Month: November 2012

Original Article: Vancouver bike share bailout worries unfounded, say City, Bixi

In Andrew’s post, he clearly identified the reasons that governments have introduced the Bixi project: mainly, to reduce the emissions of green house gasses from modern transportation. This also increase the public awareness towards the environment especially global warming affecting our world significantly. Other concerns may arise from this project such as the profitability of the Bixi which he has noted in the end of the post. Although personally, I believe that profitability is not a concern when it interferes with government policies. Since governments should hold the priority of providing services to the public, which includes the environment, financial difficulties are less essential.

On the other hand, Andrew may discuss more pros and cons of the project to strengthens his point of view. For example, what can the government do to prevent people from stealing the bikes? Who will be responsible if the bike breaks down? In China, people can lend the bikes as long as they scan their ID and return it within a few days. If the deadline was not met, they might be charged. But this is just one of the solutions towards these problems.

India may hike refined palm oil import duties

Indonesia lowered its export taxes on processed palm oil which has worried the domestic Indian refineries. A tariff or export tax is a tax imposed on products that are produced in one country but mostly sold in others[1]. Governments do so to protect their domestic industries from losing demand of their products because of cheaper imports. Tariffs are also used to discourage exploitation and to keep more goods produced in the country, by increasing domestic demand.

According to the article, the Indian refinery industry is requesting an increase in import duties on Indonesia’s export – processed palm oil so as to increase the prices of the oil so that Indian consumers purchase more of the Indian produced oil. A bulk of India’s import is made up of crude palm oil from Indonesia which are then processed into refined oil. However, since Indonesia’s export tax on refined oil has been reduced, the demand for refined oil would increase and India’s refining capacity could turn ‘idle’.

Indonesia’s reduction in export taxes has led to a significant decrease in the cost of the product, which will therefore attract more consumers because of its low price. Since India has been hit by severe food inflation, the domestic demand for imported oil will worsen India’s economic condition. The Indian industry demands an increase in tariff value from $484 a tonne to $1100-1200 per tonne to be imposed on Indonesian oil.

By imposing a tariff, the Indian government would protect the Indian oil refineries. Several jobs, potential output and revenue would also be saved.

This allows domestic producers to increase their production and so the revenue also increases. Despite the Indonesian exporters selling their products to India, they have to pay a tariff which decreases their revenue. Also importers pay a higher price for the imported good, so the market price ishigher. This discourages Indian consumers to purchase the imported oil and switch to Indian produced oil which is more affordable.

This action taken by the government would be beneficial to the Indian industries because of the negative impacts on the economy if the tariff is not imposed. India is already suffering from inflation at 10.9%[2], which has caused higher prices and so a fall in demand. Therefore this request for imposing tariffs is justified because of the economic problems faced by India.

Indian inflation rises to yearly high of 9.78%

As the article states, the inflation in India is caused ‘due to the rising costs of food, fuel and manufactured goods’. Possible types of inflation occurring in the country include –Cost-push and Demand-pull inflation.

Cost-push inflation occurs when there is an increase in the costs of production.

According to the diagram above, we can see that as the cost rise, the short-run AS falls from SRAS1 to SRAS2. This therefore results in an increase in the average price level from P1 to P2 and a decrease in the output from Y1 to Y2. This increase in the cost of production could be due to increase in the average wage levels perhaps due to minimum wage laws and trade union enforcement. Increases in resources, capital creates cost-push pressures on firms. Also, the fall in the value of India’s currency is a possible cause for the inflation. This can be explained by the lower exchange rate, which could make imported capital and raw materials more costly therefore increasing the costs of production.

On the other hand, demand-pull inflation happens due to the increase in AD in the economy. A possible cause for demand-pull inflation is when the economy is approaching full unemployment.

According to the graph above, we can see that as the economy almost reaches full employment level of income, there is a small amount of spare capacity. The increase in AD from AD1 to AD2, results in an increase in the real output from Y1 to Y2. Therefore the increase in the AD brings up the average price level which can be caused due to any changes in any of the components of AD in an economy.

India’s government can manage the inflation using policies specific to the type of inflation. If the inflation is due to excess demand (demand-pull) then the government could reduce the AD in the economy using implementing a deflationary fiscal policy that increases taxes and lowers government spending. Another policy to combat demand-pull inflation would be deflationary monetary policy that raises the interest rates and reduces the money supply in the economy. Cost-push inflation can be managed by reducing income taxes, reducing corporation taxes, reducing trade union power and eliminating or reducing minimum wages.

China launches temporary cotton reserve

The Chinese Government is intervening in the agricultural market in order to protect the producers of cotton. As the article mentions, the government aims to stabilize the expectations of cotton production while preventing major price fluctuation. Cotton being a demand and supply price inelastic agricultural product has a higher tendency to face price volatility. The government has therefore launched a temporary cotton reserve or in other words through the use of buffer stocks.

Also a subset of commodity agreements, buffer stocks are used by countries to stabilize export earnings from producing primary products. Primary products or commodities are used as inputs in manufacturing industries. Buffer stocks aim to stabilize the market price of the product through buying the supplies of the product when there is an excess supply and selling the stock, as the supply is low.

The diagram above shows how the buffer stock scheme works. P min is the guaranteed minimum price to the cotton farmers offered by the government. The price floor is set above the normal free market equilibrium price. The supply curve of the cotton is vertical which represents a fixed supply. The government then buys the excess supply of Q2 to Q1 and stores it in order to maintain the guaranteed price at P min. If there is an excess demand, the government would sell the stocks to reach the guaranteed price at P min.

However there are several disadvantages of implementing buffer stock schemes. Farmers may overproduce as the government promises to buy whatever amount if produced and not bought by customers. According to history, commodity agreements have collapsed due to financing problems.

Although the price may stabilize, inc

omes would not because they vary with the level of output. Storage and financing costs are high. Perishable items cannot be stored for long.

Chinese Premier says country cannot grow in isolation

Why do countries trade? Countries trade for several reasons as the following:

1. To provide a variety and different quality of goods for consumers
2. To maintain good political relationships
3. Sharing competitive and absolute advantages
4. Recognition of domestic firms and more income are also why countries trade.

However,China has applied strong ‘economic policies’ which restricts countries to trade (more import) to China, so Chinese firms are exporting in a greater proportion than importing. And this is a big reason why China has been the world’s leading exporter, consisting of a low and stabilized currency helps the goods to other countries to remain cheap (which may seem like the quality is better). Since China has a big labour force, the labour market is very competitive; which in result causes the wages for general employees to be low. And this, is what I believe, I big advantage for domestic firms, because they will start off their businesses with lower costs but with better productivity workers and high labour forces. This results cheaper exports than other countries. Other than the cheap goods, China also puts on protectionism to protect their domestic firms and meanwhile concentrating on their exports. There are several protectionism in which a country like China may use:
Tariffs

Quotas

Protectionismare useful because it helps the domestic firms to maintain their production but at the same time allows some variety of goods for consumers; however these generally lead to a breaking relationship between countries. But I think it would not affect China as much since it has became a strong economy and especially in terms of exports, therefore other countries are less likely to put a large protectionism on Chinese made products.

Overall, China has ‘apparently’ decided to take away some of its policies and start to focus on its domestic goods, this means, other countries can be benefit because it will be less competitive. And in the future, if the Chinese government truly meant what they said, they will stop weakening its currency, lower their imports restrictions and allow more freedom in the market (such as investments, trading, etc).