Edexcel Economics Unit 4 Global Economy Discussion Thread (10.June.2014)

Original post by Dilzo999

Can someone explain liquidity trap for quantitative easing? Thanks.

“The liquidity trap - a situation in which conventional monetary policy loses all traction” (Paul Krugman, March 2008)--- by this definition, a liquity trap for quantitative easing- the buying up of government bonds by the central bank to increase the supply of money that they can lend to households and businesses, would occur when quantitative easing fails to influence the level of spending in an economy. This would happen if banks were risk adverse, which is likely considering the global crisis brought on by easy credit. Another point could be the marginal propensity to save is high, therefore less loans will be taken out and consumption will remain low.
A good example for a liquidity trap on quantitative easing would be japan. They used to have deflation despite introducing an aggressive form of QE, many argued it was due to the Japanese culture to save rather than spend. However, they have turned it around recently and have had inlation of over 3%, so it could have been due to time lags rather than the ineffectiveness of QE.
QE seems to be the monetary policy less prone to liquidity traps. You normally find it has the effect of causing too much inflation. This is due to the quantity theory of money and the depreciation the increase supply of a currency causes on exchange rate (boosts exports and reduces imports)- --AD= c+i+g+(x-m)
Hope this made sense :smile:

Reply 184

Can anyone explain why a country would want to reduce a trade in goods surplus? I was lead to believe that a surplus was a good thing and that it was only deficits that countries wanted to reduce...until my teacher decided to drop the bomb that surpluses were bad (on my official last econ lesson!!) :curious:

Reply 185

ThatGirlYasmin

Original post by cashisking

Can anyone explain why a country would want to reduce a trade in goods surplus? I was lead to believe that a surplus was a good thing and that it was only deficits that countries wanted to reduce...until my teacher decided to drop the bomb that surpluses were bad (on my official last econ lesson!!) :curious:

This is what I got taught:

- Having a surplus prevents another countries economy from growing, eg Germany exports more than they import and thus have a current account surplus. If they were to import more their surplus will be reduced in return for growth in another country.

-It causes the currency to appreciate. This makes their exports more expensive which may lead to fall in aggregate demand. They may find it difficult to maintain a surplus without a fall in consumption.

-It shows that there is less consumption of goods in the country which could suggest a lack of improving living standards.

-Could leave the country vulnerable to recession if demand in trading partner countries fall.

Yeah, I guess that's it!

Reply 186

Original post by cashisking

Can anyone explain why a country would want to reduce a trade in goods surplus? I was lead to believe that a surplus was a good thing and that it was only deficits that countries wanted to reduce...until my teacher decided to drop the bomb that surpluses were bad (on my official last econ lesson!!) :curious:

The main things I can think are inflation (as it's an injection into the circular flow of income) and loss of demand following recessions (many countries including the US implemented high protectionist policies) so if countries rely on exporting then this could be a problem. Also fails to consider dynamic comparative advantage.

Reply 187

Original post by ThatGirlYasmin

This is what I got taught:

- Having a surplus prevents another countries economy from growing, eg Germany exports more than they import and thus have a current account surplus. If they were to import more their surplus will be reduced in return for growth in another country.

-It causes the currency to appreciate. This makes their exports more expensive which may lead to fall in aggregate demand. They may find it difficult to maintain a surplus without a fall in consumption.

-It shows that there is less consumption of goods in the country which could suggest a lack of improving living standards.

-Could leave the country vulnerable to recession if demand in trading partner countries fall.

Yeah, I guess that's it!

And a great evaluation point here could be that possibly the exchange rate won't be significant for some countries - like China had a pegged interest rate which affected the US

Reply 188

Original post by ThatGirlYasmin

This is what I got taught:

- Having a surplus prevents another countries economy from growing, eg Germany exports more than they import and thus have a current account surplus. If they were to import more their surplus will be reduced in return for growth in another country.

-It causes the currency to appreciate. This makes their exports more expensive which may lead to fall in aggregate demand. They may find it difficult to maintain a surplus without a fall in consumption.

-It shows that there is less consumption of goods in the country which could suggest a lack of improving living standards.

-Could leave the country vulnerable to recession if demand in trading partner countries fall.

Yeah, I guess that's it!

Thank you

Reply 189

Original post by Ehawks

The main things I can think are inflation (as it's an injection into the circular flow of income) and loss of demand following recessions (many countries including the US implemented high protectionist policies) so if countries rely on exporting then this could be a problem. Also fails to consider dynamic comparative advantage.

Thanks

Is there any difference between dynamic comparative advantage and comparative advantage?

Reply 190

Original post by cashisking

Thanks

Is there any difference between dynamic comparative advantage and comparative advantage?

It's simply time periods. Static means that it considers something at the point of time, whereas dynamic considers the long-run. When comparative advantages are found, then they only actually consider the short-run. So if we apply this here, China may have a comparative advantage in manufactured goods now, but it may not in the future. So therefore, if it has an economy which is export reliant and countries recognise a better trading partner, then China's economy can crash. If you get that in, then you'll be looking at high marks! :smile:

Reply 191

Which one of you lovely people would like to explain quantitive easing to me please? :smile:

Reply 192

Original post by Ehawks

It's simply time periods. Static means that it considers something at the point of time, whereas dynamic considers the long-run. When comparative advantages are found, then they only actually consider the short-run. So if we apply this here, China may have a comparative advantage in manufactured goods now, but it may not in the future. So therefore, if it has an economy which is export reliant and countries recognise a better trading partner, then China's economy can i crash. If you get that in, then you'll be looking at high marks! :smile:

thanks

i think i get it! seems like a good evaluation point to have. Fingers crossed balance of payments comes up

Reply 193

44289

why would a fall in manufactured goods prices lead to a worsening in the terms of trade?? :confused:

Reply 194

aminkaram

Guys trade weighted index and sterling effective index are the same thing right?

An can someone explain import penetration ratio and export sales ratio.

(edited 9 years ago)

Reply 195

Original post by Ehawks

Which one of you lovely people would like to explain quantitive easing to me please? :smile:

Quantitative easing is a bit of a tricky one. Its a monetary policy implemented by the central bank to influence the supply of money and therefore inflation rates.
Say the level of inflation is below the 2% target then the central bank would buy up government bonds to increase their money supply. If the banks have access to more money then they can lend to private individuals and businesses. This should boost aggregate demand as consumer spending would rise.
-Another form of QE is printing money. I don't think this is used by the UK, but it has the same effect as buying government bonds (supply of money increase).
-Another point of QE is that it would cause the supply of that currency to increase. If you draw an exchange rate diagram you would see that as the supply of a currency increases the currency becomes weaker, so it becomes cheaper for international economies to buy your goods. Therefore there is an improvement in the current account. AD would also go up as exports are a component.

Reply 196

Trilo9y

Someone explain Primary Product dependency for me please.
Need analysis and evaluation.

Reply 197

Original post by 44289

why would a fall in manufactured goods prices lead to a worsening in the terms of trade?? :confused:

Terms of trade= (index of export prices/index of import prices) x 100.
Lets say Germanys cars decline in price, this would mean their export prices fall. If this falls more than the price of their imports then the value for T.O.T would get smaller. This is called a worsening as they have less money to pay for those imports.

http://www.youtube.com/watch?v=wmqnCjjidEM --- he explains it much beter :tongue:

Reply 198