Archive for the 'current account' Category

May 25 2007

China’s Vice Premier talks basic economics

Wu: Large yuan rise would hurt China — Shanghai Daily | 上海日报

China’s Vice Premier Wu Yi defends China’s currency controls in Washington:

The yuan’s value isn’t the cause of the deficit, Wu said yesterday at a
dinner in Washington attended by US Treasury Secretary Henry Paulson
and Federal Reserve Chairman Ben S. Bernanke.

About 85 percent of China’s surplus with the US is from foreign companies
exporting products no longer made in the United States, such as shoes,
she added.

So, America’s trade deficit is not because of a historically weak Yuan, rather because America imports shoes made in China. VP Wu should look more closely at her audience; she’s preaching to the choir with Paulson and Bernanke in attendance; and I doubt they’re swallowing what she’s dishing up. Of COURSE the trade deficit is because America imports “products no longer made in the United States”. But why do they do this? Uhm, could it be because of the historically weak Yuan? Looks like VP Wu could use a refresher in her principles of Macro course.

Now the US is threatening new trade barriers if the Chinese do not allow the Yuan to appreciate more on foreign exchange markets.

“Large scale yuan appreciation will have a negative impact on China’s
economy,” Wu said, adding that trade protection would hurt relations
between the US and China.75 RMB in Shanghai

China’s increasing of the yuan’s flexibility may slow growth and cut into profits in Chinese firms. However, new barriers to trade with its largest trading partner will do the same. China’s liberalization of industry should now be accompanied by a similar liberalization of financial markets. A more balanced current account will allow China’s economy to begin growing at a more sustainable rate and help to allow China’s middle class access to the quality goods they demand from abroad.

Most importantly, American teachers in China will have access to more affordable breakfast cereal and quality coffee, which at current exchange rates cost more than I like to think about.

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May 02 2007

Does free trade really mean lower prices? A debate between two economists much smarter than me

Dani Rodrik’s weblog: Does Free Trade Bring Lower Prices?

Greg Mankiw’s Blog: Does free trade lower prices?

Here’s a very interesting discussion between two Harvard professors (a “diablog” as my IB students and I call it). Greg Mankiw (author of a widely used AP Econ textbook) takes Dani Rodrik to task on his view that countries producing the products for which they have comparative advantage, and trading in a free global market, may actually face higher prices as a result of free trade. This seems to defy what AP Econ students learn about the impact of free trade on domestic product prices.

In our text, we learned that in a particular market in which free trade exists, the world supply curve lies beyond the domestic supply curve, resulting in a lower world price, meaning domestic firms produce less output and sell it at a lower price than they would without trade. This of course would represent an industry in which the country in question is at a comparative disadvantage, and thus is a net importer of the product. Assuming that a particular country will be net importers of certain goods (those for which they have a comparative disadvantage) and a net exporter of other goods (those for which they have a comparative advantage), we may infer that the net result will be lower prices faced by consumers due to all the relatively cheap imports that trade affords. Rodrik, however, argues that in some cases, when a country is a net exporter (as the US is for agricultural products, given its huge comparative advantage in the farming industry), the foreign demand for its domestic output may in fact drive prices paid by domestic consumers up, as foreigners demand more and more of the country’s output in those markets. If the increase in price that results from exporting large quantities of output outweigh the price decreases that consumers enjoy due to cheap imports (think Walmart, folks) then perhaps free trade would result in an overall increase in the price level.

The theory brought forth in the Mankiw/Rodrik discussion goes way beyond AP Economics, but if you’re like me and enjoy pushing your understanding of economics to the edge, these articles just may be within the realm of an AP Econ student’s grasp of the subject! And if this stuff interests you as much as it does me, then you may just consider studying Econ in college! Which reminds me, for those of you who promise to major in Econ in college, I promise to have a pleasant surprise for you the day after our AP exams on the 17th! Stay tuned!

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