Is Currency Depreciation Or More Government Debt Expansionary ?
The Auckland International Airport follows monopoly market structure in New Zealand. This is the busiest and largest airport across the country. Monopoly market represents single seller and large number of buyers in a specific industry. Thus, two characteristics of this monopoly market are barriers to entry and profits (Zeuthen, 2018). Firstly, the monopolist set up significant barriers for other firms to enter into the market. This is because monopolist cannot control the industry completely if supply increases into the market after entering of new markets. Hence, in monopoly market, firm and industry has the same meaning. Secondly, in monopoly market, the monopolist firm can earn supernormal profits in both short-run and long run. On the contrary, the monopolist can also incur loss. This makes the chief difference with perfect competition. In long run, a perfectly competitive market cannot earn super normal profit.
In economy, the concept of allocative efficiency occurs when price equates with marginal cost. However, in monopoly market, both marginal cost and average cost remain below price and consequently the market experiences loss regarding allocative efficiency. This further causes market failure (Holmes, Hsu & Lee, 2014). The monopolist firm cannot experience this allocative efficiency in long run, as the chief focus of this firm is to extract price from consumers. This price remains higher compare to the production costs. On the contrary, a competitive market achieves this condition in long run. With the help of following diagram, this situation can be explained.
Source: (created by author)
The above figure represents long equilibrium condition of a monopoly firm. According to this figure, price (P) remains higher compare to long run marginal cost (LMC). As a result, the monopolist firm does not experience allocative efficiency.
Externalities represent costs related to consumer behaviour, which are not included in the price of final consumed product. Thus, cigarette smoking also generates externalities, as economic costs of smokers in this context are to bear medical costs. However, non-smokers as well as governance bear this cost (Lorant et al., 2017). The other externality associated with cigarettes consumption is the health effects within the environment of tobacco. Due to smoking, non-smokers along with other family members suffer from various health problems. This further decreases worker productivity within country.
Source: (created by author)
As smoking has negative externalities, its social cost remains high compare to private cost. Due to imposition of tax by 10%, price increases from P1 to P2. This further reduces demand and consequently supply curve shifts from S1 to S2 (Hsing, 2017). Thus, total consumption of tobacco reduces from Q1 to Q2.
Public good represents a product, which one person can consume instead of reducing its availability to other one. Therefore, no person can be excluded from consuming this product. Thus, two chief characteristics of this public good is non-excludable and non-rivalries (Stiglitz & Rosengard, 2015). From this aspect, education also falls under the category of public good, as it is the basic good. Every person needs basic education for which government of all countries provides education to everyone through implementing policies.
The government of a country provides public goods to its citizens for accessing basic needs. This type of goods become essential, as market failure occurs within economy and the market does not provide those (Stiglitz & Rosengard, 2015). Thus, it becomes beneficial for some market to do not allow any form of market provision.
Two countries trade with each other when they one of them experiences comparative advantage to produce one product due to lower opportunity cost. Therefore, opportunity cost helps a country to measure its trade-off.
Source: (created by author)
The above figure has represented currency depreciation of NZ dollar in terms of the US dollar. Two main reasons of currency depreciation are high inflation and easy monetary policy. The interest rate in New Zealand remains comparatively low. Moreover, the country experiences higher inflation. Consequently, its currency has depreciated compare to the US dollar.
Currency depreciation in New Zealand can influence its current account balance significantly. Due to this depreciation, exports become cheaper and this in turn increases exports of this country (Rbnz.govt.nz., 2018). On the other side, imports become expensive, which further reduces imports from other countries. As a result, current account of New Zealand improves significantly.
Current account balance (CAB) of June 2017 (a):
CAB: Goods balance + Services balance + primary income balance + secondary income balance
CAB (a): 1032 + 842 – 2214 – 266
CAB (a): - 606
CAB (b): 192 + 950 – 2521 -241
CAB (b): - 1620
According to above calculation, current account balance of New Zealand in both years became negative.
Current account deficit increases over the year in New Zealand and this implies that the country has imported more goods and services over the year compare to its imports (Beusch et al., 2017).
Depending on demand elasticity, the current account balance of balance of payments can be deteriorated even if the terms of trade of a country have improved.
Beusch, E., Döbeli, B., Fischer, A. M., & Ye?in, P. (2017). Merchanting and current account balances. The World Economy, 40(1), 140-167.
Holmes, T. J., Hsu, W. T., & Lee, S. (2014). Allocative efficiency, mark-ups, and the welfare gains from trade. Journal of International Economics, 94(2), 195-206.
Hsing, Y. (2017). Is Currency Depreciation or More Government Debt Expansionary? The Case of Thailand. Journal of Advances in Economics and Finance, 2(4), 237.
Lorant, V., Rojas, V. S., Robert, P. O., Kinnunen, J. M., Kuipers, M. A., Moor, I., ... & Richter, M. (2017). Social network and inequalities in smoking amongst school-aged adolescents in six European countries. International journal of public health, 62(1), 53-62.
New Zealand's central bank - Reserve Bank of New Zealand. (2018). Rbnz.govt.nz. Retrieved 10 November 2018, from https://www.rbnz.govt.nz/
Stiglitz, J. E., & Rosengard, J. K. (2015). Economics of the public sector: Fourth international student edition. WW Norton & Company.
Trade, N. (2018). Free trade agreements. New Zealand Ministry of Foreign Affairs and Trade. Retrieved 10 November 2018, from https://www.mfat.govt.nz/en/trade/free-trade-agreements/
Zeuthen, F. (2018). Problems of monopoly and economic warfare. Routledge.
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