Marshall-Lerner Condition/J-Curve

J-Curve

A country's trade balance experiences the J-curve effect if its currency becomes devalued. At first, the country's total value of imports exceeds its total value of exports, resulting in a trade deficit. Immediately following the depreciation or devaluation of the currency, the volume of imports and exports may remain largely unchanged due in part to pre-existing trade contracts that have to be honoured. Moreover, in the short run, demand for the more expensive imports (and demand for exports, as they are cheaper to foreign buyers using foreign currencies) remain price inelastic. This is due to time lags in the consumer's search for acceptable, cheaper alternatives (which might not exist).

Over the longer term a depreciation in the exchange rate can have the desired effect of improving the current account balance. Domestic consumers might switch their expenditure to domestic products instead of expensive imported goods and services, assuming equivalent domestic alternatives exist. Equally, many foreign consumers may switch to purchasing the products being exported into their country, as with a their currency they will be able to buy them cheaper. Therefore as the currency devaluation reduces the price of a country's exports, it consequently brings the country's level of exports to gradually recover, and the country moves back to a trade surplus. 

*A J-curve is called so due to it's shape, starting out as a fall that is followed by a rise.

If we look more at this graph we can see that X is the point where the currency got depreciated. The segment from X to Y is where PED is inelastic, and not much in the market changes therefore the current account balance still worsens. But starting from Y to point Z the PED becomes elastic, meaning as longer time has passed people have started switching from using expensive imports to domestic goods. As well as other countries have started buying more of this country's exports as they are cheaper to buy with foreign currency. Leading to the CAB get back to the surplus.

* http://www.dineshbakshi.com/ib-economics/international-economics/157-revision-notes/2139-marshall-lerner-condition-and-j-curve
* http://www.econclassroom.com/?p=2821 

Marhsall-Lerner condition

Fewer imports and more exports doesn't necessarily mean an improvement in the country’s balance of trade. What matters is whether the increase in income from exports exceeds the decrease in expenditures on imports. The Marshall-Lerner condition examines the price elasticities of demand for exports and imports of a particular country. 

The condition tries to answer the question: when does a devaluation or a depreciation of a currency improve the current-account balance of a country?

The Marshall-Lerner condition states that a devaluation or a depreciation of the currency will improve the CAB if the sum of the elasticities (in absolute values) of the demand for imports and exports is greater than one,

ExportsPED + ImportsPED > 1

For example: if UK experiences a depreciation of its currency it means it is more expensive for them to import goods, yet their exports will be cheaper for other countries to buy. Therefore logically there will be less import than before and more export. If foreigners’ demand for exports from UK is relatively elastic, a slight weakening of the pound should cause an increase in foreign demand, which can but doesn't have to cause the export income for UK to rise rapidly. As well as, if UK's demand for imports is highly price elastic, then a slightly weaker pound should likewise cause UK’s demand for imports to decrease, which can in turn reduce UK's expenditures on imports.

(Yet once again doesn't have to, if it's really expensive to import yet demand hasn't fallen that much we might spend just the same amount on imports. This all depends on the elasticities of the demand.) Therefore this is where the M-L condition comes to play: If the combined elasticities of demand for exports and imports is elastic (the coefficient is greater than 1), then a depreciation of a nations currency will shift its current account balance towards surplus, and vice-versa. 

Euro-zone country:  Netherlands

Current Account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid).

Dutch current account surplus decreased to 16501.30 EUR Million (10 percent of GDP) in the second quarter of 2015, compared to a 17686.6 surplus a year earlier, due to a lower surplus of primary income. While Dutch businesses distributed higher dividends to foreign shareholders than a year ago, Dutch investors received lower dividends on the equity and shares they hold. Meanwhile, the trade balance was at a similar level when compared to the second quarter of last year. Even though the trade balance surplus was bigger for 2015 July it was for 2014 July, the Dutch current account surplus decreased. Reason for that;

Over the past year the value of euro has fallen quite a bit in comparison to other currencies especially to U.S dollar. From July 2014, 1.3715 U.S dollars = 1 euro to July 2015 when 1.1058 = 1 euro.
Therefore when the Dutch shareholders had to pay their dividends to someone who's company uses U.S dollars they had to pay more in euros this year than they had to last year. for example if their dividend last year in July was 1000 dollars then they only had to pay 729.12 euros to them, yet the 1000 dollars this year means they had to pay 904.32 euros. When it comes to bigger numbers this difference will be more significant as there is a 24% increase in the amount they have to pay this year! That also means that this year they technically also receive 24% less in dividends (when paid in U.S dollars.)
Therefore Netherlands received less income in 2015 July than it did in 2014 July, and this loss was bigger than the increase in the trade balance therefore it caused a decrease in the current account surplus.

http://www.tradingeconomics.com/netherlands/current-account

Workpoint 22.5

A quota- Physical limit on the trade imposed by the government. Restriction on the import numbers of certain good or services that are to be ordered in a given time period. Quotas are used to restrict international trader's access to the domestic market to benefit domestic producers and allowing them to become more dominant on the market. 

When a quota is imposed there are always losers and winners: 

winners: domestic producers, other foreign consumers,

Losers: domestic consumers, foreign producers,

• Winners:
• domestic producers- before the quota was introduced, they had to sell their goods at the world price, which is way lower than they would like to sell at. Therefore domestic producers only supplied at the quantity 0-Q1, and got the revenue of a. Now after the quota has been imposed, the price rises to Pquota, foreign supply is limited, yet the demand doesn't change they will sell more and therefore earn more. Domestic suppliers therefore demand 0-Q1 and Q3-Q4, and their new revenue is a+c+d+f+i+j.
  
  
• Other foreign consumer- As the quota is imposed, the country that the textile was imported from now has a surplus of textile and has to find a new market to export to. Or they might try to sell the textile in their home country with a lower price just to sell some. Yet as textile isn't a good that spoils really, they aren't in a hurry to sell it.
  
  


• Losers:
• domestic consumers- Governments decision to impose quotas will cause the price of goods to increase from the world price to Price quota. Therefore make textile more expensive for domestic consumers to buy. As before the demand was at Q2, yet has now dropped to Q4. And that brings us the loss of consumer surplus k, as the wheat is not purchased - a dead-weight loss. 
  
• foreign producers- Before the implication of the quota foreign producers were dominating the market and selling at the world price. Before they were providing the textile quantity from Q1-Q2, and earning the revenue of b+c+d+e. After the quota they are only allowed to supply the quantity of Q1-Q3, yet they also earn the revenue of the Pquota; b+g+h. Usually a fall in income but doesn't have to be, yet there is a surplus of textile for them to sell somewhere else now as they lost some of their market.
  
  

Balance of Payments­ Worksheet

1. Distinguish between an import and an export:
1. Import- something that is brought into a country.
2.  Export- something that goes out of the country.
1. Visible and invisible trade: 
1. visible trade: Imports and exports of physical merchandise, something you can actually see and touch.     
2.  Invisible trade: Services and other products that do not result in the transfer of physical objects.things you can't touch.
   
   
2. State whether the following are
1. an export or an import for Hong Kong
2. visible trade or invisible trade
1. A HK toy sold in UK - Export, visible trade
2. French cheese sold in HK. - Import, visible trade
3. A HK tourist holidaying in Thailand - Export, invisible trade
4. Cathay Pacific buying planes from Airbus - Import, visible trade
5. The HK Police Force buying Russian weapons - Import, visible trade
6. An Australian tourist staying at HK Disneyland - Import, invisible
   
   
3. In which part of the HK Balance of Payments account would the following transactions be recorded: 
1. A US company buying shares on the HK stock market -Financial account
2. HK citizen sending wages earned in UK back to HK - Current account
3. A HK company selling prawns direct to France - Current account
4. An Italian firm investing in a chain of restaurants - Financial account
5. HK company paying dividends to US shareholder - Current account
   
   
4. Which of the above transactions are inflows of money to HK (and are therefore credits on the balance of payments account) and which are outflows (and thus debits)? 
1. Credit- 
1. HK citizen sending wages earned in UK back to HK
2. A HK company selling prawns direct to France
3. An Italian firm investing in a chain of restaurants
2. Debit-
1. HK company paying dividends to US shareholder
2. A US company buying shares on the HK stock market
   
   
5. The fictitious figures below refer to HK’s balance of payments for 2007, 08, 09 and 2010 Calculate for each year

1. Balance on trade in goods
2. Balance on trade in services 
3. The balance of trade 
4. The current account balance
   

2007 

1. Balance on trade in goods:  42,345 - 57,600 = -15,255
2. Balance on trade in services: 654,000 - 124,000 = 530,000
3. The balance of trade: -15,255 + 530,000 = 514,745
4. The current account balance: 514,745 -12,500 - 34,000 = 468,245

2008 

1. Balance on trade in goods: 123,000 - 245,789 = -122,789
2. Balance on trade in services: 12,789 - 9,876 =  2,913
3. The balance of trade: -122,789 + 2,913 = -119,876
4. The current account balance: -119,876 + 123,765 + 47,987 = 51,876

2009 

1. Balance on trade in goods: 56,363 - 66,666 = -10,303
2. Balance on trade in services: 46,879 - 38,945 = 7,934
3. The balance of trade: -10,303 + 7,934 = -2,369
4. The current account balance: -2,369 + 100,000 - 99,999 = -2,368

2010 

1. Balance on trade in goods: 853,970 - 900,000 = -46,030
2. Balance on trade in services: 345,876 - 200,000 = 145,876
3. The balance of trade: -46,030 + 145,876 = 99,846
4. The current account balance: 99,846 + 0 + 34,987 = 134,833

Fed Chairperson Recommendation

Consumer indicators

Consumer confidence

Consumer confidence is an economic indicator which measures the degree of optimism that consumers feel about the overall state of the economy and their personal financial situation. Consumer confidence is expressed through their activities of savings and spending. and measured by the consumer confidence index (CCI). If consumers are uncertain about the economy, they will buy less, and the economy will slow further. If consumer confidence increases, then the economy will grow. Generally consumer confidence is high when interests and unemployment rates are low.

The reason why consumer confidence is important to macroeconomics is the fact that consumers are responsible for two-thirds of the nation's economic activity, or the gross domestic product (GDP). If the Consumer Confidence Index is trending upwards, it is likely for stocks to go higher as well. Yet once the Confidence gets too high, the excessive demand it is creating could result in inflation as firms might not be able to meet demand. That in return could lead the Federal Reserve to raise interest rates. 

"As the labour market has strengthened, so has US consumer spending. However with wage growth remaining subdued, there are few signs of runaway spending growth, with consumers staying in cautious mood"

The CCI, however, is a lagging indicator, so whatever the survey says, remember that it doesn't tell us what is going to happen, but what has happened and if it can be expected to continue.

As consumer confidence rises, it means consumers are more likely to and will spend more money on goods and services. Therefore in the short run the aggregate demand in the country will rise, and shift to the right. the new point at which producers will be able to supply the goods is going to be at a higher price level. When the consumer confidence keeps rising and people demanding more it can lead to inflation as too much pressure is put on producers to fill the demand in the short run. Therefore, too much consumer confidence leads to too much demand and shortage in supply leading to rapid increase in prices causing inflation.

Country Specific Protectionist Policies

Country: Indonesia,
The market: Live beef,
The form of protectionism: quotas

          As Indonesia already had a quota for cattle import, there already was a welfare loss marked with the green triangles. and instead of people demanding Q2 at world price, they were wanting Q4 at Pquota1. Now that the government cut the quota even more, by 80%! Now since the price is higher due to the lack of supple,  people only demand Qeq at the price of Pquota2.  This gives us an even bigger welfare loss; the whole blue area + the green, consisting of loss on consumer surplus and loss of production efficiency.


       Before domestic suppliers provided 0-Q1 and Q3-Q4, and importers Q1-Q3. Now only Q1-Q5 of the cattle is imported, which is a huge change over that short period of time. And domestic suppliers are expected to supply 0-Q1 and Q5-Qeq.    

         Indonesia imports most if not all of it's cattle from Australia, and while they already had quotas placed on the trade, they decided to cut them almost by 80%! The reason government uses to justify this is that they want Indonesia to become more independent and for domestic producers to come to the rise. When before the cut, they ordered about 250 000 head a quarter then now just around 50 000. Due to the lack of supply yet on going demand for meat, Indonesia is facing a major shortage. If it doesn't work out then they might increase the quota a little again.

      Due to Indonesia having a very low level supply of cattle on their own, I don't think there is a single winner in this situation. Yes, it may help the Indonesian domestic cattle suppliers to come to the market a bit more, but in the meanwhile the people still want food and cattle is something that takes time to grow. You can't just slash the quota so much and expect people to wait for domestic cattle and pay a ridiculously high price until then. People will still want to eat, and in my opinion, they should if at all cut the quota little by little allowing the domestic suppliers to raise their cattle and not be pressured.
     

       This quote is a loss for everyone; Australia lost their main cattle importer, the people in the country have to pay a higher price for meat and might even run out of meat, and even though domestic suppliers might earn a bit more money then before they also have a lot of pressure put on them.

http://www.abc.net.au/news/2015-09-03/first-australian-live-cattle-export-resumes-indonesia/6746336

International trade article

"Under the new central scheme Price Stabilisation Fund (PSF), the government has started importing pulses after a gap of two years to boost domestic supply and check retail prices of pulses that have sky-rocketed beyond Rs 150 per kg.

          

In a statement the government said: "In order to ensure retail distribution to the consumers, it was decided to import 5,000 tonnes of tur dal and 5,000 tonnes of urad dal by MMTC. The first consignment of imported Dal would be reaching Mumbai by September 5."

            

The government said it has taken several measures to increase availability and control the price of essential commodities, especially pulses and onions. States have been empowered to impose stock limits on pulses, export of all pulses is banned except Kabuli Chana, organic pulses and lintels to the tune of 10,000 tonnes and there is zero duty on import of pulses, it added.

India imports about four million tonnes of pulses largely through private trade." Yet as we read, the private stakeholders have raised the prices so high that most people aren't able to buy them any more. Yet the are considered essential commodities that should be available for everyone.

As India can't produce sufficient amount of pulses themselves, the government has stepped in "to reimburse Rs 113.40 crore of losses on pulses imported between 2006-2011 by NAFED, PEC, STC and MMTC, apart from losses incurred in the sale of pulses up to six months after closure of the scheme". Therefore this will enable PSUs to be financially sound to intensify trading activities to cool down prices of essential commodities.

When we read we see that there is zero duty on import of pulses, therefore it will cost less to import pulses and lower amount they are sold for. If the government supplies a great amount to the market that is way below the price at the moment. Private suppliers will have to decrease their prices as well in order to still be in the business, and the zero duty on imports gives them more incentive to do so. 

As we see from the graph, when supply is increased in a market it causes a shift of the supply line to the right, resulting in a new equilibrium price and quantity. In this case we don't know yet how much the prices have changed as they are only starting the imports. Yet we can see that when supply is increased the prices fall. With the price falling people demand more. Therefore the new equilibrium point will be at Q2, P2. Price will be lower therefore more will be demanded.

http://economictimes.indiatimes.com/news/economy/foreign-trade/governement-to-pay-agencies-rs-113-40-crore-for-losses-on-pulses-import/articleshow/48772248.cms

Elimination of Tariff exercise

Arguments for and Against Free Trade in a Developing Country 

Background:  You live in a developing country in Latin America.  Your country currently has many policies that make it difficult for foreign companies to sell products there, including high tariffs.  A new economic proposal is being debated in your national legislature. This proposal, if it passes, would eliminate the 40% tariff on agricultural machinery.  This would probably lead to future policies that would reduce or eliminate other trade barriers, opening the doors to free trade in your country. 

Your job:  You are a reporter for the leading newspaper in the capital city of your country.  You are assigned to decide whether your paper should be for or against the 40% tariff.  You conducted six interviews with interested citizens and government officials about the proposal to eliminate the tariff.  You must now analyse the information from the interviews and form an opinion for your newspaper about this proposal. 

Directions: For each of the six interviews, make a check mark to indicate whether the person was in favour of the protective tariff or opposed to it.  Then summarize the reasons each offered to support his or her position. 

1.  Mr Juarez (Govt Official):__X __ Eliminate the tariff   _____ Keep the tariff

Why?  The tariff should be eliminated as we want for our markets to expand and people to have more choice. It will bring more competition and more development into the market and force the prices to go down.  We want more people to have possibilities on buying machinery to create new vacancies and do develop the agriculture.

2.  Mr and Mrs Baez (Own a bakery):_X_ Eliminate the tariff   _____ Keep the tariff

Why? Yes I think tariff should be eliminated, it would eventually do good for everyone. I own a bakery and buy a lot of base ingredients like flower, butter, milk etc. every month/week. And these are mostly made from agricultural products, therefore as we would eliminate the tariffs, agriculture could develop much more efficient and the prices of products would drop. Meaning I’d get my basic needs cheaper, would be able to sell cheaper and earn more profit!

3.  Mr Rodriguez (Farmer): _X__ Eliminate the tariff   _____ Keep the tariff

Why?  The tariff should be eliminated as it would let us farmers develop our lands better and efficient. With new technology we might even be able to grow things we weren’t able to before. We will also be able to grow crops more efficiently and be able to sell them cheaper; therefore more people would have the available funds for food.  I probably might even earn more profit.

4.  Ms Sanchez (Teacher): _____ Eliminate the tariff   __X__ Keep the tariff

Why? I think the tariffs should be kept, as we want our domestic producers to do well. As well as my sister’s husband works in machinery factory and I wouldn’t want him to lose his job because some foreign traders want to earn more profit here. As well as if we import more and produce less domestically it means out GDP will fall – life quality will fall.

5.  Mr Lopez: (Machinery Factory Worker)_____Eliminate the tariff  __X__ Keep the tariff Why?  Keep the tariff. If the tariff will be eliminated, then there will be loads of foreign supply being imported to the country that will be priced lower. That means less people will be buying our domestic produced machinery therefore prices would be lowered and less people will be needed for manufacturing. It would mean that I’d have to possibility to lose my job!

6.  Ms Miranda: (Economist) __X__ Eliminate the tariff   _____ Keep the tariff

Why?   The tariff should be eliminated as it would help our agricultural market to develop. The market would grow much bigger and have more variety as new technology brings more opportunities. When the machinery will be cheaper to buy, it means more people/farmers will be able to buy it which also means they will probably need more workers. Therefore products will be cheaper, all production of agricultural products will be more efficient, evolve more workers and expansion of the market.  Plus it gives way more work for me to analyse all the effects and write articles!

Prioritize your Opinions:  Should a Developing Country Have Free Trade? 

You have read and summarized six interviews about whether a developing country should eliminate a protective tariff and move toward free trade.  You may have found that there are important arguments on both sides of the question, and that sometimes the interviews provide conflicting information.  For example, people for and against the protective tariff believe that more jobs will be created for people in the developing country if their opinion is followed.  To complete your assignment for the newspaper, you must decide if you are for or against removing the tariff. 

Look through your notes for the people who were in favour of the proposal to eliminate the tariff.  List the five reasons that you think were most convincing to support this opinion.  After each reason, indicate how important you think that reason is by assigning one-to-five stars.  (One star means that you think the reason is of minor importance; five means that you think the reason is crucially important.)  Do the same for the people who were against the proposal to eliminate the tariff.  Then write your conclusion in the space provided. 

Five Important Reasons to Eliminate the Protective Tariff / how strongly I feel about this Reason

1. Ability to sell different goods cheaper, making them available to a wider range of people****      

2. Ability to earn more profit through paying less for production **     

3. Ability to produce agricultural products cheaper and more efficiently *****

4. It would encourage agricultural development and innovation for new machinery ****  

5. More production means more demand for workers***

Five important reasons not to eliminate the protective tariff

1. People working in the factories might lose their jobs**

2.Domestic production will decrease ***

3.Might cause decrease in GDP***

4.Free trade will make it harder for smaller companies to enter the competition or maybe even continue  in the business with foreign machinery**

5.Domestic producers want to keep the price on a high level to earn profit.*

Conclusion: MY NEWSPAPER SHOULD BE FOR THE PROPOSAL TO ELIMINATE THE PROTECTIVE TARIFF ON AGRICULTURAL MACHINERY.

The tariffs should definitely be eliminated, as for that also speak the reasons why we should/shouldn’t eliminate them.  The reasons that speak against the elimination of the tariff are just temporary problems that it will bring, like structural unemployment. Yet as the reasons speaking for the elimination of the tariff, they show long term changes for the better. As we eliminate the tariffs, we are on the way to open the market up for free trade. Without the tariff the prices of agricultural machinery would drop as the quantity is imported is usually made more efficiently and cheaper therefore they are able to sell cheaper. Lower prices for the machinery, mean that more farmers/companies will be able to buy them and increase their capital. Therefore they will be able to produce more, higher more people, yet sell their products at lower prices making them available for more people.