Comment on Jessie’s Blog

Comment:Jessie, this blog post is done very well.  Good Job.  It made the J Curve idea really easy to understand.  Although, you did not talk about whether or not this idea is just a theory or if it is a concept that is evident in many different economies.  Some more real world examples would help.  Overall, though, I thought this blog post was done very, very well.  It really simplified the concept making it very easy to understand! GOOD JOB!

Jessie’s Blog Post:

Things get worse before they get better

December 8, 2010 by 11smitje

People are worried that even though the UK is trying to  rebalance its payments by increasing exports, but currently its imports are increasing at 5 times the rate of their exports. This is because of the J-curve idea. Initially when a currency depreciate, imports become more expensive but exports do not increase, making the currency worse off. This is because domestic firms are already contracted to importing and cannot change, so they must buy the expensive imports until they can renegotiate their contracts. Also, the world firms are already contracted to previously cheaper countries, so it will take time for them to get contracted with the U.K. Although it seems like Things are getting worse, as people are buying expensive imports and exports have not increased. However, given time the economy, in theory, will improve.

Response to “UK trade gap widens unexpectedly as imports rocket”

This blog post is in response to the article “UK trade gap widens unexpectedly as imports rocket.”:

Britain’s trade gap widened more than expected in March as imports shot up five times faster than exports, according to official data that cast fresh doubts over the prospects of an export-driven economic recovery.

Contrasting with surveys indicating fast-growing overseas demand, partly thanks to a weak pound, the Office for National Statistics reported that the UK’s deficit on trade in goods widened by £1.2bn in March to £7.5bn. That compared with a deficit of £6.3bn in February, when exports bounced back after the harsh weather in January had dampened business activity and blighted transport. Economists had forecast March’s goods trade deficit to widen only slightly to £6.4bn.

While many businesses say overseas orders have been improving, the official data underlined worries among economists that, for now at least, a weak pound is raising costs for importers but not yet providing a significant boost to exports. At the same time there are fears that financial troubles in the eurozone, a key trading partner for the UK, will hamper demand.

“Net exports are one of the greatest hopes for growth this year and next given the improvement in competitiveness associated with the pound. Thus far, all the weakening in sterling has brought is inflation and we are still holding our breath for the long awaited boost to growth,” said Alan Clarke, UK economist at BNP Paribas. “Although the weakness of the pound improves competitiveness, unless this is accompanied by an expansion in overseas demand, then there will be little if any improvement in the performance of exports.”

Manufacturing offers some hope

The ONS reported that total exports of goods in March rose by 1% but total imports rose by 5.2%, with imports of cars, other consumer goods and chemicals in particular outweighing the equivalent exports. The total trade gap in goods and services with the rest of the world widened to £3.7bn in March from a deficit of £2.2bn in February as the surplus on trade in services also deteriorated. Imports from the EU rose almost four times faster than exports.

Britain has not run a surplus in visible trade – manufactured goods, food and drink and oil – since 1982, and the deficit peaked at £93bn in 2008. The trade balance for goods and services combined has been in the red in every year since 1997, as the biggest component, manufacturing, has deteriorated particularly sharply.

Still, both parties in the new coalition government have pledged to help manufacturing return to strength after the recession.

The trade numbers follow official March manufacturing data showing the fastest output growth in almost a decade. Economists said that expansion accounted for some of the rise in imports in March as factories bought in components.

Most analysts still see exports picking up this year and businesses appear to share their optimism. A survey of UK firms trading internationally by HSBC showed 92% expect volumes to stay the same or increase over the next six months.

“We believe that trading internationally will help UK businesses beat the recession,” said HSBC’s Ian Tandy.

This article represents the idea of Marshall-Lerner condition.  The Marshall-Lerner Condition states that for a currency devaluation to have a positive impact on trade balance, the sum of price elasticity of exports and imports (in absolute value) must be greater than 1.  This condition was created by and named after Alfred Marshall and Abba Lerner, who were economists studying this particular area.  The condition gives a reason for why a reduction in value of a nation’s currency need not immediately improve its balance of payments.  there is a mathematical formula for the Marshall-Lerner Condition, so one can use the formula to see find if there will/should be devaluation of a currency.

United States: Current Account Deficit (via Johanne’s Economic IB Blog)

This is really interesting Jo! It was surprising that the economy changed from surplus to deficit in such a short amount of time. I would have never guessed that it would change that quickly. Since the USA is at 6.4%, is it the worst in the world? I would not have thought that the USA would have the worst deficit since they have one of the largest economies in the world. But anyways, GOOD JOB!!

In 2010, the United States’ economy has a current account deficit. Although, the United States’ has not always been in this situation. From the 1980s to around the late 90s, they were in a surplus and were a really strong economy. The current account ranged from 5 billion to 100 billion.  But from the start of the new millennium, their current account started to go downhill, all they way to a deficit of 800$ billion in 2006. As one economy experi … Read More

via Johanne’s Economic IB Blog