Feb 26 2009

An Asian Exodus?

FT.com / China / Economy & Trade – Downturn drives expat exodus from Shanghai

Having recently moved from Shanghai to Zurich myself, I was interested to see this headline in today’s Financial Times.

Korean companies are shipping workers home, cutting off school fees and repatriating wives and children without their menfolk to cut costs. They are the first large wave of expatriates to have begun leaving China’s financial capital as a result of the global economic crisis but their departure raises the prospect of a broader exodus of foreigners who may take investment, skills and job creation opportunities with them.

The press officer of the Korean consulate in Shanghai could not answer questions about the exodus of her countrymen – because her post had just been abolished and she was being sent back to Korea…

Japanese relocation companies, meanwhile, say there has been a marked rise in Japanese families returning home from Shanghai compared with last year and they expect the pace to pick up further during the traditional peak relocation months of March and April.

As Korean and Japanese families pack up and leave Shanghai, the impact is likely to be felt at international schools catering to the expat community in Eastern China. Koreans made up around 15% of the students at Shanghai American School, while other schools in the city had even larger numbers of Japanese and Korean students. In Beijing the exodus is also underway:

The pain has not been limited to Shanghai. A parent with children enrolled in an expensive Beijing international school says most of her daughters’ Korean classmates have left the school almost overnight.

This story reminds me of my own experience as an international school student in the late 1990’s, when the Asian financial crisis plunged Korea’s economy into deep recession. At the time, 30% of my school in Malaysia were Korean students, and in one semester over half of them packed up and moved back to Korea. In one year enrollment at the International School of Kuala Lumpur’s high school fell from 600 students to 420!

One reason the Korean and Japanese economies are struggling is that they are heavily dependent on exports to the rest of the world. With incomes falling and unemployment rising among their trading partners, the effect is amplified in Japan and Korea by significant falls in aggregate demand and GDP due to lower net exports, investment and consumption in the Japanese economy.

According to this article in the FT, the current fall in exports in Japan is the worst in 50 years.

Japanese exports fell 45.7 per cent in January, eclipsing a 35 per cent drop in December and big declines last month for Taiwan and South Korea.

The slide in exports was the steepest since 1957 and highlighted the severe impact of the global slowdown on demand for Japanese products ranging from cars to heavy machinery and electronics. Exports to the US fell 52.9 per cent and those to China were down 45.1 per cent .

Falling demand has forced manufacturers such as Toyota and Sony to cut production and jobs. It has reinforced concerns the economy will suffer another quarter of falling output. Gross domestic product shrank 3.3 per cent in the last three months of 2008, the largest fall in 35 years.

The diagram below provides a graphical representation of the impact of falling exports on Japan’s economy.

Discussion questions:

  1. Some economists believe that recessions are a crisis of confidence. What do they mean by that and how does the situation in Japan seen above reflect this theory?
  2. What is the multiplier effect and how does the fall spending on Japanese exports by the rest of the world result in an even greater fall in Japan’s GDP?
  3. If you were the manager of a Japanese firm facing falling demand from international customers and you had to cut costs, what costs would  you cut in the short-run to remain competitive? What about in the long-run, assuming demand for your products remained weak?

About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

49 responses so far

49 Responses to “An Asian Exodus?”

  1. Jordanon 28 Feb 2009 at 5:24 pm

    It is no surprise that this exodus is taking place in the current financial climate, especially when it is happening in Asia, which has always been known for its exports in a time where export demand is diminishing. With the number of people and the amount of time which is involved, is it really the most effective choice? It seems like a difficult, and almost definatly chaotic solution even given the financial "crisis" which is taking place.

  2. Bjorn Kvaaleon 01 Mar 2009 at 5:05 am

    I agree with Jordan because although it makes sense for China to decrease costs in a period of recession, but wouldn't it be better in the long run to become more effective and decrease costs elsewhere. Seeing that many products made in China and Asia are normal goods, the demand for these goods will decrease in this period of recession, which decrease the export demands. I'm not so sure if it is a good idea to lay off all of these workers, when it could be more beneficial to cut costs by decreasing bonuses given to the high-classed admins in international companies.

  3. Alex Hanon 03 Mar 2009 at 4:12 am

    I don't have much to say about this but first of all, this is sufficiently disturbing for me!! We learn in economics that in a time when the demand for a company's products is low, the company must focus on cutting their costs. Though this is something they must do, what kind of costs they cut is up to them. I agree with Bjorn in that when cutting costs, the act of laying of workers should be the last cost they cut because these people often are so dependent on these jobs. This is one of the supporting arguments for why a bailout for the auto industry was necessary. If the industry were to fail, millions of people would be left helpless. I really hope this financial crisis does not last too long

  4. Dominic McNameeon 03 Mar 2009 at 5:29 pm

    Being part of an ex-pat family its a bit scary to say this but it does make sense to cut back on expat workers. Generally they cost more than a local worker, as the company has to pay for extra things like housing, international schools and flights back home. Assuming a similar quality of work could be found locally it would make little sense for a company to employ ex-pats when their economy is in rescission.

  5. Nicholas Burnhamon 04 Mar 2009 at 8:27 am

    What makes this whole matter worse than it would be for other countries is the fact that Japan is simply an export country. That means that even if people living in japan demand the same quantity and quality of goods than they always do, the country can still be under threat from recession. Dependancy on export trade allows vulnerability to easily spread recession. If any one of the many countries Japan deals with plunges into recession they will demand less from the Japanese economy and decreased demand, if on the right scale, is what leads to recession, so effectively, the recession in any one of the trade partners of Japan could very well spill over into japan itself.

  6. Anneon 04 Mar 2009 at 10:22 pm

    It's not just a Japanese and Korean exodus, but an American and a European and a etc..

    It's a mass exodus of expats away from Shanghai and it is not only happening here but in places like Dubai

  7. Justuson 05 Mar 2009 at 4:31 pm

    This is the dangour of an export nation like Japan, Korea and exporting nations in Europe. In times of recession export will of course break in and unemployment will rise drastically. In Germany for instance the situation is very serious, because already many firms have to face a decrease in exports up to 40%. Especially the car industry is affected: Japan and Germany have so many car companies like Toyota, Volvo, VW, BMW, Daimler, Porsche etc. that when no one wants them anymore they have a big problem. The reason there is an exodus from China can also have to do with protectionism however. This can already be heard elsewhere in Europe "British jobs for British people". The chinese might want to try to give as many jobs to their countrymen, before giving them to foreigners.

  8. Christian Evertzon 19 May 2009 at 11:54 pm

    The Asian exodus as described in that article is a very serious matter. Countries like Japan which are heavily dependent on their exports are extremely suffering in times of an economic recession and therefore Japanese firms especially bring their overseas worker home, because they are even more expensive than a local worker. This can be seen by the fact that many children from ex. pat families attend international schools which are very expensive, yet the firms usually pay for the school fees. However, I think that we will also see that "Exodus" to some extent in Switzerland as well. Many international firms are also located in Zuerich and now decide to bring workers home, in order to reduce costs. Therefore I think that our school will most certainly experience a drop in enrollments for next year as well.

  9. Theresa Mehlon 20 May 2009 at 2:24 am

    Some economists believe that recessions are a crisis of confidence. What do they mean by that and how does the situation in Japan seen above reflect this theory?

    Consumer confidence is one of the determinants of consumption. When people or companies feel that the future economy is going to be bad, they will not spend since they feel like they need their savings. Governments will not invest since they think they need the money to get through this upcomming harsh time.

    If economists annouce that there will be a recession, then companies will react like in the example. They will take their foreign workers home and save everywhere they can since they fear of losing profit in the future.

    What is the multiplier effect and how does the fall spending on Japanese exports by the rest of the world result in an even greater fall in Japan’s GDP?

    If Japanese exports will decrease GDP will go down since less is demanded. If less is demanded then too much will be supplied and the price will fall which will lead to higher unemployment, which will cause even less consumption.

    As even less is consumed less is demanded and the circle starts again… This is the multiplier effect!!

    If you were the manager of a Japanese firm facing falling demand from international customers and you had to cut costs, what costs would you cut in the short-run to remain competitive? What about in the long-run, assuming demand for your products remained weak?

    In the short run wages will be cut, since if one wants to remain competative that is the easiest way to cut costs. But in the long run wages cannot be cut more and more so workers have to be cut, wich will lead to a rising unemployment

  10. Nicholas Burnhamon 20 May 2009 at 4:59 am

    I think the multiplier effect has more to do with the slope of the SRAS than a cycle into recession. When a government spends money to boost the AD, the change in GDP is greater than the amount spend by the government. It's more likely a cycle upward, but maybe you are right. The consumer confidence is dropping in this case because of a fall in investment. Investment is a determinate of AD, and when it falls, the whole AD slope moves inward, causing falls in GDP and price levels

  11. Alex Hanon 21 May 2009 at 6:15 am

    As "Anne" said, it's a global exodus. This can be rooted back to the recession. As countries become poorer ie. their national incomes pl, they try to decrease imports and increase exports because that will increase AD and reduce unemployment. So countries are constantly disagreeing. Country A wants to export goods to Country B to increase its GDP but Country B doesn't want to import from Country A because its GDP falls and Vis versa. So these import export relationships between countries become weak and people retreat back to their homes.

    I think an expansionary demand side fiscal policy might work to save the poor workers who have to leave their lives and move back. As taxes reduce and G spending is increased, national increases as well as consumer confidence which leads to an increase in AD. To cope with this increase in AD, firms will be determined to increase their output so they will increase investment. This will open more jobs and close the recessionary gap as well. Before you know it, AD had increased with the multiplier effect. And finally, as people in all countries begin to have higher incomes, they will start to demand foreign products which means slowly, the imports and exports will restore itself.

    Of course many countries may choose not to do this because they could go into dept.

  12. Gabrielon 22 May 2009 at 7:23 pm

    Confidence is one of the main determinants of consumption and therefore also a determinant of Aggregate Demand. If consumers are not confident because of low incomes and high prices then they will not spend as much an will tend to save more. Japanese people are also not confident in the economy and are forced to cut back in spending. A fall in Japanese exports will result in a greater result in GDP because of the multiplier effect. A decrease in net exports will lead to a decrease in AD. This will then lead to a decrease in investement and therefore a decrease in SRAS. This will eventually lead to unemployment. In the short-run firms might be able to lay off some workers or lower wages but they will have to wait longer to get rid of land or capital to reduce costs.

  13. Laura Perezon 22 May 2009 at 8:46 pm

    1) Confidence in the economy is an important factor and the lack of it causes a chain of reactions that eventually leads to a decline in economic growth and if it's great enough, recession. Confidence in the economy are determinants for both investment and consumption which drive aggregate demand. 'The effect is amplified in Japan and Korea by significant falls in aggregate demand and GDP due to lower net exports, investment and consumption in the Japanese economy.' As stated in the article Japan is experiencing serious recession partly due to falls in investment and consumption which are low because people have no faith in the economy and do not want to invest when demand is falling.

    2) The multiplier effect is when an input of government spending into the economy results in a greater increase in aggregate demand than the initial government spending. This concept can be seen currently in the Japanese economy because a decrease of incomes abroad has caused a major fall in exports which in turn has triggered a chain of reactions that has eventually resulted in an even farther drop in aggregate demand. A fall in exports has caused firms to reduce investment and households to decrease consumption and save up instead. This all ties in with the previous question dealing with confidence and how the lack of it leads to one thing, which leads to another and eventually the economy is driven to recession.

    3) The short run is also known as the fixed wage and price period so if my firm was facing problems and I needed to cut costs I would fire workers since they are not willing to accept lower wages. In the long run wages would get adjusted to lower prices as unemployment rises and people get more desperate for jobs.

  14. Rocio Perezon 23 May 2009 at 5:35 pm

    Confidence has a huge impact on investment and consumption, as the Japanese predict a bad outcome for their trading partner's economies, their confidence decreases.

    Japan who heavily relies on exports is affected by the sudden decrease in aggregate demand for these, forcing firms to cut back on costs which directly affects unemployment and GDP. Households and firms confidence in the economy are also affected, causing a decrease in AD.

    In the short run during the fixed plant period I would cut back on workers which is what is happening right now as a result of the recession. In the long run, during the variable plant period, I would shut down factories or possibly try to adapt to whatever is in demand in the economy today, if possible. If it is too costly though then I would have no choice but to shut down.

  15. Benji Rosenon 24 May 2009 at 12:16 am

    It seems that all the obvious points have been made concerning the discussion questions, yet most people have tried to avoid the multiplier effect question. The multiplier effect is when a change in a factor of aggregate demand has reprocussions greater than just the immdediate change in demand. It multiplies since the money is re spent, and will mulitply any injection/change by the quotent of 1 and the marginal leakage rate (percent of income households save rather than spend). This has a flip side though, since if there is a big leakage in the economy, then aggregate demand will decrease, and this shock in aggregate demand (due to a decrease in demand for exports) will also have a multiplier. The money not spent, will not be spent again, and again and again. This will plunge their economies down even further, especially since the marginal propensity to consume will decrease dramatically as people loose confidence in the economy.

  16. Aleya Thakur-Weigoldon 24 May 2009 at 10:29 pm

    Consumer confidence is a very important factor in a recession and to economic growth. Consumer confidence is the main determinant of consumption and investment and therefore has a great impact of aggregate demand. As soon as consumer confidence decreases aggregate demand decreases causing economic growth to slow down and in the worst cases causing an economy to go into a recession.

    if I were a company and in need of cutting my costs, I would cut back on workers in the short run, which is also known as the fixed wage period, because they would not be willing to accept any lower wages. In the long-run, also known as the variable plant period I would close some of my factories and just as Rocio said, try and adjust my products to the wants and needs of the consumer.

  17. Bastion 25 May 2009 at 2:27 am

    Asia is well known for its exports, especially China and Japan. Because consumer confidence is decreasing around world especially Europe, less firms and households are consuming and investing. This leads to a decrease in AD and largely decreases the amount of imports for most European countries. Because Asia is the "export capital" mostly Japan and China are suffering from a large decrease in net exports, which causes AD to fall in Asia. there are very little exports coming out of Asia now, compared to its peak, in the short run a possibility to increase demand again, would be to lay off workers who are not willing to accept lower wages in these crisis times. In the long run the price level would decrease as well as employment, meaning lower wages would attract the unemployed.

  18. Maren Rackebrandton 25 May 2009 at 6:22 am

    Recessions are caused if aggregate demand falls and this can occur through a confidence crisis or bad future expectations. If the confidence and future expectations are bad than the people won't consume or invest and therefore aggregate demand falls leading to a recession. Everybody is more likely to save and that is what happened in Japan. They want to bring their workers back into the country so their costs are reduced.

    Multiplier effect: the government spends money and the increase in aggregate demand will actually be greater than the amount of government spending. Japanese exports fell and therefore the Japanese had less money to spend, decreasing consumption and investment in the economy to fall and thus leading to an even greater fall in GDP.

    As Laura said, the short run is the fixed wage period, so in the short run the wages cannot be lowered. Therefore firms have to lay of workers. In the long firms can adjust by lowering wages.

  19. Marc Lemannon 25 May 2009 at 3:21 pm

    Christian, although some students at ZIS may leave because companies have pulled back their parents, the waiting list is so large that the enrollment size will not suffer a decrease. As for international schools that have many Asian students, a decrease may be very apparent. Since the Japanese and Koreans rely heavily on exports, a fall of international revenue will force them to cut costs not to lose profit. The fastest short term solution is cutting down the workforce. This may occur, but probably to a greater extent within the country, and not the international workforce. Not to lose good workers that are abroad, the cheapest is to bring them back to the country and to send the children to a local school.

    Perhaps the company doesn’t even have to cut costs, but lacks the confidence that they will do well in the future. This will also cause them to cut costs. As workers are fired, the confidence of everyone decreases, causing people to consume less. This fall in GDP would be accelerated by the multiplier effect, because as the GDP falls, more people begin saving, companies invest less, and the whole economy begins a downward spiral, causing an even greater fall in GDP.

  20. Masaya.echl.f09on 07 Mar 2010 at 3:45 pm

    Some economists believe that recessions are a crisis of confidence. What do they mean by that and how does the situation in Japan seen above reflect this theory?

    Some economists believe that recession are a crisis of confidence because the consumer’s confidence is a determinant of aggregate demand. When the consumers sense the danger in the upcoming recession, they tend to tighten their wallets and become passive in consumption. This theory reflects the situation in Japan because as the people begin to see the reduced demands in export, they fear the impending recession and begin to save money to live through the harsh time.

    What is the multiplier effect and how does the fall spending on Japanese exports by the rest of the world result in an even greater fall in Japan’s GDP?

    The multiplier effect is when the final increase in aggregate demand becomes greater than the actual amount of spending. The fall spending on Japanese exports by the rest of world results in an even greater fall in Japan’s GDP because since Japan’s economy is export-based, all the large corporations exporting their goods will experience a reduced income. When their income is reduced, they must reduce variable factors such as labor, quantity of production, etc to maintain operating at a reasonable level.

    If you were the manager of a Japanese firm facing falling demand from international customers and you had to cut costs, what costs would you cut in the short-run to remain competitive? What about in the long-run, assuming demand for your products remained weak?

    If I were the manger of a Japanese firm facing falling demand from international customer and I had to cut costs, I would reduce the quantity of production and cut labor cost by laying worker off. These two factors are most likely to be chosen by any manager because these are variable factors of production, costs that vary with output. In the long-run, it would basically be the same as the short run but fired workers would eventually start willing to work for low wages because national price level have dropped.

  21. Masaya.echl.f09on 07 Mar 2010 at 3:49 pm

    @Maren Rackebrandt

    In regards to your answer to question three, the firm adjusting to lower wages can be tied into the concept of neo-classical LRAS. When the demand falls, the price level goes down. Though initially workers would be unhappy of the low wages at a relatively high price level, once the demand falls, the price level is fixed and workers will soon regain their jobs. In effect, output would increase because there would be more workers at the firm to produce more output. =self-correction

  22. Trevor.echl.f09on 08 Mar 2010 at 12:44 am

    What economists mean by saying “a crisis of confidence” is that recessions and, therefore, drops in aggregate demand are caused by lack of confidence whether it be on the parts of consumer, investors, or maybe even the government. Japan is a good example. One of the reasons their recession is so tough is because investors don’t see the nation as a good place to keep their money anymore. In addition, Japanese citizens are saving their money more because of the serious plight that the nation finds itself in.

    The multiplier effect is the concept that explains how $1 dollar or other currency injected into the economy will yield much more than that after it has parts of it have been spent and saved over and over. The money that other countries were spending to purchase these goods is money that would have gone to the firms who would’ve given some of that money to its workers. Those workers would’ve spent their money on something else, giving that new person the money. This cycle would continue, but instead, it’s broken off by the steep fall in exports.

    In the short-run, I would cut worker’s wages. This would be the only short-term solution that could work for the time being. If this situation became a long-run one, I would probably begin laying off employees and finding other ways to downsize.

    Trevor Tezel

  23. Trevor.echl.f09on 08 Mar 2010 at 2:04 am

    Masaya,

    I was just a little confused on your definition of the multiplier effect and what that’s all about. I see it as more of the output that is gained from the input of every monetary amount. And I think we also differ on the subject of the actions we would take if we were experiencing a drop in the demand for our product. Just cutting back the quantity produced would seem to have little effect because the main costs are still present. One other possibility could be to reduce the amount of constant payments that have to be made by closing such things as factories.

    Trevor Tezel

  24. sara.echl.f09on 08 Mar 2010 at 6:01 am

    1. Confidence is one of the main determinants of consumption and therefore also a determinant of Aggregate Demand. If consumers are not confident because of low incomes and high prices, then they will not spend as much and will tend to save more. Japan is experiencing serious recession due to falls in investment and consumption which are low because people have no faith in the economy and do not want to invest in it when demand is falling.

    2. The multiplier effect is when an input of government spending into the economy results in a greater increase in aggregate demand than the initial government spending. Japan’s economy relies mostly on exports meaning all of the companies exporting goods will have a reduced income due to the fall spending. When their income is reduced, the companies must also decrease their costs such as labour and quantity of production to make sure they don’t lose money.

    3. If I was the manager of a Japanese firm facing falling demand,I would do the same as many managers do and start to cut down employees’ wages and quantity production. If the demand didn’t increase in the long-run, I would start to lay off workers to decrease the company costs even more.

  25. sara.echl.f09on 08 Mar 2010 at 6:04 am

    Trevor,

    I agree with your idea about first cutting the wages in the short-run and only starting to lay workers off in the long-run. During that time the company might get back on its feet and then the wages can be increased again. Also, a lot of workers might quit to try and find better jobs when the wages are decreased, which also decreases costs.

    Sara

  26. Mattea.echl.f09on 09 Mar 2010 at 5:19 am

    1. Some economists believe that recessions are a crisis of confidence. What do they mean by that and how does the situation in Japan seen above reflect this theory?

    By a crisis of confidence, economists mean that consumers and investors no longer feel safe in investing their money. Japan is a good example of this, as consumers who don't feel confident in their incomes will reduce consumption, decreasing aggregate demand.

    2. What is the multiplier effect and how does the fall spending on Japanese exports by the rest of the world result in an even greater fall in Japan’s GDP?

    The multiplier effect explains how one dollar spent in the economy can have a larger effect on economic growth. In Japan, exports have decreased by a certain amount. The firms who are losing this money are then not paying as much in wages to their workers, who are in turn not spending it in consumption. This means that the fall in exports has a greater effect throughout the economy.

    3. If you were the manager of a Japanese firm facing falling demand from international customers and you had to cut costs, what costs would you cut in the short-run to remain competitive? What about in the long-run, assuming demand for your products remained weak?

    Most managers will begin by cutting employee benefits and wages. In the long term, however, increasing product quality is likely a better option as this will lead to increased demand.

  27. Jacob.echl.f09on 09 Mar 2010 at 5:23 am

    1. When they say this, many times they are alluding to investment. When confidence in investment goes down, then the value of the amount of currency goes down and it inflates prices, causing a bigger burden on the consumer. In the case of Japan, due to the slow global economy, many countries lost confidence in Japanese investments. This caused a fall in exports into Japan which forced them to cut jobs. With the inflated economy and the need to cut jobs, consumption lowered and the emigration has only made it worse.

    2. The multiplier effect is when an outside source causes a domestic source to be lowered by a multiplier. In this case, other countries are buying less from Japan and as a result Japan is producing less. Japan is mostly export based, so when fewer countries are willing to spend, Japan is not producing as much as they did before because now there is a surplus. Due to the multiplier effect, this surplus lowers Japan’s GDP because Japan is producing less.

    3. The easiest would be workers. By cutting say 100 workers, one cuts costs in salaries and benefits without hurting output too much. Especially in Japan where there is likely a surplus since fewer countries are importing from Japan. After a while, in the long run, I could make cuts in factories if the demand is still bad, and in reality I might just shut down before things get worse. Maybe start up again when things are better.

  28. Mattea.echl.f09on 09 Mar 2010 at 5:23 am

    Sara,

    Would you really say that cutting employees is the best way to reduce long term costs? As you cut employees, you also lose production potential. This would decrease your long-term profits. I'm sure the ratio of decreased profits from cutting employees and the money saved from cutting employees differs with each firm, but couldn't a firm be better served by increasing efficiency and product quality? The best way to increase demand is to make your products more appealing; rather than cutting costs, it could be better to increase profits in this way.

  29. Jacob.echl.f09on 09 Mar 2010 at 5:28 am

    Mattea,

    If the global economy is not stable enough for countries to have faith in investment, I don't think improving quality will do much to help demand, though that is a good thought. That may actually raise costs in the short run but if quality is raised enough the slight increase in demand might overcome it, though it's doubtful.

  30. Marrissa.echl.f09on 09 Mar 2010 at 5:34 pm

    I believe that in an economy, if confidence of an investment goes down then the investments in currency tend to fall with it, leaving the consumers in a problem. Even if people living in Japan demand the same quantity and quality of goods than they always do, the country can still be under threat from recession. Other countries see this lack of confidence and end up not taking in the Japanese investments because its a slow Global Economy. This causes the Japanese Large companies and Firms to Start cutting Jobs, and as long as consumers don’t feel confident in their incomes, they will reduce consumption, thus decreasing aggregate demand.

  31. Marrissa.echl.f09on 09 Mar 2010 at 5:39 pm

    Jacob, I agree with your assumption on cutting of workers. The only issue I See arising is that even though cutting off 100 workers seems fine in benefiting a company and getting out of an economic crisis, yet there are two ways to look at this. In order to Have a company working up and fully functional, the amount of workers need to be at a reasonable amount and any less, like you said, maybe the factory will have to shut down. In all hope if Recession bets better, the factories and such could start back up.

  32. Chamonix.echl.f09on 09 Mar 2010 at 10:20 pm

    The economists who call this situation "a crisis of confidence" mean that fear and uncertainty are dissuading people from investing and consuming which makes the recession worse. This is seen in Japan when families are afraid of losing their incomes and therefore refrain from buying.

    The multiplier effect is a phenomenon in which a small amount of spending creates economic growth greater than the amount spent throughout the economy. As other nations are not buying Japanese exports, Japan does not have money multiplied throughout its economy and therefore is not growing economically.

    If unions allowed it, I would cut the wages of workers and perhaps lay off some workers to reduce short-run costs. In the long run I would be willing to work to create a better-differentiated product that might sell better. If I could not afford this investment, I would shut factories.

    Chamonix

  33. Chamonix.echl.f09on 09 Mar 2010 at 10:25 pm

    Mattea,

    I agree that in the long-run investing in creating quality products is the best option for surviving a recession. But in your response to Sara, you seemed to say that it was a good option in the short run. I am wondering how you think that a firm struggling in a recession could find research and development money? Where could cuts be made that would allow for this.

    Great post–thanks for raising these interesting questions!

    Chamonix

  34. marcelo.echl.f09on 10 Mar 2010 at 5:29 am

    Mattea,

    But if you are actually struggling with your present costs, and demand keeps decreasing, which means that you will lose even more, where will you get the money to improve the quality of your products from? Maybe you mean that although demand decreases, you still have spare money to improve the quality… But what if your company is dependent on investors, who suddenly stop investing? You might have a problem there…

  35. marcelo.echl.f09on 10 Mar 2010 at 6:13 am

    1. Some economists believe that recessions are a crisis of confidence. What do they mean by that and how does the situation in Japan seen above reflect this theory?

    As aggraegate demand falls, consumers and investors start wondering whether their investments are being wise or not. As they lose confidence in the market, they stop investing and consuming, worried that they might be naively losing their money. As a result, the recession gets worse. This can be indeed seen in Japan, where consumers are no longer consuming, since they do not feel their incomes are enough, and fear the recession.

    2. What is the multiplier effect and how does the fall spending on Japanese exports by the rest of the world result in an even greater fall in Japan’s GDP?

    The multiplier effects illustrates how a little amount of money spent on the normal flow of the economy, can later be reflected by a much greater amount, creating economic growth. Thus, as exports sellings have decreased, inputs are lower, thus causing the fall in GDP.

    3. If you were the manager of a Japanese firm facing falling demand from international customers and you had to cut costs, what costs would you cut in the short-run to remain competitive? What about in the long-run, assuming demand for your products remained weak?

    At first, in the short-run, although I feel ashamed by saying it, I would indeed lower wages of workers, and lay off some. However, if this does not work, and demand keeps decreasing, I would shut down factories, indeed.

  36. Dennis.echl.f09on 10 Mar 2010 at 7:33 am

    1. By crisis of confidence, some economists mean that the confidence of the consumer is a determinant of aggregate demand. The actual determinant of AD is consumer spending, but the level of confidence a consumer has, which is effected by either a recession or economic boom, most definitely determines at what level they will be spending.

    2. The multiplier effect is when a certain amount of money injected into an economy produces a

    greater amount of economic growth than would have been accounted for with that particular amount of money. Japan's lack of the multiplier effect is their downfall because surrounding countries refuse to purchase their exports and are therefore not injecting money into the Japanese economy.

    3. In the short run, I would slowly minimize costs by cutting wages of workers and in the long-run, I would consider firing workers and possibly cutting down on production.

  37. Dennis.echl.f09on 10 Mar 2010 at 7:45 am

    Marcelo,

    I like how you worded your response to number one insomuch as that it was very understandable how a loss of consumer confidence spurs a recession and pushes something that wasn't necessarily so bad right over the deep end. And on number three, I agree with you, it would be pretty tough to have to tell people that work for you that you will be lowering their wages.

    -Dennis-

  38. Ralph.echl.f09on 15 Mar 2010 at 3:32 am

    1. Some economists believe that recessions are a crisis of confidence. What do they mean by that and how does the situation in Japan seen above reflect this theory?

    A crisis of confidence is when the consumer starts to doubt the state of the countrys economy. I believe that Dennis has pointed out correctly that it affects the aggregate demand. This doubt will cause less consumers spending.

    2. What is the multiplier effect and how does the fall spending on Japanese exports by the rest of the world result in an even greater fall in Japan’s GDP?

    The multiplier is the amount of money pumped into the Japanese economy, without other countries buying Japanese products. Without this demand, supply must drop to avoid business making major losses and not being competitive anymore. As well as reducing supply cutting jobs is a very easy option and most countries will do this. The loss of jobs will cause the GDP to drop.

    3.If you were the manager of a Japanese firm facing falling demand from international customers and you had to cut costs, what costs would you cut in the short-run to remain competitive? What about in the long-run, assuming demand for your products remained weak?

    I would reduce the productivity of the business and produce less goods and lay off employees as the business would not be running efficiently or reduce wages temporarily. A business must run effciently to be competitve over the long term. Harsh as it is!

  39. Catherine.echl.f09on 15 Mar 2010 at 8:56 am

    1.) In a recession, people feel more inclined to protect their money, like through savings. For example, people will cut back on investments and unnecessary expenditures. In Japan, people reduce their consumption of goods in order to save money.

    2.) The multiplier effect refers to the impact that each dollar that is spent has on the economy. Generally, a dollar spent in the economy has a greater impact on the economy than its worth would suggest. A while ago, I heard about the recycler effect, which argues that (and I am not sure if my numbers are entirely correct here) one dollar spent is worth approximately 13 dollars to the economy. When spending falls on Japanese exports, wages in Japan will decrease, spending by the workers will decrease, etc. As a result, the GDP falls.

    3.) In the short-run, I would decrease my number of employees as well as individual wages. I would also try to invest in more productive machinery that operated at a lower cost. In the long-run, I would attempt to come up with an extraordinarily brilliant way to differentiate my product, and make it more appealing to potential customers.

  40. Catherine.echl.f09on 15 Mar 2010 at 9:02 am

    Hey Marrissa,

    In your response, you talk a lot about confidence in the market. I agree with you on this idea. In some of the greatest recessions – like the one that occurred in the U.S. in the 1920s – one of the initial responses was a complete loss of confidence. People withdrew their shares in the market, and therefore it crashed. I think it is important to remember that markets fluctuate, and that a recession does not always imply that investors should immediately withdraw shares. Sometimes, it’s a lot more beneficial to the market to ride out the storm.

    – Catherine

  41. Meiling.echl.f09on 16 Mar 2010 at 7:27 pm

    1. When economists say that recessions are a 'crisis of confidence', they mean that suspicion or speculation over the state of the economy by one group can trigger a chain reaction across an entire population, which, in the case of the Wall Street Crash, can result in millions of people trying to sell their shares, and cause a recession. Confidence is a very important in determining the level of aggregate demand, as the rate at which people consume and invest depends a lot on how confident people are in the well-being of the economy. During a recession a vicious cycle of destruction occurs, created by a lack of confidence, as exemplified in the article – 'the effect is exemplified in Japan and Korea by significant falls in AD and GDP due to lower net exports, investment and consumption in the Japanese economy.' This is because people lack faith and confidence in the economy, and therefore do not wish to invest when aggregate demand is falling.

    2. The multiplier effect is the theory that an initial change in aggregate demand causes a change in aggregate output for the economy that is a multiple of the initial change. The multiplier effect is evident in the case of Japan; falling incomes in other countries causes a decrease in demand for Japanese imports, and because Japan is an export dependent country, this will cause AD to decrease as firms reduce investment and people reduce consumption. This shift in AD will result in a fall in GDP, whose cost is far greater than the initial sum lost – the multiplier effect.

    3. If I were the manager of a Japanese firm facing falling demand from international customers, I would cut labor, because it is usually the most expensive factor of production. I know that this would not be beneficial in the long run, because if many firms laid-off workers, then unemployment would increase and consumption decrease, and AD would shift further to the left. However, in the long-term, because many firms are likely to do this, then I think that people would be willing to work for lower wages, because of the falling price level, so I would take the opportunity to hire skilled labor that would be more expensive.

  42. Meiling.echl.f09on 16 Mar 2010 at 7:32 pm

    Dear Catherine,

    1. I like your idea about investing in more productive machinery. However, I think that in uncertain economic times many firms would be unwilling to take that risk as they could not be sure that it would pay off, and would also increase their chances of bankruptcy. So I think the government, during these periods, should consider giving R&D grants to firms so they can invest in machinery to be more productive. This would drive the prices of their goods down.

    2. Like you, I also think that it is better to ride out the storm, as cyclical fluctuations are a part of any market economy and aren't completely unavoidable. Again though, there are lots of people who try and speculate on the stock-market and try and make lots of money by short-selling and so on, who make money by trying to avoid the storm, so to speak, and it can sometimes be these people who trigger a crisis of confidence, which can in turn exaggerate the effects of the recession.

  43. elijah.echl.f09on 18 Mar 2010 at 1:45 am

    1. The idea of a crisis of confidence is that there is no real economic instability but merely panicky investors who spot something small or through regular market transactions begin dumping stock leading to other seeing the same and following. This sets up an entire pattern in which no one believes in the economy and everyone collectively tanks it when there is no real issue in the first place. The situation in Japan can be seen to reflect this as Japan's economy has not be substantially dented, nor has the world situation changed that much. Rather response to a small and natural downturn ended up in people panicking and making it worse. In the graph above for example, the initial drop to AD 1 is logical based upon natural market fluctuation whereas AD 2 is based up consumer panic.

    2. The multiplier effect is the effect in which one small action can be multiplied by people just naturally following along. For example some starts selling stock because they think that the stock is peaking. Others soon start thinking the same thing worrying that they will miss out on their chance to cash in on the program. Soon enough everyone is selling and the stock or product is worth nothing and a depression is entered. It is the effect that allows a crisis of confidence. The fall on spending on Japanese exports by the rest of the world results in the fall in Japan's GDP by this effect because as people begin buying less from Japan not only do they lose direct income then their citizens question the economy and begin saving and stop spending which can lead to farther economic losses.

    3. Assuming I was a manager of a Japanese firm the short term costs I would look to cut would be those that I could either buy back cheaply later if necessary, or those with the least amount of investment. In short labour. There are always qualified people looking for jobs, especially in a bad economy, and as such you can easily afford to cut wages or sack your employees entirely without fear of losing them forever. Thus this is a wise area to cut. Beyond that for long term cutting ultimately it makes sense to cut production to raise the price a bit higher and then just hold with lower numbers of workers. Overall the market has contracted and the only thing to do is scale down the firm as well.

  44. elijah.echl.f09on 18 Mar 2010 at 1:48 am

    Meiling

    I find it interesting in your response to question three that you suggest using the opportunity to hire skilled workers. While I can see that being valuable considering a long term contraction in the market doesn't it make sense to cut costs and then keep them low or reduce production some how? Assuming there simply isn't as much demand sometimes it can make sense to limit supply.

  45. Armando.echl.f09on 24 Mar 2010 at 4:15 am

    As aggraegate demand falls, consumers and investors start wondering whether their investments are being wise or not. As they lose confidence in the market, they stop investing and consuming, worried that they might be naively losing their money. As a result, the recession gets worse. This can be indeed seen in Japan, where consumers are no longer consuming, since they do not feel their incomes are enough, and fear the recession.

    The multiplier effects illustrates how a little amount of money spent on the normal flow of the economy, can later be reflected by a much greater amount, creating economic growth. Thus, as exports sellings have decreased, inputs are lower, thus causing the fall in GDP.

    If I was the manager of a Japanese firm facing falling demand,I would do the same as many managers do and start to cut down employees’ wages and quantity production. If the demand didn’t increase in the long-run, I would start to lay off workers to decrease the company costs even more.

  46. Armando.echl.f09on 24 Mar 2010 at 4:20 am

    Hey Marcelo,

    I think that your decision of finally closing down the factory is the safest and the wisest, since it would be quite pointless to keep losing money.

  47. Laura Yilmazon 31 Mar 2010 at 1:01 am

    1. The idea of a crisis of confidence is that there is no real economic instability but merely panicky investors who spot something small or through regular market transactions begin dumping stock leading to other seeing the same and following. This sets up an entire pattern in which no one believes in the economy and everyone collectively tanks it when there is no real issue in the first place. The situation in Japan can be seen to reflect this as Japan’s economy has not be substantially dented, nor has the world situation changed that much. Rather response to a small and natural downturn ended up in people panicking and making it worse. In the graph above for example, the initial drop to AD 1 is logical based upon natural market fluctuation whereas AD 2 is based up consumer panic.

    2. What is the multiplier effect and how does the fall spending on Japanese exports by the rest of the world result in an even greater fall in Japan’s GDP?

    The multiplier is the amount of money pumped into the Japanese economy, without other countries buying Japanese products. Without this demand, supply must drop to avoid business making major losses and not being competitive anymore. As well as reducing supply cutting jobs is a very easy option and most countries will do this. The loss of jobs will cause the GDP to drop.

    3. The easiest would be workers. By cutting say 100 workers, one cuts costs in salaries and benefits without hurting output too much. Especially in Japan where there is likely a surplus since fewer countries are importing from Japan. After a while, in the long run, I could make cuts in factories if the demand is still bad, and in reality I might just shut down before things get worse. Maybe start up again when things are better.

  48. Laura Yilmazon 31 Mar 2010 at 1:03 am

    marcelo,

    i dont think the right decision would be closing down the factory as such. You would be making so many losses. Instead of trying to recover, you would making your situation way worst.

    Laura

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