces of demand and
supply
Fixed exchange rate
 An exchange rate system in which
the value of one currency has a
fixed value against other countries.
This fixed rate is often set by the
government
Semi-fixed/semifloating exchange rate
An exchange rate system that
allows a currency’s value to
fluctuate within a permitted
bank of fluctuation
Foreign exchange
market
A term used to describe the
coming together of buyers and
sellers of currencies
Short-term capital
flows
Flows of money in and out of a
country in the form of bank
deposits. Short-term capital
flows are highly volatile and
exist to take advantage of
changes in relative interest rates
Long-term capital
transactions
Flows of money related to
buying and selling of assets,
such a land or property or
production facilities or shares in
companies.
External economic
shocks
Unexpected events coming from
outside the economy that cause
unpredicted changes in AS or AD.
Examples might include rapid rises
in oil prices or a global slowdown
Purchasing power
parity
The exchange rate that equalises
the price of a basket of identical
traded goods and services in two
different countries. PPP is an
attempt to measure the true value
of a currency in terms of the goods
and services it will buy
J-curve effect
 Shows the trend in a country’s balance of trade
following a depreciation of the exchange rate. A
fall in the exchange rate causes an initial
worsening of the balance of trade, as higher
import price raise the value of imports and
lower export prices reduce the value of exports
due to short-run inelasticity of the demand for
imports and exports. Eventually the trade
balance improves. An appreciation of the
currency causes an inverted J-curve effect
The
J-Curve
Figure: The J-Curve
Current account (in
domestic output units)
Long-run
effect of real
depreciation
on the current
account
1
3
2
Time
Real depreciation takes
place and J-curve begins
Copyright © 2003 Pearson Education, Inc.
End of J-curve
Slide 16-55
Marshall-Lerner
condition
States that for a depreciation of
the currency to improve the
balance of trade the sum of the
price elasticities of demand for
imports and exports must be great
than 1
Hedging
 Business strategy that limits the risk that
losses are made from changes in the price of
currencies or commodities
 is an investment position intended to offset
potential losses/gains that may be incurred by
a companion investment. In simple language,
a hedge is used to reduce any substantial
losses/gains suffered by an individual or an
organization.
Hedging strategies
 Forward exchange contract for currencies
 Currency future contracts
 Money Market Operations for currencies
 Forward Exchange Contract for interest
 Money Market Operations for interest
 Future contracts for interest
 Covered Calls on equities
 Short Straddles on equities or indexes
Categories of
hedgeable risk
 Commodity risk: the risk that arises from potential movements in the value of
commodity contracts, which include agricultural products, metals, and energy
products.[3]
 Credit risk: the risk that money owing will not be paid by an obligor. Since credit
risk is the natural business of banks, but an unwanted risk for commercial
traders, an early market developed between banks and traders that involved
selling obligations at a discounted rate.
 Currency risk (also known as Foreign Exchange Risk hedging) is used both by
financial investors to deflect the risks they encounter when investing abroad and
by non-financial actors in the global economy for whom multi-currency
activities are a necessary evil rather than a desired state of exposure.
 Interest rate risk: the risk that the relative value of an interest-bearing liability,
such as a loan or a bond, will worsen due to an interest rate increase. Interest
rate risks can be hedged using fixed-income instruments or interest rate swaps.
 Equity risk: the risk that one's investments will depreciate because of stock
market dynamics causing one to lose money.
 Volatility risk: is the threat that an exchange rate movement poses to an
investor's portfolio in a foreign currency.
 Volumetric risk: the risk that a customer demands more or less of a product than
expected.
Futures market
 Markets where people and businesses can buy
and sell contracts to buy commodities or
currencies at a fixed price at a fixed date in
the future
 is a central financial exchange where people
can trade standardized futures contracts; that
is, a contract to buy specific quantities of a
commodity or financial instrument at a
specified price with delivery set at a specified
time in the future.
Foreign currency
reserves
 Foreign currencies held by central
banks in order to enable
intervention in the FOREX
markets to affect the country’s
exchange rate
Bilateral exchange rate
The exchange of one currency
against another
Effective exchange rate
 The exchange rate of one currency
against a basket of currencies of
other countries, often weighted
according to the amount of trade
done with each country
Single currency
A currency that is shared by
more one country. The euro is
shared by 15 countries in the
European Union
Expenditure-switching
policies
 Policies that increase the price of
imports and/or reduce the price of
exports in order to reduce the
demand for import and raise the
demand for exports to correct a
current account deficit on the
balance of payments
Expenditure-switching
policies can be achieved by
A fall in the exchange rate
Tariff on import
Subsidising export
Expenditurereducing policies
Policies that reduce the overall level
of national income in order to
reduce the demand for imports and
correct a current account deficit of
the balance of payments
Expenditure-reducing
policies can be achieved by
 Raising the level of taxation
 Reducing government
expenditure
 Raising interest rates
Economic integration
 Refers to the process of blurring the boundaries
that separate economic activity in one nation state
from that in another
 is the unification of economic policies between
different states through the partial or full abolition
of tariff and non-tariff restrictions on trade taking
place among them prior to their integration. This is
meant in turn to lead to lower prices for
distributors and consumers with the goal of
increasing the combined economic productivity of
the states.
The degree of economic integration
can be categorized into seven stages
Preferential trading area
Free trade area
Customs union
Common market
Economic union
Economic and monetary union
Complete economic integration
Stages of Economic integration
common barriers in external
relations
activities inside the trade bloc
Trade pact type
goods
(tariffs)
Preferential trade
agreement
Free trade
agreement
Economic
partnership
Common market
Monetary union
Fiscal union
Customs union
Customs and
monetary union
Economic union
Economic and
monetary union
Complete economic
integration
Shared
policies
eliminating barriers for exchange of
goods
(non-tariff)
servi
ces
capit
al
TIFA
BIT,
TIFA
lab
our
mone
tary
fis
cal
dsgoo
Tar
iff
Nontariff
serv
ices
cap
ital
lab
our
Non-tariff barriers
 Things that restrict trade other
than tariff
Trade deflection
 Where one country in a free trade area imposes high
tariffs on another to reduce imports but the imports
come in from elsewhere in the free trade area
Trade deflection
Free trade area
 An agreement between two or more
countries to abolish tariffs on trade between
them
 is a theoretical concept where a trade bloc
whose member countries have signed a freetrade agreement（FTA）, which eliminates
tariffs, import quotas, and preferences on
most（if not all）goods and services traded
between them.
Customs union
An agreement between two or more
countries to abolish tariffs on trade
between them and to place a
common external tariff on trade
with non-members.
Single market
Deepens economic integration from
a customs union by eliminating
non-tariff barriers to trade,
promoting the free movement of
labour and capital and agreeing
common policies in a number of
areas
Economic union
Deepens integration in a single
market, centralising economic
policy at the macroeconomic
level
Monetary union
The deepest form of integration
in which countries share the
same currency and have a
common monetary policy as a
result
Monetary policy
sovereignty
The ability of country to pursue
an independent monetary
policy
Trade creation
Where economic integration
results in high-cost domestic
production being replaced by
imports from a more efficient
source within the economically
integrated area
Trade diversion
 Where economic integration
results in trade switching from a
low-cost supplier outside the
economically integrated area at a
less efficient source with the area
The dynamic effects of
economic integration
 A reduction in monopoly power
 Greater innovation and R&D
 A larger market and economies of
scale
Transaction costs
The costs of trading, which
includes cost of changing
currencies
Stability and Growth
Pact
Limits agreed to public sector
borrowing and national debt
for those EU countries that are
part of the euro area
Automatic stabilisers
Elements of fiscal policy that cushion
the impact of the business cycle without
any need for corrective action by the
government. For example, higher
spending on unemployment benefits
and welfare payments and lower
taxation receipts provide and automatic
fiscal stimulus in times of economic
slowdown
Fiscal transfer
Occur where taxation raised in
one country is used to fund
government expenditures in
another country
Economic
convergence
 The process by which economic conditions in
different countries become similar. Economists
distinguish between monetary convergence and
real convergence. Membership of the euro area
only requires monetary convergence to have
taken place
 is the hypothesis that poorer economies’per
capita incomes will tend to grow at faster rates
than richer economies. As a result, all economies
should eventually converge in terms of per capita
income.
Types of
Convergence
 Absolute Convergence: Lower initial GDP will lead to a higher average
growth rate. The implication of this is that poverty will ultimately disappear
'by itself'. It does not explain why some nations have had zero growth for
many decades (e.g. in Sub-Saharan Africa)
 Conditional Convergence: A country's income per worker converges to a
country-specific long-run level as determined by the structural
characteristics of that country. The implication is that structural
characteristics and not initial national income determine the long-run level
of GDP per worker. Thus, foreign aid should focus on structure
(infrastructure, education, financial system etc.) and there is no need for an
income transfer from richer to poorer nations.
 Club Convergence: It is possible to observe different "clubs" or groups of
countries with similar growth trajectories. Most importantly, several
countries with low national income also have low growth rates. Thus, this
adds to the theory of conditional convergence that foreign aid should also
include income transfers and that initial income does in fact matter for
economic growth.
Optimal currency area
Refers to conditions that need to be
avoid the costs of monetary union.
These conditions include: a high
degree of labour market flexibility,
mechanisms for fiscal transfer, and
the absence of external shocks that
impact differently on different
economies
With trade, Crusoe’s Consumption-Possibilities Curve
（CPC）can lie beyond his Production-Possibilities
Curve （PPC）