Krugman on Chinese mercantilism
My dictionary suggests that mercantilism is governmental regulation of a nation’s economy for the purpose of augmenting state power at the expense of rival national powers. Answers.com says that the term historically refers to policies designed to accumulate bullion, establishing colonies and a merchant marine, and developing industry and mining to attain a favorable balance of trade. China’s trade and exchange rate policies have been a subject of heated controversy for many years and, as we head into a new year, Nobel prize winning economist Paul Krugman launches an attack on Chinese mercantilism which he argues has cost over a million jobs in the USA.
“We know that China is pursuing a mercantilist policy: keeping the renminbi weak through a combination of capital controls and intervention, leading to trade surpluses and capital exports in a country that might well be a natural capital importer. We also know, or should know, that this amounts to a beggar-thy-neighbor policy — or, more accurately, a beggar-everyone but yourself policy — when the world’s major economies are in a liquidity trap.”
Lots in this short paragraph for students:
1/ How can capital controls and intervention affect the value of the Chinese exchange rate?
2/ Using your understanding of the balance of payments, explain how trade surpluses can lead to capital exports. Identify some of the longer-term effects of these capital exports.
3/ Why does mercantilism represent a beggar-thy-neighbour policy? With what consequences for the world economy?
4/ What policies are available for governments wanting to reduce trade imbalances?
Google Wave: Trade deficits and surpluses
We were back on Wave last night considering some of the wider arguments surrounding persistent trade imbalances. Are trade imbalances a problem?
We are hoping that - as more Economics teachers migrate to Google Wave - we will be able to schedule collaborative sessions (typically lasting between 45 to 60 minutes) where we can generate ideas, arguments and perspectives in real time and support eachother’s teaching on chosen topics or issues.
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Guardian’s World Economic Cycle Guide
This is a fascinating time for keeping up to speed with where regions and countries are in their business cycles. The UK seems to be one of the laggards - Stephanie Flanders explores some of the reasons here - whereas the USA is tentatively starting a recovery. And demand and output in many emerging market economies remains strong. Click here for the Guardian’s interactive guide to the world economic cycle.
Sugar prices and production and investment incentives
World sugar prices are close to a 30 year high with values on the Chicago mercantile exchange hovering just under $30c per pound. For countries whose sugar exports account for a large proportion of their export earnings, the steep increase in world prices has brought about an improvement in their terms of trade and - because demand for many foodstuffs is price inelastic, a favourable change in their balance of trade. A good example of this is the African country of Mozambique, a nation almost destroyed by a long running civil war that eventually ended in the early 1990s but which has also been hit in recent years by severes drought hit many central and southern parts of the country, including previously flood-stricken areas. And where half of the population must survive on less than $1 a day.
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Income inequality in the USA
The Economist carries a short feature on the scale of income inequality in the USA and finds that a quarter of America’s total income is earned by the top 1% of the population.
“The concentration of income earned by this top percentile now stands at its highest since 1928. Two-thirds of the country’s total gains in the five years to 2007 accrued to the top 1%, whereas the bottom 90th percentile saw only 12% of the extra income.”
We have been looking at income inequality as part of our study on measuring the standard of living. Wikipedia carries up to date information on measures such as the Gini coefficient for countries where the relevant data is available.
Are the Japanese the latest victims of a strengthening currency?
The Japanese Yen has hit an eight month high vs the US Dollar according to BBC news BBC News Article. This has prompted a lot of hand wringing from the Japanese ruling party and has sent share prices in Tokyo tumbling. But why should having a strong currency against the greenback equate to economic turmoil?
Paul Mason on Economic Aftershocks
Newsnight’s Economics Editor Paul Mason was on fine form last week with a set of short reports on how the economic and financial crisis has affected the UK and Global economy. Both are between five and six minutes long and I showed them to my A2 students as a prompt for discussion and also to an able AS set who are still dipping their toes in the macroeconomic waters! The features allowed us to discuss (at AS level) the inter-connected nature of the world economy (for example the need to re-balance demand and trade between the USA and China) and also to consider the reasons for and consequences of the huge rise in public sector spending and borrowing.
For AS economics I have deliberately left introductory stuff on the circular flow until we have kicked around ideas and arguments about the recession - causes, effects and ways out of the downturn.
Here are the links to Paul Mason’s three video reports from last week:
Aftershock - Impact on the World
Aftershock - Has ideology changed?
What happens when the hose pipe is turned off?
I paid my annual visit to the Edinburgh Fringe last week. The Book Festival provides a welcome antidote to a heavy diet of comedy, live music and theatre and I popped in to hear Larry Elliot (Guardian) Dan Atkinson (Mail on Sunday) Philip Augar (Author) and Paul Mason (BBC Newsnight’s Economics Editor). The first meeting with Elliot and Atkinson was pretty dire, but Paul Mason and Philip Augar were both on excellent form on Tuesday morning. Paul Mason in particular offered some vibrant insights into what is happening both in the United States and also in China.
In the USA you can still buy ‘snag-tooth’ properties in Detroit for less than $1000 using your credit card. Snag-tooth properties is a term coined to describe housing estates targeted by sub-prime lenders where there are huge numbers of boarded up and semi-derelict repossessed houses waiting for a buyer. It was Paul Mason’s luck to be in Detroit and then New York at the epicentre of the drama surrounding the collapse of Lehman Bros a year ago. His book Meltdown is a terrific read and one I am putting on my reading list for our new group of sixth form economists.
Both Augar and Mason doubt whether the evidence of a rebound in activity in the leading economies can be sustained as we head into 2010. The extraordinary macroeconomic policy response involving huge rises in government borrowing, bail-outs and scrappage schemes, ultra-low policy interest rates and extended quanititative easing must inevitably provide a boost to short term production. But the growing evidence that the commercial banks are largely hoarding the extra deposits created by QE is evidence that the banks have not sufficiently re-capitalised or cleaned up their act. A failure to fix the banks is limiting the impact of the monetary stimulus and small businesses across the country are finding lending conditions tightening and paying upwards of twenty times the policy rate.
Interest rates are likely to remain low for a long time to come - UK base rates may stay below 1% throughout the whole of 2010 - but a fiscal retrenchment is inevitable and it threatens to undermine the strength of any recovery. The government borrowing figures are horrendous within a short space of time the cost of servicing a national debt in excess of £1 trillion will take up to 10 per cent of tax revenues.
Philip Augar: Chasing Alpha: How Reckless Growth and Unchecked Ambition Ruined the City’s Golden Decade
Paul Mason: Meltdown: The End of the Age of Greed
Britain’s Got Talent and Behavioural Economics
We are studying behavioural economics in school this week and Tom Aedy one of my AS students thinks he may have spotted some possible asymmetric dominance in the voting for the final of Britain’s Got Talent! Here is his letter to Dan Ariely author of Predictably Irrational.
Truck tariffs and unintended consequences
The USS protects its domestic vehicle market with a twenty-five percent tariff on imported trucks. By contrast, the import tariff on regular automobiles is just 2.5 percent and the tariff on components imported to make trucks is also far less than 25 per cent. Little wonder that foreign companies have over the years made a bee-line for the USA to make trucks and that many car-makers have only put three doors on a SUV so that they can be classified as vans. This guest post by Jim Lawrence on Dani Rodrik’s web site is excellent on some of the unintended consequences of distortionary tariffs.
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