Ben Lee's Blog

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).

South Korea’s unemployment rate rises to year high

Unemployment, also known as the workers that are willing and able to work but do not have a job. In Korea, even though the government has tried to recover the economy, but certain areas were not concerned. “The unemployment rate in South Korea rose to its highest level for one year in February.” As the article explained, although the economy recovery created jobs for the workers, but “the total workforce grew by 341,000 pushing the unemployment rate up.” The disadvantages of high unemployment rate are, higher crime rates, depression, living standars, etc. Thesse will definitely not help the economy development in the future. On the other hand, the inflation, the continuing upward trend in price of general goods and services during a period of time in an economy, was raising, this continues pushing the unemployees to seek for a job while increasing their usual spendings.

To fix this, firms will have to lower the wages while increasing the number of job opportunities for more workers, which is lowering the competitions (as indicated in the left diagram). And governments have to provide subsidies for firms in order to do this (as indicated in the bottom diagram), or even better, in the long run, provide educations or training sessions for the people to increase their skills and abilities for better jobs.