Need Economics help desperate Watch

electrix
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#1
Report Thread starter 9 years ago
#1
Just sat higher economics and this was one of the questions. Can someone answer it for me for 3 marks:

Explain how an increase in value of yuan against dollar is likely to affect US balance of payments
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jlee
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Hey, I sat the exam aswell. I cant remember exactly what I put but it was something along the lines of: provided demand for imports and foreign demand for exports was elastic a fall in the value of the dollar in terms of the yuan would have a positive impact on the balance of payments as Chinese imports would be made more expensive and US exports would be made cheaper comparitively.
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electrix
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(Original post by jlee)
Hey, I sat the exam aswell. I cant remember exactly what I put but it was something along the lines of: provided demand for imports and foreign demand for exports was elastic a fall in the value of the dollar in terms of the yuan would have a positive impact on the balance of payments as Chinese imports would be made more expensive and US exports would be made cheaper comparitively.
Damn, i put down that chinese exports had become more expensive, so the US import bill from china would be more expensive, thus a deficit occurs- totally wrong in hindsight
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irinag
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basically since china is a great exporter and even so to the US, if there is an appreciation of the yuan against the dollar then Chinese goods imported by the Americans will be more expensive to them, so they will have to pay more and this will show in the US current account with a minus. this is a value effect. however, the effect in only on the short term, as on the long run the depreciation of the dollar against the yuan will increase the American exports and then the current account will register an increase, higher than the decrease explained before, this being a volume effect. the theory is known as the J-effect. hope this was helpful
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electrix
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(Original post by irinag)
basically since china is a great exporter and even so to the US, if there is an appreciation of the yuan against the dollar then Chinese goods imported by the Americans will be more expensive to them, so they will have to pay more and this will show in the US current account with a minus. this is a value effect. however, the effect in only on the short term, as on the long run the depreciation of the dollar against the yuan will increase the American exports and then the current account will register an increase, higher than the decrease explained before, this being a volume effect. the theory is known as the J-effect. hope this was helpful
So would my answer get sod all then :sad: Good Essay questions though :woo:
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irinag
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at what exam did u get this question? i mean what year?
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electrix
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(Original post by irinag)
at what exam did u get this question? i mean what year?
This was in the Higher Economics examination today. Would my answer actually merit anything?
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irinag
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the way i see it your answer is valid if u look on the short run, as afterwards the volume effect surpasses the value effect you explained in your answer. i guess mostly it depends on what you were taught in class and how strict the grading is. could be half the points i guess.. i dont really know what the higher economics exam is, is it an undergraduate module?
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electrix
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(Original post by irinag)
the way i see it your answer is valid if u look on the short run, as afterwards the volume effect surpasses the value effect you explained in your answer. i guess mostly it depends on what you were taught in class and how strict the grading is. could be half the points i guess.. i dont really know what the higher economics exam is, is it an undergraduate module?
Same level as AS level i suppose, however it counts as a stand alone qualification
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illy123
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Dollar depreciates against the Yuan. As a result more dollars are required to purchase Chinese exports; so Chinese exports are not as competitive as other countries' or the US's own domestic market. However, American exports are cheaper for the Chinese; as they need to offer fewer Yuan than before. In the short run, this is likely to worsen the current account - The J-curve suggests that due to trade negotiations in the short run; demand for exports and imports is inelastic (it is also hard to quickly find substitutes). So America will import roughly the same amount from China; paying more for it, and it will export the same amount (and get less); so in the SR the current account is worse off. However, as trade negotiations end and substitutes are found; given that the combined elasticity of exports and imports is more than (-)1 (Marshal Lerner condition - you can wiki the proof by calculus) the current account position will be better off.

However, you should not just consider price but also quality. If the quality is high (e.g. good insurance policies, good after-sales help) then the demand is likely to be more inelastic. So if China has got good quality exports it will be hard to find a suitable substitute and so demand will not fall by much in the long term. However, this is unlikely as China hasn't got a reputation for good quality but cheap prices. You must also consider whether America imports or exports more to China (if it imports more then the current account will worsen; whilst if it exports more then its exports will be more competitive). You should also consider that in the LR, floating exchange rates can automatically adjust themselves to a degree! As there will be less demand for Chinese exports (given that America imports the most from China); the lower demand for the Yuan will devalue the Yuan and so in the long run it could return to the level where it was previously at.

I'm sure you can always add more! My macro exam is quite a way away so I'm not fully brushed up on all the topics.

Edit: 3 marks ... hmm .... lol... could be an overkill.
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