GDP per Capita: 1600$

Gini Index: 39.4

Population Growth rate: 1.855%

Dependency ratio: 76

Unemployment rate: 11% (2002)

Underemployment rate: n/a

When the government gives a subsidy to domestic producers, the domestic supply curve shifts downwards from S1 to S2. S2 represents the domestic supply with the addition of the subsidy. The price to consumers remains the same but imports will fall while domestic production will increase. Though the overall quantity supplied does not increase in terms of world supply, the ratio of imports to domestic changes.

The diagram above depicts an increase in supply of the yen in terms of USD. Factors such as increased interest rates abroad, like the US, could have led to an increased supply of Japanese yen. The increase in supply from S1 to S2 results in a depreciation of the currency (Price point P1 moves down to P2).

China has an absolute advantage in the production of both shoes and cloth. It can produce more of both than India with the same factor inputs. However, India has a comparative advantage in producing shoes, since they only give up 2.5 meters of cloth for each pair, whereas China gives up 4 meters of cloth. China should specialize in cloth and India should specialize in shoes.

This diagram illustrates the supply of paper in the European Union. In this case, the European Union is importing paper from China. Because there are imports, there is a kink in the supply of paper. The quantity supplied by the EU is represented by 0 to Q1 whereas the quantity supplied by foreigners or, in this case, China, is Q1 to Q2.

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

Absolute advantage - an instance where a country is able to produce more than another country using the same means of production.

Comparative advantage – an instance where a country is able to produce at a lower opportunity cost than another country.

Free trade – international trade that takes place without any trade barriers.

Tariff – a tax that is placed upon imported goods to protect local companies from international competition and to generate revenue for the government.

Quota - a limit that is placed on the amount of imported goods and services that can enter a country.

Subsidy – money paid by a government to a firm which is done to encourage the output of the firm and also to give it an advantage against firms from overseas until it can compete on the international markets.

Balance of payments – the value of all payments made between the residents of one country with the residents of another country over a given period of time.

Balance of trade – the revenue received from the exports of goods with the expenditure on the imports of goods removed over a given period of time.

Current account – measure of the flow of funds from trade in goods and services including profit, interest, dividends, foreign aid, grants, and remittances.

Capital account – measure of the buying and selling of assets between countries. These assets that are bought and sold are separated into assets that show ownership and assets that show lending.

Current account surplus – a situation that exists when the revenue from the export of goods and services and income flows included is greater than the expenditure on the import of goods and services including income flows over a given period of time.

Current account deficit - a situation that exists when the revenue from the export of goods and services and income flows included is less than the expenditure on the import of goods and services including income flows over a given period of time.

Marshall-Lerner condition – a condition which states that a depreciation or devaluation of a currency will only result in an improvement in the current account balance if the elasticity of demand for exports and the elasticity of demand for imports is more than one.

J-curve – theory that suggests that even if the Marshall-Lerner condition is fulfilled, a depreciation or devaluation of a currency will lead to a further worsening of the current account deficit before long term improvement occurs.

Exchange rate – the value of a currency expressed in the terms of another currency.

Fixed exchange rate – an exchange rate system where the value of a currency is fixed to either the value of another currency, the average value of a group of currencies, or to a commodity.

Floating exchange rate – an exchange rate system where the value of a currency is determined by the demand and supply of the currency on international markets.

Depreciation – fall in the value of a currency in terms of another currency in a floating exchange rate system.

Appreciation – rise in the value of a currency in terms of another currency in a floating exchange rate system.

Devaluation – fall in the value of a currency in a fixed exchange rate system.

Revaluation - rise in the value of a currency in a fixed exchange rate system.

The Chinese currency is a fixed rate that the government keeps it constant to currencies in other countries. This continued up until 2005, when the Chinese currency was said to be kept artificially low due to their monetary policy. Since the price of the Chinese RMB is much lower compared to the U.S dollars, it can flood out the dollars out of the market.

The diagram shows how there is a shift in supply in the Chinese Currency. The increase in supply is shifted from Q1 to Q2, and would decrease the price form P1 to P2.

The articles explain how China has agreed to manipulate its currency. However China still own millions of debts from the US, and this devalues their Chinese RMB, especially for the US. Yet China is not the only country that is manipulating their currency. So are many other countries, and this is what it’s leading to the currency war. Currency war is when number of countries either strengthen or weaken the currency, and is often functions like a chain reaction, since one country’s currency is relative to other country’s currencies.

Recently there were news telling how the Chinese government is on their attempt to devaluing their RMB currency. China has been motivated to devalue their own currency, due to the rising value of their RMB. As of consequence, we can see how China is facing currency devaluation.

Historical trends: 1960-1991 showed a very steady maintenance of the current account at around zero. 1991-2006 saw a huge rise in the deficit that reached below -200billion. The deficit was brought up slightly, to its current level in 2010, about -125billion. 2009 figures: US went from a deficit of around -175billion to -75billion. http://tradingeconomics.com/Economics/Balance-Of-Trade.aspx?Symbol=USD … Read More

via Economics

The graph shows that from 1974 to 1980, Germany had a steady current account approximately at zero. The account then dropped to -5 from the early 1990, until it started increasing from the year 2002. Currently we can see that Germany’s account is in surplus, ranged from 5 to 15. Overall the trend seem to be very inconsistent, since the account increases of decreases very frequently.

Proponents:

1. Globalization allows economies to reduce production costs, have better quality of products, and simply connect world together.

2. Made people richer, moved out millions of people out from poverty, and more people moved far ahead into the middle classs

3. Whenever one nation is out of resources they can go out to other countries for trading

Negatives:

4. Can culture of one’s nation

5. For example with oil the United States had the largest exporting economy until the oil shock, then they decided to get oils form other countries, particularly South Africa.

1. Lack of/poor examples – I had irrelevant examples which did not support my answer getting a higher score,

2. Lack of Diagrams – I defined the terms well, but did not draw a diagram to demonstrate my full understanding, and

3. Ineffective Evaluations – sometimes I did not even evaluate anything.

Scary Danger Zone!!!!