Once again, time management was an issue. It’s a toss-up between fitting everything I should say in, and making it ledgible. I always find (not just for economics) I take my time a bit more in the beginning of the exam, then panic and rush towards the end.

This may be linked to my other issue with the exam. While I knew the theories well enough, I lacked the amount of detail needed to achieve a higher grade. I think I should study the little details more; I tend to study the theories in general, and write quicker so that all the details may be included.

K:So, as a trade commissioner, what does that job include?

C: Well, our primary job is to help Australian businesses to succeed overseas. That could mean helped companies to export from Australia to Japan, helping them invest in Japan and set up companies, and set up successful operations in Japan. But it also involves helped Japanese companies to invest in Australia; a productive investment which helps build our industries. So, our work involves dealing with a lot of Australian companies, understanding what they need, helping them identify the best way to get into the market, in the case of an exporter it could be finding an importer, and agent or distributer, work with a retailer or perhaps even have an online strategy. If they want to invest in the market, well, could be a greenfields investment were they come in and start up a new company from scratch or could be that they buy into an existing company, take over an existing company or form a joint bencher with a Japanese company. With investment we have Japanese companies looking to invest in Australia, not only resources, to secure supply of resources, such as coal, iron or gas, but also people that are looking to invest in the Australian market, people that would be setting up businesses might be distributing food products, beverages, different sorts of industrial products,  even housing products into the Australian market place. So these are some of the things that the job of an Australian trade commissioner includes.

K: Does trading have any affect on relations between Japan and Australia?

C: Australia’s trading relationship with Japan actually goes back to the 1880s, when Australia started exporting wool to the newly emerging textile industry based around Osaka. In the twentieth century, Australia’s trade with Japan was dominated by resources, in particular coal, iron and later natural gas and uranium. In the 1970s, many large Japanese firms invested heavily in Australia to develop the resources industry. However, while the very large firms have played an important role in Australia, trading relations, most of Australia’s exporters are actually small to medium sized companies. These companies export and incredibly wide range of products and services to Japan, from processed foods to computer software, engineering services and aboriginal art. This level of enterprise has forged many close relationships and has fostered greater mutual understanding between Australians and Japanese. This is particularly true if we look at the large amount of business which takes place between family based firms in the two countries. Through commerce, we often see enduring friendships emerging, and the level of understanding and mutual respect that goes far beyond mere business. So we can say that while we often think of the big famous companies when we think of international business, the truth is, the bed rock of commerce between Australia and Japan is built on many thousands of smaller companies who have built close and lasting relationships with each other.

K: You’re also the Australian Consul General in Osaka, what does that job include?

C: Well that involves first and foremost providing to Australian citizens when they need it, being mindful of their welfare and providing consular services to Australians as they might need it. That includes assistance if they should be arrested, what we call notarial services which is witnessing of signatures and other legal documents, which is hard to do when you’re out of the country, letting people know about developments that might affect them, such as the recent earthquake and tsunami, and also public diplomacy, maintaining relationships with key government representatives, business and social leaders in the Kansai area, to understand about the Kansai area and also to promote the individual Australian businesses.

K: You mentioned the earthquake in Tohoku, so in light of this recent event, do you have any extra duties?

C: Well, when the earthquake and tsunami first hit, the most important thing we had to do was to try and determine the whereabouts of Australians we believed were in the affected prefectures. So we spent quite some time largely on the phone trying to call around evacuation centres, schools, hospitals, trying to identify the whereabouts of Australian citizens that were registered with us. After that, we found that a lot of people wanted to go back to Australia. Either they were in earth-quake or tsunami affected areas and couldn’t stay there anymore, or perhaps they were in Tokyo and were concerned about problems in Tokyo such as disruption of transport, regular power blackouts, aftershocks, which some people find very stressful, and also the possibility of radiation coming from the nuclear power plant. So all those people would leave Tokyo and fly down to Osaka, and leave to go back to Australia from Osaka. In some cases they didn’t have all the necessary paperwork they needed, so we would help them and make sure they could get the documentation in time so they could safely go back to Australia. We also make sure that information is available for Australians, to know what’s going on, make sure there’s updated information for them about the possibility of radiation contamination, and also to report back to Australia, so that the government can make decisions about how to handle the crisis. There was a time there when we also had to help the relief team that arrived that arrived from Australia, a group of over 70 people and sniffer dogs that were sent to help find survivors. They arrived and they badly needed water because water was running out in stores in Tokyo. We actually purchased about 1000 litres of water in the middle of the night on a Sunday, and arranged to have it shipped up to Tokyo. We just do whatever is needed to help the relief efforts, to look after Australians’ welfare, and generally provide the support that our government expects us to.

The GDP is 382 billion US dollars. This is a growth rate of .10%. The current acount is 97648. This is 2.5% of the GDP.

One advantage of adopting another currency is if the country is suffering from hyperinflation, as was the case with Zimbabwe. After having an inflation rate of over 500%, they gave up on it and just used American dollars, which lowered the prices in Zimbabwe significantly.

Another advantage is that one can travel to one country to another and not have to change currency. This would be useful in the Euro zone, especially as the countries in the Euro zone are close to one another, and people would presumably travel to other countries quite often.

A disadvantage is that the entire area is affected by changes in the exchange rate. If the demand for French exports decreases, then the Euro will depreciate. Then other countries may have to buy their own currency to reduce the supply of it, to try and appreciate it again.

For this exam, there is an hour in which to answer three questions. Therefore, this should be 20 minutes per question. For this question, you should define comparative advantage and specialization. You should also use an appropriate diagram and explain it briefly. If possible, you should include a real life example, and evaluate the pros and cons of comparative advantage.

2) Definition:

A country has a comparative advantage when they can produce a good or service at a lower opportunity cost than another country. If countries specialise where they have acomparative advantage then the level of output and therefore world welfare will be increased.

3) Triple A pages

Absolute and comparative advantage

Free trade

International trade is based on specialisation at a national level. Countries exchange goods with others and pay for imports from the revenues received from exporting. To work effectively, this system relies on few, if any, barriers existing to interfere with ‘free trade’.

The basic principle of free trade dates back to mercantilism and fed through to the early exponents of laissez-faire economics in the seventeenth century. Amongst the most famous early writers on economics was Adam Smith, who produced his ideas on absolute advantage. This was where one country concentrated on developing those goods in which its natural resource base allowed it to produce more than any other country with given resources. Later, David Ricardo developed comparative advantage theory which suggested that a country should exchange goods with another country as long as the domestic opportunity costs were different. As a result of this, production should increase and individual consumption should rise. In essence, these two early economic observations still underpin much of what we know about international trade.

Absolute and comparative advantage

Absolute advantage exists when one country is able to produce a good more cheaply in absolute terms than another country.

Comparative advantage exists when one country is able to produce a good more cheaply, in comparison to other goods produced domestically, than another country.

Comparative advantage is a principle of economics which states that trade between two countries will be mutually beneficial as long as their domestic opportunity costs of production differ.

Comparative advantage – example

Stage 1 – opportunity cost ratios

Let’s say that there are two countries – Utopia and Happyland. These countries produce two products – hardware and software. With one unit of their resources they can each produce as shown in Table 1 below.

This means that the opportunity cost ratios for each country are as follows:

Utopia – for every 1 unit of hardware they produce the opportunity cost is 5 units of software.

Happyland – for every 1 unit of hardware they produce the opportunity cost is 15 units of software.

This means that Utopia has a comparative advantage in the production of hardware as for every unit of hardware they produce they give up less software. This makes them relatively more efficient at the production of hardware.

However, this also means that Happyland has a comparative advantage in the production of software as for every unit of software they produce they only give up one fifteenth of a unit of hardware, whereas Utopia have to give up one fifth of a unit.

We can see this clearly if we plot the production possibility frontiers for the two countries.

Figure 1 PPF’s for Happyland and Utopia pre-trade

Let’s say that they choose to use half their resources on the production of each good. In this case, their consumption (pre-trade) will be as shown in table 2 below.

Stage 2 – specialisation

If each country now specialises where they have a comparative advantage, then we will get production as shown in Table 3.

We can see straight away that world production is greater, but each country has now only produced one good and, so once they have specialised, they will want to trade to get some of the other good. The terms of trade (or exchange rate) that they trade at will be determined by the opportunity cost ratios we worked out in stage 1. The terms of trade will settle somewhere between the two opportunity cost ratios to ensure that both countries benefit.

Let’s say they settle on an exchange rate of 1 unit of hardware = 10 units of software and that they agree to trade 75 units of hardware for 750 units of software. The position now will be as shown in table 4.

If we now draw the pre-trade and post-trade PPF’s for each country we can clearly see as in Figure 2 below how they are better off from specialisation and trade as they can now reach higher levels of consumption of both goods than was possible before specialisation.

Figure 2 Production – post specialisation and trade

So, consumption increases through specialisation and trade compared to a situation of self-sufficiency. It remains the basic idea behind modern free trade. Despite these advantages, many countries still protect their domestic trade-why? You therefore need to know both the advantages that arise from free trade and the reasons why protectionism still exists (see section 4.2 for details on protectionism).

Limitations of comparative advantage theory

We need to be careful, as comparative advantage theory does not explain all changes in trade patterns. It is an important explanation, but you also need to take into account that:

• Transport costs and tariffs will change the relative prices of goods and may therefore ‘blur’ the impact of comparative advantage.
• Exchange rates do not always relate exactly to what comparative advantage theory suggests as they have many other determinants – this may also negate the theory.
• Imperfect competition may lead to prices being different to opportunity cost ratios. Imperfect competition may also lead to the exploitation of economies of scale which may adjust to what comparative advantage theory suggests should happen.
• Comparative advantage theory is a static theory and does not take account of some of the more dynamic elements determining world trade. In particular, the factor of production capital is not a natural resource, and so may come outside the scope of the theory.

4) – Comparative advantage is between two countries

- Comparing the opportunity cost of producing one product over the other

- The country with the lowest opportunity cost should specialize in that product

- The countries should trade with each other to get the other product.

5) Powerpoint Lecture

comparitive advantage

6) Diagrams

A diagram showing how one country would have a comparative advantage, for example.

Utopia can produce 200 units of hardware for every 1000 units of software. This is 1 hardware for every 5 software, and 1 software for every 1/5 hardware. Happyland can produce 100 units of hardware for every 1500 units of software. This is 1 hardware for every 15 software, and 1 software for every 0.06 of hardware. Therefore, Utopia should produce hardware, and Happyland should produce software, and then they can trade with each other for the other product.

7) Evaluation

You should go over some limitations to this theory. Perhaps, if time permitting, you can talk about pros and cons and the stakeholders involved in employing comparative advantage and specialization.

According to the Marshell-Lerner condition, this should mean the Price Elasticity of Imports plus the price elasticity of exports should be more than 1. However, this is only work if the demand for imports is elastic. The Marshell-Lerner theory is that if these are the conditions, then the current account will improve.

Using the J-curve, a general trend for the current account problem of the UK can be determined. The idea is that things will be worse before they get better. As the market adjusts, the current account deficit will get worse. As you can see from the graph, in the long run, this will lead to a current account surplus.

Definitions:
- Tariff (Located in folder)
- Trade Protectionism (located in folder)

Evaluation:
-The decision to impose a tariff on imported steel (located in folder)

Collaboration
-uploaded diigo articles (located here )
- Commented on Takaki’s blog
Commented on Serina’s blog

Reflection
- Class debate reflection (located here)
- Data Response Reflection (located here)

Improvement:
-Improving a little on Evaluation (located in folder)
-Improving on knowledge of Theory of Comparartive advantage (located in folder)

Showcase:
-US Tyre duties Spark China Clash data response (located in folder)

If the claims are true that China is manipulating their currency, then there is only one way that they can; by adjusting the supply of their currency. By selling more of their currency, the supply curve will shift, therefore decreasing the value of their currency.

According to an article from the BBC, the Chinese yuan is undervalued. “The yuan, which has depreciated 6.9% against the dollar since February 2009…” (BBC, 2009). Despite the current account surplus that China is experiencing, their currency is of still very low value. “An undervalued Chinese currency means that Chinese products are cheaper for US consumers and American products cost more in the Chinese market.” (BBC 2009) China has one of the biggest current account deficits in the world, because their exports are so cheap compared to exports from other countries. This evidence can contribute to the claim that China is manipulating their currency.

Laurence Kotlikoff, an economics professor at Boston University, claims that the US should not crtiticize China. He says that some of China’s current account surplus is caused by some money that they have invested back in the US. ‘The U.S. can’t grow if it doesn’t invest and without foreign investment the country would now be disinvesting.’ (Kotlikoff, 2010) If China didn’t invest in US treasuries, then their current account surplus might not be quite as large, however, without that investment, the US might not experience any economic growth. He also claims that appreciating the Yuan wouldn’t necessarily change the prices of Chinese exports to America. Kotlikoff’s implication here is that China’s current account would probably stay the same. If the goods from China are still cheaper than those from domestic firms, then people would still continue to buy Chinese goods. It is implied that China would have no reason to manipulate their currency if this were the case.

‘The currency [of China] will strengthen to 6.7 per dollar by June 30, according to the median estimate of 25 analysts’ (Chen, 2009) This evidence certainly does not agree with the fact that China might be manipulating their currency. If it was being manipulated to keep exports cheaper, then the trends would certainly not show it appreciating.

If China was manipulating their currency, it would be by intentionally increasing supply, as that is the only thing the government has control over. the Supply would shift from S1 to S2. The price would decrease from P1 to P2 and the quantity would increase from Q1 to Q2.

According to the balance of payments theory, if a country is in current account surplus, then their currency should appreciate. The demand for the yuan should shift, as the yuan is needed to buy the cheap exports, and more people wish to buy them. This should cause the yuan to appreciate. This is not the case. From this evidence, it can be assumed that China is manipulating their currency to some extent.

I did pretty well on the rest of the data response. I lost a mark on the evaluation part, because I didn’t talk really talk about the reasons to trade; one being that it can reduce international hostilities. I think what helped me though was thinking about it in terms of the CRAMPSS evaluation, and deciding which of those could be applied to this section.

I quite like this section. One of the ways I think about diagrams is by thinking of it as a narrative.

One thing I hadn’t considered was NAFTA, or the North American Free Trade Agreement, which Dominic brought up. This is a trade agreement that has benefited the parties involved, particularly Mexico. It was a good argument and it really helped our case.

Avu used the argument that international trade has put Africa in a debt trap. I said that trade gives Africa more goods and services; ones they mightn’t of had before, or ones that might be better than the inferior ones that are available. It surprised me when Hao also rebutted this point, pointing out the rise in GDP that AFrica has experienced.

Of course, sex trafficking was bought up. I actually researched a lot for this, and found an article that claims that prostitution caused globalization, not the other way around. Unfortunately, I did not get to use this point. If I had known Hao was not going to use it in his rebuttal, I would have used it in mine. I didn’t want to say it because I didn’t want to step on Hao’s argument.

One aspect of globalization I hadn’t even thought of was loss of culture, so I didn’t really have anything prepared. Although I liked Harmeet‘s point that globalization could actually bring cultures together, by using our team as an example. Chinese, Australian, Filipino, Korean, Indian and ‘Whatever Kotaro is’ in one room.

Avu and Amber both used Dominic’s shoes as an example of sweatshop labour. Attacking the other team directly is a good debating technique, as often, they have no way to defend themselves. However, we argued that while what pay they get might be bad by our standards, it could be very good for them. The prices of items in those places mightn’t be as expensive as things in our countries, and so the pay they receive could very well be enough  for them to live off.