Pakistan

$451.2 billion (2010 est.)

country comparison to the world: 28

note: data are in 2010 US dollars
2.7% (2010 est.)

country comparison to the world: 135

$2,400 (2010 est.)

country comparison to the world: 181

49.9% of GDP (2010 est.)

country comparison to the world: 52

-$2.641 billion (2010 est.)

country comparison to the world: 164

-$3.583 billion (2009 est.)
$20.29 billion (2010 est.)

country comparison to the world: 68

$18.33 billion (2009 est.)
$32.71 billion (2010 est.)

country comparison to the world: 56

$28.53 billion (2009 est.)
Pakistani rupees (PKR) per US dollar – 85.27 (2010), 81.7129 (2009), 70.64 (2008), 60.6295 (2007), 60.35 (2006)
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INTERNATIONAL ECONOMICS: Terms and Definitions

Reasons for trade:

Economic integration and the WTO:

Balance of payments and balance of payments problems:

Exchange rates and the terms of trade:

Free trade and protectionism

N06 [Paper 2]: Explain the link between the Marshall-Lerner condition and the J-curve effect.

Definition:

Marshall-Lerner condition: looks at the overall impact of a depreciation on the current account of the balance of payments

J-curve: This is because in the short run, there will be few extra exports sold when prices fall – people overseas do not react immediately and so export demand will take time to change. However, extra money will have to be paid for imports immediately and so the current account will tend to deteriorate. In the medium term however, the lower export prices will start to lead to an increase in demand for them and so the current account will start to improve. The export elasticity of demand is therefore low in the short run, but will be higher in the long run.

Balance of Payments: The balance of payments accounts measure the international trade performance of an economy and show how well it is managing to match imports and exports of goods and services and the flows of investment in and out of the country. The accounts are usually split into two parts – the current account and the capital account. The current account shows trade in goods and services while the capital account shows flows of investment into and out of the country.

  • Current account
  • Capital account

Triple A:

Marshall-Lerner condition

A depreciation will increase import prices and decrease export prices. Therefore, the more price elastic the demand for imports and exports, the greater will be the fall in demand for imports and the increase in demand for exports and the greater will be the improvement on the current account.

The Marshall-Lerner condition looks at the overall impact of a depreciation on the current account of the balance of payments. This will be the sum of the effects we identified above on imports and exports. The condition states that the current account will improve after a depreciation if the sum of the price elasticities of demand for imports and exports is greater than 1. The further above 1 the sum of the elasticities is, the greater the improvement in the current account will be. Follow the link below for a more detailed explanation of this with associated diagrams.

J-curve

Evidence around the world suggests that the Marshall-Lerner condition does not hold in the short run, but does in the medium to long run. This is because in the short run, there will be few extra exports sold when prices fall – people overseas do not react immediately and so export demand will take time to change. However, extra money will have to be paid for imports immediately and so the current account will tend to deteriorate. In the medium term however, the lower export prices will start to lead to an increase in demand for them and so the current account will start to improve. The export elasticity of demand is therefore low in the short run, but will be higher in the long run.

Relevant Powerpoint Slides


Diagrams


US, “China is MANIPULATING RMB!”

China used to have fixed exchange rate, so the government can set its currency at certain level. An exchange rate is the value of one currency expressed in terms of another. The system China used to have, a fixed exchange rate, is an exchange rate regime where the value of a currency is fixed, or pegged, to the value of another currency, or to the average value of a selection of currencies, or to the value of some other commodity, such as gold. Therefore, Chinese Yuan used to be very stable as market forces didn’t cause the currency to appreciate or depreciate. However, China changed their exchange rate system to a managed currency exchange rate, also called as “managed float”. A floating exchange rate is an exchange rate regime where the value of a currency is allowed to be determined solely by the demand for, and the supply of the currency on the foreign exchange market. However, since it’s “managed,” there are several policies in managing the demand and supply; therefore, in “managed floating” system, the value of currency is not determined solely by the demand and supply. Although some economists mention that at one point, China went back to its old, fixed exchange rate as the value of Yuan greatly depreciated, but there was no official announcement on dismissing the managed float system.

Currently, according to the article, US government is becoming suspicious about China’s RMB as the value of RMB has been very low. US insists that the value of RMB is manipulated by Chinese government. In floating exchange rate system, as the diagram on the left shows, the currency appreciates when there’s high demand with low supply, while it depreciates when there’s low demand with high supply. An appreciation is an increase in the value of one currency in terms of another currency in a floating exchange rate system, while a depreciation is a fall in the value of one currency in terms of another currency. According to the US, China is depreciating the currency on purpose because China wants higher profit from exporting. US and other foreign countries will import goods from China because the value of currency is depreciated, which allows foreign consumers to buy greater amount at lower price. As many countries now want to buy RMB, the demand will increase, whereas the supply is not increase as rapidly. Therefore, the RMB should appreciate.

However, surprisingly, the value of RMB is still very low, as if it were not affected by the demand and supply of the world market. That is, China uses managed floating exchange rate, but is employing various policies to manipulate the value of RMB to keep it low. Weak RMB causes US to import more of Chinese goods, which lessens the domestic businesses’ market. Consumers will be happy about weak RMB as they can buy the same type of goods at a much lower costs, while local businesses are suffering from it. On the other hand, when the RMB is strong, Chinese local businesses will get damaged as the consumers will buy cheaper foreign goods. Unlike how RMB is expected to react to the increasing demand for the currency, RMB is kept very low and this situation causes US to cast doubt on the currency manipulation.

JAPAN current account balance (CAB) (via kana’s blog♪)

Unlike the country I chose, Mexico, Japan has current account surplus. The difference is shown greatly in the bar graphs. One for Mexico’s current account balance is basically opposite of that of Japan’s current account balance.
I think this post shows the how Japan has current account surplus, but for the links, I think it’s better to link it to the title or words rather than copying and pasting the URL.

JAPAN current account balance (CAB) 1) deficit/surplus in term of GDP  [http://indexmundi.com/japan/current_account_balance.html] Japan's surplus began from 1981 with Current Account Balance (CAB) 4.761, probably after the world war. Japan is ranked 2nd for 2009 CAB by having 131.2 billion dollars (US billion dollars). 2) analysis one recent article: [http://news.bbc.co.uk/2/hi/business/7573892.stm] In this article, Japan's trade surplus lowered down 91.15bn yen ($830.5m; £444.2m), … Read More

via kana's blog♪

Single Currency

Single currency is when a number of countries join their currencies together into one single currency. For example, Euro of European Union is a single currency.

Pros:

  1. A single currency removes the cost that is required for converting from one country’s to another currency. This benefits individuals or firms that travel or trade a lot among the member states of EU.
  2. It’s easy to compare the price when a single currency used, because there’s no need to convert each time you compare the prices of goods in different countries. Therefore, this increased price transparency helps firms to cut costs, as they can find the cheapest goods or services more easily.
  3. Asingle currency should encourage greater competition as there is greater transparency in prices. This helps increase efficiency as firms are forced to remain competitive.
  4. The Euro is one of the most significant world currencies, as there are over 300 million consumers. Both these things add up to the possibility of increased inward investment from the rest of the world into Europe.
  5. When a single currency is used, one can eliminate concerns about exchange rate uncertainty, at least within the single currency zone. Thus, one doesn’t have problems with knowing whether the exchange rate will rise or drop. Hence, the trading within the zone is encouraged with the use of single currency.

Cons:

  1. Having a single currency means that there is a single monetary policy, which sets interest rates for all Euro countries. That is, the monetary policy will be applied all the Euro countries, so any monetary policy will be set to benefit more countries, regardless of the consequences in one country that might be damaged by that monetary policy.
  2. Even when countries are closely in line, it may be possible that a single policy will have different effects on different countries. For example, a much larger proportion of people own their own house in the UK than many other European countries. This makes the UK much more reliant on mortgage lending. A change in interest rates then, may have a different effect on the UK from other countries.
  3. Single currency is bad for recovering from the external economic shocks, such as a rapid rise in oil prices, which may have an adverse impact, depending on how much a country depends on the scarce resources.
  4. Transition costs are very high because all of the already issued money have to be destroyed or remade into a new currency (single currency). New money has to be issued and the old withdrawn, vending machines have to be adapted to take the new coins,and foreign exchange departments may shrink in size in some financial institutions.

According to the article about the situation in Spain, Spain is on the edge of debt crisis after introducing a single currency, followed by experiencing prosperity. Although the problems Spain had primarily were better than the problems in Greece or Ireland, the actual crisis was developing under the surface. While there was a boom in the Euro countries, the prices and wages increased more rapidly in Spain in the attempt to cover up for the large trade deficit. However, after the bubbles created over the boom were eliminated, Spain was left with incredible costs, which made Spain even weaker than before the boom. It’s hard for them to become competitive in the world trade again because they are using a single currency. If Spain had had its own currency, peso, it could have intervene in the exchange rate to become competitive again. So, in the case of Spain, it seems like it was sweet and dreamy when the Euro was first introduced, but later, they realized that it’s more bitter and sour to have a single currency.

 

Section 4.5&4.6 Reflection.

In sections 4.5 and 4.6, I think I have understood currencies, exchange rate and the aspects of balance of payments. Now, I can define all the terms related to the exchange rate or the balance of payments. However, I think I should understand and practice explaining the effect of certain economic impositions, such as growth in GDP (increase in income) or interest rates, on the short term and long term. In addition, for the future reference, I should remember to relate the self-correcting system to the balance of payments in long term.

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