Australia's Terms of Trade

1. Data of ToT over the 10 year period of 2001-2010
 

2001   104.8%

2002   105.85%

2003   105.92%

2004   116.18%

2005   131.08%

2006   145.52%

2007   152.39% 

2008   174.63%

2009   162.98%

2010   178.9

2. Identify the year to year trends in the terms of trade. 

From the year 2000 to 2010 there is a pretty consistent and even to say a rapid yearly increase in terms of trade, growing from a 100% in year 2000 to 178.9% in 2010. 

Even though the data shown a pretty clear increasing trend, from year 2008 to 2009 there was a drop in ToT from 174.63% to 162.98% respectively. Yet for the next year ToT picked up again and increased from the 2009 162.98% to 178.9% in 2010, being the highest and latest value in the data, proving the clear increasing trend.

3. Identify the changes in trade balance over this same period.  

changes in trade balance were quite unrelated to those of ToT, and show more of a fluctuation. A decrease from 2001 til 2005, dropping from 0.18% to -2.72%, from there on it picked up again and increase to -1.61% in 20017. and since then has been fluctuating heavily yearly.

Balance of trade as a % of GDP
2001   0.18%

2002   0%

2003   -2.12%

2004   -2.7%

2005   -2.72%

2006   -1.81%

2007   -1.61% 

2008   -2.6%

2009   0.1%

2010   -0,97%

The trade of balance in this data is represented as a percentage of GDP, and is generally fluctuating on the negative side meaning there is a trade deficit; more expenditure on imports than earned from exports. 

In years 2001, 2002, and 2009 there were slight positive values, at 0.18%, 0% and 0.1% respectively. The trade balance values were the lowest in 2004, 2005 and 2008 at

4. Next, using your understanding of price elasticity of demand, research the types of exports and imports for your assigned country.

IMPORTS: Australia is a major importer of machinery and transport equipment, computers and office machines and telecommunication lasers. Therefore tertiary goods

EXPORTS: Rich in natural resources, Australia is a major exporter of commodities. Metals like iron-ore and gold account for 28 percent of total exports, coal for 18 percent and oil and gas for 9 percent. Manufactured goods constitute 33 percent of the total exports with food and metal products and machinery and equipment accounting for the biggest share. Agricultural products, particularly wheat and wool make up 5 percent of trade outflows. Mainly primary and secondary goods.

a. Based on the results of your research, to what degree do you think demand for exports/imports is elastic or inelastic?

Most of Australia's exports are demand inelastic as they are primary and secondary goods. Yet many if not most of the goods imported by Australia are elastic in demand as they require higher technology and labour skill for production and are priced higher, therefore are known to be price elastic in relation to demand.

b. Based on your research, does it appear that changes to the terms of trade has affected the balance of payments?
In this specific example I don't see a clear correlation between the Terms of Trade and balance of payments, as the fluctuation in the trade balance has very little correlation with the values of ToT

Review questions -economic integration

1. Using a diagram, explain the difference between a free trade area and a customs union. Use real world examples

A free trade area is just a trading bloc that involves several countries trading in between themselves with no boundaries in place.

Yet, a customs union involves a free trade area as it is one step higher in the economic integration. instead of just not having any trading boundaries between the bloc countries, They have also agreed on common external trading barriers put in place for countries outside of the customs union.

An example of a free trade bloc is NAFTA, consisting of Mexico, Canada and United States of America.
Example of a customs union is CARICOM, consisting of Antigua, Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, Saint Kitts and Nevis, Saint Lucia, Saint Vincent, the Grenadines, Suriname, Trinidad and Tobago.


2. Discuss the likely effects of a membership of a customs union. Use a real world example.

From stepping into a customs union a member is likely to experience either trade creation or trade diversion. As well as membership can also increase the market size as well bring more diversity and development of products such as technology. Yet if country A has higher production costs of certain goods than other countries in the bloc, country A might experience higher unemployment than before due to production shifting from their country to the others and vice versa.

Trade creation- a reduction in tariff barriers leading to an increase in consumer surplus and economic welfare. As well as production going from a higher cost producer to a lower cost producer therefore leading to a regain of world efficiency. 

Trade diversion-international economics in which trade is diverted from a more efficient exporter towards a less efficient one, causing welfare loss as well as loss of world efficiency.

Example: UK joined EU, they had a comparative advantage in the production of lawn mowers, resulting in trade creation in the EU when trading barriers are removed. Before the French were making lawnmowers on a higher cost. Now consumers benefit from lower costs of lawnmowers from England as well as there is regain of world efficiency.

3. Evaluate the consequences of membership of a monetary union. Use a real world example.

The consequences include:
the reduction in transactions cost of changing currency;
the reduction of exchange risk leading to greater trade and foreign investment, and to a lower risk premium embodied in the cost of raising capital;
increased transparency in price comparison;
political gains of closer union and cooperation brought about the greater closeness of economic relationships; - preparation for complete economic and monetary integration as well as keeping relations smooth


Example: European Union

Trading blocs and Economic Integration

A trading bloc: a group of countries that join together in some form of agreement in order to increase trade between themselves and/or to gain economic benefits from cooperation on some level. Below is a list of some of several regional trading blocs.

East African Community (EAC)

1. The nations involved in the trading bloc 
• Republic of Kenya
• Republic of Rwanda
• Republic of Tanzania
• Republic of Burundi
• Uganda of Uganda
  
2. Identify the kind of trading bloc (customs union, free trade area, common market, monetary union)
• EAC is a customs union- a type of trade bloc which is composed of a free trade area between the member countries, that have agreed to a common external tariff with respect to imports from the rest of the world.
  
3. The impact that membership in the trading bloc has had on the economy of one member nation.
• Rwanda’s Minister for East African Affairs, Amb. Valentine Rugwabiza, has said the country is already reaping benefits of being part of the East African Community, seven years since becoming a member. During the past few years since Rwanda joined the EAC, the investments coming from the region have consistently increased. Businesses from Kenya have invested in Rwanda more than US$450 million which has contributed to the creation of thousands of jobs. Yet they have not made such impressive progress regarding trading across borders, and this doesn't depend solely on them; it has to do with how long it takes to cross those borders, cost of transport and of course non tariff barriers. Even though tariffs between the countries have been removed as they are in a customs union, different non-tariff restrictions keep popping up.
  
4. An example of trade creation and trade diversion (appropriate charts)
   
   
   Kenya exports approximately three-fifths of its goods to Uganda and Tanzania, but had been facing tariffs of between 10 and 20 per cent before the establishment of the East African Community. In September 2014 Tanzania became the largest export destination of Kenyan goods within East Africa. The long-held perception by Uganda and Tanzania that Kenya's economy - mainly the manufacturing sector - was more competitive than theirs - causing production to go from higher to lower cost - more efficient. GRAPH COMING AND DIVERSION EXAMPLE TOO

Foreign Exchange Market and Exchange Rate Determination

1. Exchange rates are like prices, in that they are determined by supply and demand. But not all exchange rates are allowed to float freely, since the governments or central banks of some countries actively intervene in the market for their currency to manipulate its value. Identify one policy a government or central bank could use to strengthen the value of its currency and one policy that could weaken the value of a currency.

• Governments could use fiscal policy to lower the taxes in a country, leaving people with more money in their pockets to spend. Therefore spending on imports would rise as well, causing an increase in supply- leading to a decrease in the value of the currency

• To strengthen the value of a currency, governments could use monetary policy in order to increase interest rates. This increases foreign investors wanting to invest into your country, leading to more demand- which leads to strengthening of the currency.

2. What are the benefits of having a stronger currency?

Having a currency that has a higher value than another currency means you can buy they currency cheaper. Therefore also meaning that the other country's export goods are cheaper for you to buy.


3. What are the benefits of having a weaker currency?
When having a weaker currency in comparison to a stronger one, the people in the country with the stronger currency will will want to buy more of your exports as they would be cheaper for them to buy.

4. Which determinant of exchange rates presented in the video do you think are most attributable to the fluctuating values of currencies on foreign exchange markets, and why? Relative incomes, relative interest rates, relative inflation rates, speculation or simply the tastes and preferences of global consumers?

I think the determinant of exchange rates most attributable to the fluctuating values of currencies on foreign exchange markets is relative interest rates. As a country's interest rates rise, more people/companies from foreign countries will want to invest into your country- in order to earn more money back. And as interest rates are constantly managed, and in today's internet based world, investments are quick to make causing constant differences in the flow of money from one countries to other. As well as these investment amount are often very big and therefore affecting the exchange rate greatly.

EURO (€) VS. NORWEGIAN KRONER (NOK) 

List and explain the factors that might lead to a fall in the supply of the selected currency in relation to the Euro market.

Norway might be experiencing high rates of inflation, therefore their products would seem more expensive for European countries resulting in less demand for Norwegian products leading to a decrease in the supply of euros in Norway,

Norway might have lowered their interest rates, therefore foreign European countries will lack an interest to invest in Norway, leading to a decrease in supply of euros. 

Another explanation could be a decrease in income for some European countries, therefore decreasing demand for foreign goods such as goods from Norway.

Or maybe European consumers have just changed their tastes and preferences away from Norwegian goods.

Worksheet 23.1- Exchange Rates

Exchange rates, currency manipulations and the balance of trade

1. How does China continuing to undervalue its currency threaten the industrial economies of its largest trading partners? 
• As china is artificially keeping i's currency at a low level compared to the dollar of United States, one of its largest trading partner. It is making sure US companies rather want to  have their goods manufactured in china as the labour there is cheaper due to the low value of China's currency. Yet US's large companies don't develop factories in the US itself, the problem of high unemployment might suffer even more. Less manufacture and high unemployment will eventually lead to a decrease in market size and economic development.
  
  
2. What is China’s purpose for maintaining the low value of the RMB relative to the currencies of other nations? 
• As china has a large population it also has a large quantity of labour, a lot of it unskilled labour. Therefore they have a lot of people to work to produce manufactured goods for a low wage. As China maintains it's currency at a low value, it will be cheaper for foreign countries to buy China's exports making them more appealing. Through selling more of their goods, China experiences economic growth in relation to the market size and money in the circulation.
  
  
3. What would be a unilateral protectionist measure the US government may advocate if the WTO refuses to take action against China’s currency manipulations? How would you advise president Obama on the issue of whether to take protectionist action against China in the context of the current economic crisis in America?
   
• A unilateral protectionist measure the US government could take against China, would be to impose a quota or a tariff on the imports from China. This could cause an aggression in the population of United States as many of their goods would suddenly become more expensive, yet the build-up of domestic factories providing available vacancies would take a bit of time. Yet eventually this wood lead US out of the economic crisis and maybe even move to growth.
  Placing quotas on foreign goods has helped US before, like when they places quotas on... steel. With the quotas in place they could develop their domestic manufacture of steel, which eventually lead to US steel productions   being one of the cheapest and most efficient in the world. I'd advise for US to set quotas on certain goods, yet only when being sure there would be someone ready to develop domestic production of the exact same or supplementary good.

Non-price Determinants-Supply & Demand

The non-price determinants of supply include:

1. Changes in costs of factors of production (land, labour, capital, entrepreneurship). As there is an increase in costs of production → the supply shifts to the left, meaning there would be less supply, or in other words you would have to pay more for the same quantity.
   
2. State of technology, as technology Improves- supply shifts to the right (meaning more supply for cheaper prices)
   
3. Price of related goods: An increase in the price of a related good can influence the supply of the original good. Consider the tradeoff in the production of corn and wheat. If the price of corn rises relative to the price of wheat, it would probably be profitable to move resources from wheat production to corn production. This will cause the supply curve of corn to shift to the right and the supply curve of wheat to shift to the left.
   
4. Future expectations: if demand for the product is likely to rise, companies increase their supply (in order to be ready to supply more in the future and gain higher profit for example prior Christmas there would be an increased production of decorations.)
   
5. Government intervention: 
• Indirect taxes → increase costs → supply shifts left (less supply, increase in price)
• Subsidies → reduce costs → supply shifts right (more supply, cheaper price)
•  other ways to intervene -exchange and interest rates.
  
6. Size of the market: more firms producing the same or a very similar good means more supply overall, therefore supply of the market shifts to the right as more are being supplied at each price level.
   
7. Weather/seasonality: Affecting mostly agriculture, long periods of rain or drought can influence the quantities of crop received at the end. As well as during winter seasons many countries aren't able to grow their own crops/vegetables-decreasing supply.
   
8. Supply Shock: An unexpected event(political or environmental) that changes the supply of a product or commodity, resulting in a sudden change in its price and it's effect is almost always negative 

A shift in supply could be caused by:

supply shock:A sudden political or environmental situation may change the supply of currency.
government intervention: in different situations governments could impose a different exchange rate causing a shift in the market of a currency.

future expectation: if there's a serious depreciation expected in a currency in relation to another, the country/government might take measures to prevent that from happening.

The non-price determinants of demand include:

1. Income: As income rises, demand for normal goods rises causing the demand curve to shift to the right. Yet the demand for inferior goods usually falls, demand curve shifts to the left.
   
2. Consumer expectations of future: When consumers expect the prices of a certain good to drop in the future, the demand at the moment will fall and rise when the prices drop, and vice versa.
   
3. Consumer Tastes & Preferences: If consumer change their tastes in favor (for example an advertising campaign) then demand curve shifts to the right.
   
4. Price of related goods (substitutes and complements): 
• As price of substitutes increases (movement along the curve) the demand shifts to the right. 
• As price of complements increases (movement along the curve) the demand shifts to the left.
5. Demographic changes: if population grows, the demand for most products will increase, thus the demand curves shift to the right as more will be demanded at each price level.
   
6. Weather/seasons: as a country is entering a rainy season, the demand for umbrellas would increase greatly. 

A shift in demand could be caused by:

weather/seasonality: many countries which depend largely on tourism see great demand in their currency over the seasons.

 
price of related goods(other currencies): If certain countries are for example experiencing high inflation then their currency would appreciate and there would be less demand for it as it would become more expensive to obtain (as well as their exports) 

consumer expectations for the future: If consumers expect the value of a certain currency to depreciate, then the demand for it at the moment might drop as consumers would be waiting for the depreciation before exchanging their money.

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