Describe about the Macro Economics Analysis for Growth Expectations.
This section contains economic concepts that played role in the economic growth of Japan in the third quarter as reported by BBC on 14th November 2016. The media house reported that exports were helping the Japanese economic growth behold expectations. The export growth is attributed to world demand and depreciating of Yen (BBC News, 2016). This section will outline economic principles and theories that have led to the economic growth in the third quarter. In addition it will discuss effects of president elect Donald Trump on Japan economy.
Summary of the Article
According to the article, the Japan economy has expanded for the past three months as a result of increased exports. The GDP rose at 2.2% marking three consecutive quarter expansion. It reported that the Japanese companies rely on foreign trade due to stagnate in country demand. The Yen has depreciated in respect to dollar after the US elections. The export growth has come in a time when the Japan government has launched economic stimulus package to boost growth. The package was approved in August and was worth $275bn (BBC News, 2016).
Economic concepts in the Article
The following economic concepts are used in the Japan export growth reporting;
Demand and supply: The concept of demand and supply is used to explain how Japanese firms produce and supply products to oversee countries. This indicates that there exist demands in foreign countries that they seek to satisfy by supplying products.
Utility: This concept is used to refer to ability of a product to satisfy human want. There exist several utilities in economics. The one used in this article is place utility that refers to firms moving products from Japan to other countries where consumers can access and use the products (Singh, 2013).
Gross domestic product: This concept is used in economics to measure all products produced within a country for specified period. It indicates the health of the economy. This concept has been used in the article to show that the Japanese economy grew at an annualized rate of 2.2% for three consecutive quarters (CNBC, 2016).
Government injections: This concept refers to government spending in the economy to stimulate economic growth. The Japanese government introduced an economic stimulus package that is meant to boost the economy. The government aims at boosting the economy by injecting over 28trillion Yen. This injection upgrades public facilitates enhancing production.
Economic Analysis in the Article
From an economic point of view, this article can be analyzed in the following ways;
Demand and supply principle
The demand law states that an increase in product price leads to decrease in quantity demand and vice verse. This principle indicates that consumers are willing and able to buy products that are relatively cheap in the markets. Japan being the third largest economy in the world, they are able to produce products that are relatively cheaper to other countries. This keeps the demand for Japanese product increasing in the world market. There is also an increasing demand for manufactured products in the world market. This is as a result of increasing incomes and developments in third world countries. This factor contributes to increasing demand and need to supply products to the world market (CNBC, 2016).
Illustration of Aggregate demand and aggregate supply of Japan
From the illustration above, a change in price will lead to movement of demand on the slope. This indicates that aggregate quantity demanded will increase leading to producers increasing aggregate supplies to meet demand.
Foreign exchange rate
A countries foreign exchange rate is determined by demand and supply rate of other currencies. Depreciating country’s currency in respect to another country makes export cheaper and imports expensive. For instance, falling of Yen in respect to US dollar makes Japanese products cheaper in US and US products expensive in Japan. Depreciation of Yen in the recent months has benefited exporter leading to increased exportations since they are able to sell products at competitive prices. This principle of devaluation and valuation of a domestic currency requires government intervention to avoid extreme cases that have other impacts in the economy.
Government interventions balance the operations in the economy. They are meant to offer incentives or regulations in the economy by either encouraging or discouraging consumption. In the article, the government is using incentives to boost production in the economy by injecting capital in infrastructure. Government spending lowers production costs of firms operating in the economy. These firms are then able to sell their products at lower prices which are competitive in the market. By doing so, the government boost the economy by improving both the welfare of the producers and consumer 9in the economy. For international markets, the country is able to increase it GDP as a result of increased sales. Japan government economic stimulus package will facilitate manufacturing of products at lower prices enabling producers to offer lower prices in the market (Hubbard, 2009). These prices will be competitive and they will make more sales compared other competing countries. Therefore, government spending will work for Japan economy if other countries don’t take other disruptive measures.
Trade agreements are bidding contracts between countries to enforce trading regulations. Trade agreements enable traders to trade freely between countries or blocks. Japan has a trading partnership with USA that enables free trade between the two countries. Japan is main exporter in USA and change of trading agreements can have a big impact on the Japanese economy. With the new president elect in USA, Japan is uncertain of the trade agreements it has with US. If the presidents abolishes the trade agreements, Japan will be highly affected and it GDP will floor in the near future. The economy will lose it key consumers leading to wastage and underutilization of resources.
These decisions taken in the economy have several implications to the country’s economy and the world economy. These implications include the following;
Uncertainty in the economy: Election of Donald Trump for US presidency has led to uncertainty in the world market since market players are unable to predict if the he will honour or abolish free trade. This has led to inability to plan by firms and Japan government. Also, over reliance to export, makes the economy vulnerable since it likely to be affected by any factor occurring in the world.
Increased competition: The government injection by the Japanese government will lead to increased competition in the world market. Exporter will be able to sell products at low prices that will lead to stiff competition in the market. This will trigger other governments in the world to increase spending in order to encourage producers and make them competitive in the world market.
Vulnerability of the economy: Over reliance of export by Japan makes the economy vulnerable. The economy will be at a risk of recession if exports fail. The economy GDP will be affected if any changes occurred in any within any trading agreements.
From the discussion of the expansion of the Japan economy as a result of increasing exports, It can be summarized that the future of the country’s GDP is high dependent on external factors. Since the country depend on export, it not possible to predict performance with certainty. Japan has to maintain good relationship with other countries to ensure that the country’s export trade is maintained. It important that the country maintains a balance of trade to avoid collapse of the economy in case there is a world calamity. Therefore, it can be said that the Japanese government strategy to boost the economy is working out for the japan economy.
UK Trade Deficit despite Falling Pound
This section contains economic analysis of an article written by Angela Monaghan on the Guardian about the UK trade deficits despite the pound drop. The article was written on Wednesday 9th November 2016. The article came as a surprise of the unexpectedly situation of widening deficits in Britain even will the devaluing pound (Monaghan, 2016). This paper will outline the economics concepts in the article and do economic analyze of the situation.
Summary of the article
Following the Brexit in June 2016, the Britain’s trade deficit has widened. This comes despite the sharp fall of pound. The UK trade deficit increased by E1.6 billion E 12.7to in the second quarter. Imports increased by E1.3 billion. Exports decreased by E 200million. It reported that despite the fall of pound by 16% from June is not reciprocating by increasing exports. In the third quarter, the situation has been recorded to be improving. The trade deficit had norrowed by E1.5 billion .Exports have increased by 6.1% while imports increased by only 2.8%. With the improvements in the third quarter, the Trump victory for US presidency poses another uncertainty that is likely to reduce the exports. UK exports 20% of it goods to US and any restrictions if Trump imposes them will lead to increase in GDP by 6%. According to Bank of England, companies are restraining from huge investing citing uncertainty of demand in the future. The Bank report in November showed that the devaluated pound was increasing the costs of companies in Britain (Monaghan, 2016). The profit margins were recorded lower that the previous time. According to Agents reports, businesses feel uncertain of the long term situation even with the recovering after referendum depression.
Economic concepts in the Article
The following economic concepts are present in the article;
Devaluation of domestic currency: This concept involves decreasing price of a domestic currency in respect to foreign currency. Devaluation of domestic currency lowers the amount that can be used to exchange the currency when trading with other countries. It makes exports cheaper and imports expensive. In this case, the UK pound falls by 16% making its exports cheaper and imports expensive for the country’s exporters (Kirby et al., 2016).
Economic block: These are integrations formed in the process of international trade development. Trading countries come together to form a trading blocks that they use to negotiate and form common standards. This concept has been in Europe till June when UK voted for a referendum to exit. The EU block has been handling it trade as one nation as a result of economic integration formed by countries in Europe. Now that UK exited the block, there has been an economic wave that is explained in this article. Britain is struggling maintain it economy after the exiting the block and it has lowered its currency to work on trade deficit.
International trade: This economic concept refers to trade between two countries. It trade of a country and other partners. The concept is evident in the article and UK is noted to be Importing more than it exporting. The deficit experienced in the UK is caused by other factor other than demand of products. Other international factors are affecting the UK trade leading to unexpected widening of the trade deficit.
Profit maximization: This concept is shown by the firms in UK. These firms are pursuing rationality by trying to produce at the point when they maximize revenues and minimize costs. The companies are interested with profit margins and do raise concern when they start making losses. The concept of profit maximization enables business to decide on the amount to produce and input combination to achieve their targets.
Investments decisions: This concept is evident where the UK firms are concerned about the returns and uncertainty accompanying long time investments. Investments decisions are made by analyzing NPV of investments in the future. In this article, it remains uncertain in extent that companies cannot invest due to inability to determine returns in the future due depreciations of pound and Trumps victory for US presidency.
Balance of trade: This is an economic concept that involves a balance between imports and exports. It crucial for any country to strive to maintain a favorable balance of payment where exports are more or equal to import at a specified period of time in order stabilize the economy. In case where imports are more than export, the situation is referred to as imbalance trade of payment and it the role of the government to ensure that the situation is offset soonest possible. This concept is evident in this article as Britain is having more imports than exports.
According to the article, Britain is facing a situation where it currency has fallen since Briexit referendum but the country is not benefiting from it. When a currency devaluates, the country stands a chance to benefit from the exchange rate where exporters are able to sell more at the expense of imports. Exports become cheaper and imports become expensive. Instead of this happening, the exports reduced and imports increased in UK. This phenomenon can be explained and analyzed by use of the following theories and principles;
This theory projects the amounts that a market is willing and able to buy. It identifies the level of income that consumers are willing to pay and how they want them. Demand for products is driven by other factors not just prices charged. The theory indentifies other factors like consumer preference, expected future of supply or prices and availability supplies in the market. The theory holds that the willingness of a consumer is more important in consumption of a certain products then followed by the ability. It states that even if the consumer is able but lacks will, then he or she will not consume the products. It can be said that Briexit can as a shock to other countries in the economic block. This exist perception must have slowed the willingness of UK products consumers in other countries. Therefore, despite the prices decreasing, the country’s product demand did not increase. Though the purchasing power of consumers increased, the willingness remained in the same state. This indicates why UK exports were not in high demand in the world market despite being cheaper.
Illustration of UK exports demand
From the graph above, it can be shown the aggregate demand is constant despite price changes. This indicates that demand for exports is not responsive to prices.
This theory states the economical level of production that firms can produce in a given period of time. It involves combination of inputs to produce at the optimal level. It involves combination of the available inputs and the costs of the inputs at the optimal level in production of a certain amount of produce. The UK firms produce at the level where raw material and labour are affordable. Briexit led to increase in prices of raw materials especially the once imported to the country. The firms also depend on employees who were all over the economic block. This factor must have led to increased production costs for the UK companies leading to decreased production and consequently decreased exports.
Profit Maximization Theory
This theory states that firms in an economy will produce and sell products at the level where they maximize profits. Profits are maximized where margins between revenues and total costs are highest. This theory states that every organization is rational and will be willing to produce at the point where it profits are maximized. This point of operation is where the marginal revenues are equal to marginal costs. The cost of productions is determined by the fixed and variable costs of producing a certain amount of products. The firm will seek to make sales on the quantities that will maximize it profits. This theory states that firms will strive to maintain profit maximization as the core objective of the firm. This explains why firms will vary quantities exported to the market to level that maximize firm’s profits. Therefore, it can be said that the firms reduced sales to levels where total costs and level of revenues to be realized maximized profits.
Implication of this situation
Reduced investments: The uncertainty in the UK economy will lead to reduced investments by the firms due to instability being experienced in the economy. This is likely to lead to decreased future export.
Increased labour costs especially for international experts: The companies will experience increased production costs from employees demanding higher compensation. This is as a result of new regulations and requirements that have separated UK and the economic block that it has been belonging.
From the article of widening trade deficit in UK despite the falling pound, it can be concluded that demand of a country’s products is determined by other factors other than foreign exchange rate. The foreign exchange boosts and facilitates export but not stimulate demand. It can be said that the economy will need time to attain favorable balance of payment. It recommended that the government supports the firms in the country so that the instability experienced in the economy does not collapse their operations. The government can increase it spending on infrastructure and subsidies to promote production and minimize costs of production.
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