Thursday, April 26, 2007
China beats US as Japan’s trade partner
Sam’s bedtime reading? The topics of today’s Blog are covered in LiveEcon:
Sam’s bedtime reading? The topics of today’s Blog are covered in LiveEcon:
Chapter 13 on the foreign exchange market and the BP curve.
Chapter 14 on the IS-LM model in the open economy.
China has officially displaced the US as Japan’s largest trading partner, figures revealed on Wednesday. Trade with China soared in the fiscal year ended last month, with Japanese exports growing 21 per cent, almost double the growth of exports to the US. The record China figure reflected high demand for Japanese manufacturing inputs and greater shipments of finished products. This comes as Japan’s trade surplus soared 16.4 per cent, following a 31.4 per cent drop the previous year. Japan’s trade surplus was particularly high in March, growing 73.9 per cent, to Y1,633.5bn ($13.8bn, €10bn, £6.9bn), as imports slowed sharply while exports remained strong, especially in the car sector. The strong figures were supported by lower oil prices and the weak yen. Japan’s trade surplus is expected to continue on a firming trend, despite slower economic activity in the US.
Read the full story at:
http://www.ft.com/cms/s/a194348e-f340-11db-9845-000b5df10621.html
According to the Mundel-Fleming model, the major determinants of a country’s exports are the level of foreign national income and the exchange rate (defined as the price of the domestic economy’s currency in terms of one unit of foreign currency). In the case of Japan, the rapid economic expansion experienced by China in recent years has led to an increase in the amount of Japanese exports to that country. This has been aided by the weak yen, which has made the foreign currency price of Japanese goods lower relative to the price of goods in Japan’s major trading partners. The weakness of the yen has triggered concern in some quarters but the international reaction so far has been subdued, as it is widely accepted that an appreciation of the yen would potentially jeopardise the recent signs of economic recovery in Japan.
The much acclaimed new interactive learning package LiveEcon can help you understand the economics behind these important policy events. For example, Chapters 13 and 14 outline what are the determinants of a country’s current account and illustrate the effect of changes in foreign incomes and exchange rates on the trade balance and overall level of national income. Find out how to get LiveEcon at http://www.liveecon.com/. Download this blog as a Blogcast via the website.
Wednesday, April 25, 2007
Bank of England envisages 'sharp' inflation drop
Ever wondered about Sam’s nocturnal activities? The topics of today’s Blog are covered in LiveEcon:
Chapters 6 and 11 on monetary policy.
Chapters 7 and 15 on inflation.
Governor Mervyn King said that there could be a "sharp" decline in the UK's rate of inflation over the next four to six months. Interest rates were left unchanged at 5.25% earlier this month. Many analysts are predicting that interest rates will increase in May after house price growth has continued. UK house prices had risen because of low interest rates and limited supply. However, lower energy costs and higher borrowing costs probably would led to slower price growth in coming months.
Read the full story at: http://news.bbc.co.uk/2/hi/business/6587253.stm
Inflation has recently surged to over 3%, substantially in excess of the 2% target. In deciding whether or not to raise interest rates to slow price growth, the Bank exercised caution last month, and left interest rates unchanged. To some extent rises in energy prices and house prices have contributed to the high levels of inflation, but energy prices have now started to fall and as cuts feed through to the consumer, the pressure on prices should ease.
The much acclaimed new interactive learning package LiveEcon can help you understand the economics behind these important policy events. For example, Chapters 6 and 11 look in some depth at monetary policy, and chapters 7 and 15 look at the causes and consequences of inflation. Find out how to get LiveEcon at http://www.liveecon.com/. Download this blog as a Blogcast via the website.
Ever wondered about Sam’s nocturnal activities? The topics of today’s Blog are covered in LiveEcon:
Chapters 6 and 11 on monetary policy.
Chapters 7 and 15 on inflation.
Governor Mervyn King said that there could be a "sharp" decline in the UK's rate of inflation over the next four to six months. Interest rates were left unchanged at 5.25% earlier this month. Many analysts are predicting that interest rates will increase in May after house price growth has continued. UK house prices had risen because of low interest rates and limited supply. However, lower energy costs and higher borrowing costs probably would led to slower price growth in coming months.
Read the full story at: http://news.bbc.co.uk/2/hi/business/6587253.stm
Inflation has recently surged to over 3%, substantially in excess of the 2% target. In deciding whether or not to raise interest rates to slow price growth, the Bank exercised caution last month, and left interest rates unchanged. To some extent rises in energy prices and house prices have contributed to the high levels of inflation, but energy prices have now started to fall and as cuts feed through to the consumer, the pressure on prices should ease.
The much acclaimed new interactive learning package LiveEcon can help you understand the economics behind these important policy events. For example, Chapters 6 and 11 look in some depth at monetary policy, and chapters 7 and 15 look at the causes and consequences of inflation. Find out how to get LiveEcon at http://www.liveecon.com/. Download this blog as a Blogcast via the website.
Monday, April 23, 2007
Is the China effect over?
For the last few years, the biggest risk to the strong performance of UK economy has been inflation. But the risk has long been that we would discover that underneath our strong economy, was brewing some hidden inflationary pressure. If that emerged, it would imply that some of our recent economic success had been built on shaky foundations: it would mean that interest rates had perhaps been "too low", that the borrowing we have done on the back of low interest rates was less affordable than we thought, that the house prices we have paid on the back of easy borrowing are unsustainably high, and that any sense of consumer wealth deriving from higher house prices is a mere illusion. Well, has this inflationary pressure now materialised, or is today's 3.1% rate just a blip? Certainly it could be a blip as inflation is volatile at the moment, largely as a result of energy price swings. So we have to see through that volatility and ask where inflation will settle. That should be well below three percent, but there is still room for concern.
It all comes down to the China effect. In recent years, our economy has been dependent on deflating imported goods prices. To some extent, we've been able to enjoy simultaneous fast domestic growth, strong consumer spending and low inflation, because the prices of manufactured goods have been falling each year. If the flow of cheap imports dries up, either because the Chinese export prices rise or because our exchange rate falls, then we have to adjust the domestic economy to slower growth and restrained consumer spending. One theory is these are going up in price now, as we've reach the end of the gains to be derived from out-sourcing our factories. When there are no more factories to send abroad, there are no more cost-savings to be found in manufactured goods prices. The other factor to watch is the exchange rate. It has been relatively high, and in recent days strengthening against the dollar. As most Chinese imports are priced in dollars, they are going to get cheaper not more expensive when converted into pounds. But unless the pound rises forever against the dollar - which is unlikely - the exchange rate provides just temporary shelter against import price rises. Don't learn to rely on it.
Read the full story at: http://www.bbc.co.uk/blogs/thereporters/evandavis/
Evan's blog entry raises a number of important issues: the UK boom may be built on unsustainable levels of borrowing, aided and abetted by cheap imports (in turn helped by a "stronger" pound). A "stronger pound" (a rise in the exchange rate defined as the foreign price of domestic currency) makes imports cheaper and exports less competitive. This worsens the domestic trade balance (see http://news.bbc.co.uk/2/hi/business/6547937.stm for some background on this). As the Chinese economy develops, and/or if the pound weakens, import prices rise, and this feeds through into domestic inflation.
The much acclaimed new interactive learning package LiveEcon can help you undertand the economics behind these important policy events. For example, Chapter 13 looks in depth about the effects of exchange rate movements on the economy as a whole. Find out how to get LiveEcon at http://www.liveecon.com/. Download this blog as a Blogcast via the website.
For the last few years, the biggest risk to the strong performance of UK economy has been inflation. But the risk has long been that we would discover that underneath our strong economy, was brewing some hidden inflationary pressure. If that emerged, it would imply that some of our recent economic success had been built on shaky foundations: it would mean that interest rates had perhaps been "too low", that the borrowing we have done on the back of low interest rates was less affordable than we thought, that the house prices we have paid on the back of easy borrowing are unsustainably high, and that any sense of consumer wealth deriving from higher house prices is a mere illusion. Well, has this inflationary pressure now materialised, or is today's 3.1% rate just a blip? Certainly it could be a blip as inflation is volatile at the moment, largely as a result of energy price swings. So we have to see through that volatility and ask where inflation will settle. That should be well below three percent, but there is still room for concern.
It all comes down to the China effect. In recent years, our economy has been dependent on deflating imported goods prices. To some extent, we've been able to enjoy simultaneous fast domestic growth, strong consumer spending and low inflation, because the prices of manufactured goods have been falling each year. If the flow of cheap imports dries up, either because the Chinese export prices rise or because our exchange rate falls, then we have to adjust the domestic economy to slower growth and restrained consumer spending. One theory is these are going up in price now, as we've reach the end of the gains to be derived from out-sourcing our factories. When there are no more factories to send abroad, there are no more cost-savings to be found in manufactured goods prices. The other factor to watch is the exchange rate. It has been relatively high, and in recent days strengthening against the dollar. As most Chinese imports are priced in dollars, they are going to get cheaper not more expensive when converted into pounds. But unless the pound rises forever against the dollar - which is unlikely - the exchange rate provides just temporary shelter against import price rises. Don't learn to rely on it.
Read the full story at: http://www.bbc.co.uk/blogs/thereporters/evandavis/
Evan's blog entry raises a number of important issues: the UK boom may be built on unsustainable levels of borrowing, aided and abetted by cheap imports (in turn helped by a "stronger" pound). A "stronger pound" (a rise in the exchange rate defined as the foreign price of domestic currency) makes imports cheaper and exports less competitive. This worsens the domestic trade balance (see http://news.bbc.co.uk/2/hi/business/6547937.stm for some background on this). As the Chinese economy develops, and/or if the pound weakens, import prices rise, and this feeds through into domestic inflation.
The much acclaimed new interactive learning package LiveEcon can help you undertand the economics behind these important policy events. For example, Chapter 13 looks in depth about the effects of exchange rate movements on the economy as a whole. Find out how to get LiveEcon at http://www.liveecon.com/. Download this blog as a Blogcast via the website.
Thursday, April 19, 2007
Chinese growth heating up economy
China's economy has grown by an annual rate of 11.1% in the first three months of 2007, official figures show, fanning fears it is starting to overheat. Separate figures showed annual inflation rose to 3.3% in March. China's main share index closed 4.5% lower amid concerns interest rates will have to rise to slow inflation because earlier measures have largely failed. "Investors are worried the government may take serious steps to rein in the economy, such as an interest hike plus some administrative measures," said Xu Yinhui, a fund manager at Guotai Junan Securities.
China's economy has grown by an annual rate of 11.1% in the first three months of 2007, official figures show, fanning fears it is starting to overheat. Separate figures showed annual inflation rose to 3.3% in March. China's main share index closed 4.5% lower amid concerns interest rates will have to rise to slow inflation because earlier measures have largely failed. "Investors are worried the government may take serious steps to rein in the economy, such as an interest hike plus some administrative measures," said Xu Yinhui, a fund manager at Guotai Junan Securities.
Read the full story at: http://news.bbc.co.uk/2/hi/business/6570713.stm
The rapid growth of the Chinese economy in the past decade (China has grown by more than 10% in each of the past four years), has taken place on the back of high government spending, rising exports and increased foreign investment. All of these injections to the Chinese economy are stimulating growth by shifting the AD curve to the right. Nevertheless, this accelerating growth of GDP has raised concerns that the economy may now be ‘overheating’, in the sense that excess capacity has been used up, subsequently putting upward pressure on prices. The rising investment rate, though, should be contributing towards raising the Chinese economy’s long-run (steady-state) capital stock and output level.
The much acclaimed new interactive learning package LiveEcon can help you undertand the economics behind these important policy events. For example, Chapters 4 and 14 (at principles and intermediate level, repectively) explain how do injections in the open economy affect the aggregate level of demand, while Chapter 15 uses the AD-AS framework to explain how may overheating occur depending on the slope of the AS curve. Furthermore, Chapters 8 and 17 (also at principles and intermediate level) illustrate the long-term consequences of changes in the investment rate for the growth rate of the economy, using the well-known Solow growth model. Find out how to get LiveEcon at http://www.liveecon.com/. Download this blog as a Blogcast via the website.
Wednesday, April 18, 2007
Pound reaches 26-year dollar high
Sterling has risen to its highest level against the dollar since 1981, breaking through the $2.010 mark. The currency rose above $2 on Tuesday after unexpectedly high UK inflation figures indicated further interest rate rises were likely. Consumer price inflation hit 3.1% in March, said the Office for National Statistics. Official figures also showed that average earnings rose at an annual rate of 4.6% over the three months to February, which is the fastest rate for almost three years.
Sterling has risen to its highest level against the dollar since 1981, breaking through the $2.010 mark. The currency rose above $2 on Tuesday after unexpectedly high UK inflation figures indicated further interest rate rises were likely. Consumer price inflation hit 3.1% in March, said the Office for National Statistics. Official figures also showed that average earnings rose at an annual rate of 4.6% over the three months to February, which is the fastest rate for almost three years.
For the first time, the Bank of England governor has had to write a letter explaining why inflation has climbed.
Read the full stories at:
On the appreciation of the pound:
http://news.bbc.co.uk/1/hi/business/6566715.stm
On the eminent rate hike as inflation jumps:
http://news.bbc.co.uk/1/hi/business/6562723.stm
On pay settlements “edging back up”:
http://news.bbc.co.uk/1/hi/business/6551829.stm
The above mentioned events illustrate the interdependence of the economic system, in particular between the goods, financial, foreign exchange and labour markets.
Following the announcement of an inflation rate that was higher than the official 2% target (which arose mainly due to energy price swings), expectations of higher UK interest rates increased the demand for the pound as investors looked to buy into assets that offered higher yields.
Investors expect an increase in the future UK interest rate, as the higher borrowing costs are likely to act as a tax on consumers, boosting loan repayment costs, taking money out of their pockets and slowing the rate at which they spend and take on extra financing.
In turn, while the stronger pound has been good news for British visitors to the US, it makes life more difficult for exporters, as the appreciation increases the price of British goods abroad.
At the same time, in the face of news that average pay settlements in the UK edged up in the first three months of this year, the Bank of England is further concerned that the current rate of inflation will encourage workers to press for higher wage settlements, which would create more inflation.
The much acclaimed new interactive learning package LiveEcon can help you undertand the economics behind these important policy events. For instance, Chapters 13 and 16 at intermediate level examine the workings of the foreign exchange market and the interaction between the labour market and the price level. Chapters 6 and 11 at principles and intermediate level, respectively, also illustrate how the interest rate is determined in the money market. Find out how to get LiveEcon at http://www.liveecon.com/. Download this blog as a Blogcast via the website.
The much acclaimed new interactive learning package LiveEcon can help you undertand the economics behind these important policy events. For instance, Chapters 13 and 16 at intermediate level examine the workings of the foreign exchange market and the interaction between the labour market and the price level. Chapters 6 and 11 at principles and intermediate level, respectively, also illustrate how the interest rate is determined in the money market. Find out how to get LiveEcon at http://www.liveecon.com/. Download this blog as a Blogcast via the website.
