Friday, December 8, 2017

Money Supply Guidelines and Exchange Rate Aspects

Throughout this paper the author went through the consequences of monetary policy on the exchange rate. The author did this by using a standard two country model that was based on the Obstfeld-Rogoff model. One of the main assumptions that were made was that central banks would change monetary policy if inflation strays from the target levels. Which basically means central banks are expected to react to changes in the inflation rate. When setting up the country size and market structure of the home and foreign countries, a utility function was used to illustrate the preferences. Another was used to represent the budget constraints for both countries. He then constructed a production function for the domestic firm and created a price setting equation. The paper then goes into the money supply shock versus a shock to the monetary rule. He found that there was an undershooting of the nominal exchange rate which would mean that there is a weaker disbursement in the short run. The author also took a look at sensitivity analysis and found that the changes in the parameter values or the estimated values does not have any qualitative changes on the model. Overall when using the Obstfeld-Rogoff model he found that monetary policy rules could possibly be a reason why exchange rates tend to be fairly low at times.

  For more information Click Here  

Sunday, December 3, 2017

Trump's Taxes: A Macroeconomic Look at the New Tax Policy

          The highly discussed and viciously touted tax plan set forth by the Republicans has finally come to fruition in recent days. In order to understand the effects of this new tax policy, the Tax Policy Center, an independent think tank group, did the numbers to see what the effects of the new tax plan will likely be.

          Within their study, the researchers looked at the effects on aggregate demand as well as savings and investments, output, and the labor market. The decrease in the corporate tax rate was viewed as a positive, yet there were concerns it would have its own repercussions. The loss of revenue from the corporate tax rate reduction was seen as a likely cause to worry, as the deficit would grow at a faster rate. However, according to the projections made by the Tax Policy Center, it would actually slow the growth of the deficit by nearly 213 billion dollars over the next 20 years. This combats with previous arguments made about the increase in the size of the deficit due to the tax rate loss.

           Another point worth discussing is the increase in output seen within the GDP, with an expected growth of 0.7% the first year, and a decreasing rate every year until it reaches about 0.0% in 2027. This is much less than what the Republicans have stated it will do for the economy.

           Even without the benefits from the growth in the GDP, the study points out there are massive benefits from the new tax policy. The inversion of many U.S. companies has been a hot topic within the political atmosphere lately. This new policy will help to eliminate this continued inversion and avoidance of the United States taxes. Corporations may return to the United States, but it is not guaranteed, and current corporations will be less likely to leave as a result.

          This study expands the thoughts of the benefits of new tax policies in order to make the United States more competitive in attracting foreign direct investment as well as the potential for retaining corporations within the United States. While the study is quick in response to the new policy, and further studies will be published to show the effects further, this is a good first glimpse. It seems that this tax policy will be able to provide some positives for both the United States government as well as the maintaining of businesses within the United States.

Take a look at the study HERE

Friday, December 1, 2017

Donald Trump’s current approach

Donald Trump's actions is what is known is a Madman theory of diplomacy. Many people fear about Donald Trump's decision on the nuclear button. However, Ted Lieu assured the citizen that Trump will not be the one who first strike without the approval and discussion with the congress. However the madman theory is not a logical way to response to situation especially, form the world leader.
History has shown such behavior were never a success for example Muammar al-Qaddafi. The late Col. Qaddafi was one wacky guy, whose outrageous behavior, bizarre uniforms, incomprehensible ideology, and inexplicable conduct left almost everyone who dealt with him mystified and concerned. He was able to use Libya’s oil wealth to cause a certain amount of trouble — including a number of acts of state terrorism — but what was the end result of Qaddafi’s unpredictable behavior? He was isolated and friendless by the end of his rule, Libya was a basket case despite its oil riches, strict international sanctions had forced him to abandon his failed attempts to acquire weapons of mass destruction, and he eventually got murdered by a rebel mob. Mad, perhaps; a total failure, most definitely.
This is just one example. There are many more such as Mao Zedong, Idi Amin, Saddam Hussein and even Pol Pot. History justifies that all these leaders came to an end without any positive outcome. Trump policy either political or economical could create financially instability and constrain economic progress.
Trump withdrew from the Trans-Pacific Partnership. It would have been the world's largest free trade agreements. He threatened to withdraw from NAFTA, the world's largest existing agreement. He said he would negotiate better bilateral agreements.
Trump advocated trade protectionism. In his campaign, he promised to inflict a 35 percent tariff on imports from Mexico. He said he would label China as a currency manipulator. Trump claims that China artificially undervalues its currency, the yuan, by 15-40 percent. If it didn't reduce its trade surplus with the United States, he would impose duties on its exports. As president, he has reversed some of those claims.

Therefore due to various reason Donald Trump’s current approach to handle matters is not the right one. Serious consequences may occur.

For more information:

Cashews and Globlization

When the topic of globalization and offshoring is discussed, Americans have a hard time realizing that this is not only an American issue. India gets bad rep because a large amount of companies are utilizing India's cheaper labor. However, India has been the long reining cashew capital of the world; they are losing those jobs to their successor, Vietnam. This is just another example that trade economics are an ever-changing, fluid environment.
India's city of Kollam has been booming due to the 800 factories that process (shelling, roasting, packaging)  cashews which are then shipped to other countries for consumption since the 1930s. In 1935, India controlled almost all of the cashew exports in the world. Today, Kollam only has 100 factories still in use. Many believe that the downfall is due to India's reliance on their cheap labor. Almost all the process is still done by hand and has not been changed in decades.
This opened the window of opportunity for Vietnam. They started using technology to do all the process of cashews which made their systems cost less then in India. Over the years, India has lost more and more business to Vietnam. Vietnams use of technology was motivated by two reasons: it increased the productivity of their workers and they felt pressure to meet food safety measures of the developed countries (which meant less contact time between the cashews and the workers). Today, Vietnams factories process 50 tons of cashews per day with only 30 workers. Now Vietnam accounts for 70% of all the world cashew exports.

To read the entire article:

Sunday, November 26, 2017

Deflation and Expansion?

For the last several quarters, Japan has been growing at a feverish pace economically. This trend is due, in no small part, to an increase in their exports, which has increased on average of about six percent over the last three quarters. Japanese consumers have decreased spending by about two percent and there has been modest expansion of business investment during this same period. This is all good news, right? Who wouldn’t be content with these economic results? There is a small catch, since the 1990s Japan has instituted and over the years has ratchet-up a program of deflation, carried out by its central bank. As the central bank injects liquidity into the economy, prices subsequently fall, but so does the value of their currency, the Japanese Yen. This has presented an attractive opportunity for foreign investors looking for cheap investments, and foreign consumers looking for cheap foreign goods. Naturally, this has had a positive effect on Japan’s GDP, which explains the six percent increase in GDP over the last year.

What are some of the lasting effects of this deflationary tactic?  One argument would be that this could inhibit growth; By keeping prices so low for so long, year over year this removes money and capital from businesses and this will continually lead to a decrease in investment domestically, which would could lead to economic stagnation. On the other hand, the Japanese government could keep instructing its central bank to pump money into the economy and count on consumers to make up the difference in economic activity, in other words, consumption. But would the latter pass economic muster? Especially since Japanese consumers and the domestic sphere has been saving over the last year, instead of spending to keep the economy growing.

Thursday, November 16, 2017

NAFTA: State by State

            As the headlines around NAFTA and the negotiations thereof continue their steady drip into the mainstream media, a new study has suggested that many of the states that overwhelmingly voted for Donald Trump could actually have the most to lose if negotiations fail to come to a compromise. Case in point, Michigan, where trade is 38.9% of the gross state product. Looking at the diagram below, you can see that Michigans top import trade partner is Mexico and its top export trade partner is Canada. The terms of trade mostly derive from the automobile industry, where nine out of Michigans top ten exports and nine of its top ten imports were related to auto manufacturing. Simply put, Michigan buys a lot of auto parts from Mexico and sells a lot of cars to Canada.
            NAFTA has helped to facilitate free trade between the U.S., Canada and Mexico because conducting business with nations in close proximity has many advantages. For example, a typical good imported from Mexico to the U.S. is made from parts that are up to 40% American-made (compared to 5% American-made with Chinese imports). However, if the trade agreement were to sour, vehicles would then become more expensive to produce as the cross-border supply chains for finished products kinks. As we learned in class, the gains from offshoring would then diminish and that increased cost of production would be passed along to the consumer.

            That being said, should states like Michigan be in favor of Trumps promise to get rid of this trade agreement?


Wednesday, November 15, 2017

Trump In China

It seems that Trump is being accused of making irrational decisions, again. Levy states that Trump wasn’t taking all matters into consideration when he made this deal, that this deal was too narrow sighted. Trump has made an attempt at reducing the US-China trade deficit by selling “$250bn of additional goods and services to China.” Yet, Levy raises the issue of world trade deficits rising; unfortunately, Trump’s deal only addresses part of the US trade deficit, it merely scratches the surface. Levy raises the point that the trade deficit is a multilateral issue being taken on bilaterally. Although, Trump isn’t necessarily fixing the problem as a whole, which is most likely impossible to do all at once, he is at least staying true to what he said he was going to do while he was running for president. Trump said he would lower the US deficit and at least he is not doing nothing.

Friday, November 10, 2017

Trump Talk: What the President is Saying About Trade

At a stop in Vietnam along Trump's tour of five Asian countries, he made further remarks about the state of trade with China. Trump stated that the free trade between China and other APEC nations has resulted in the loss of millions of jobs in the United States. 

However, we have learned in class that while the jobs may have been lost to offshoring, it has ultimately benefited the United States far more than the loss of jobs. The prospect of having to produce the goods made in China within the United States would lead to either a wage decrease or a price increase, which would negatively effect the real wages of the workers within the United States. By offshoring these jobs to places like China, where there is a labor abundance, the United States is able to reap the benefits of having higher wages and paying less for the goods produced in China. China's labor abundance is massive in comparison to other nations, meaning that labor can be utilized at an extremely cheap price. This works well in the production of goods that require more labor rather than capital. Since this is the case, bringing the jobs back from China would only hurt the United States more than it would benefit it. 

Trump also mentioned the trade imbalance between China and the United States. We have also discussed in class how this can be misrepresented. China is often the producer of the final good, but not the parts that go into the final good. However, export measurements only measure the value of the final good, not the value added. This means that the data can be misconstrued to show an enormous trade deficit for the United States. This seems to have a political motivation behind it, as economists who work for the government would have this data readily available to them. At any rate, it seems that Donald Trump is moving closer to imposing further tariffs on the importation of goods from APEC nations, which would ultimately only hurt the United States citizens, as it would decrease the terms of trade by raising the price of imports. This rise in import good prices would shift production back home, but at a higher price to consumers, decreasing the real wages of US citizens in the process.

For more on Trump's trip and comments on his way through Asia, please read this article: