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Observatory of Economic Complexity (OEC) – great graphics on global trade

October 9, 2017 1 comment

I picked up the OEC site from Michael Cameron’s blog ‘Sex, Drugs and Economics’. The Observatory of Economic Complexity is a tool that allows users to quickly compose a visual narrative about countries and the products they exchange. It was Alexander Simoes’ Master Thesis in Media Arts and Sciences at the MIT Media Lab. The project was conducted at The MIT Media Lab Macro Connections group. Alex’s Advisor was César A. Hidalgo, principal investigator of Macro Connections. Since its creation in 2010, the development of The Observatory of Economic Complexity has been supported by The MIT Media Lab consortia for undirected research.

The graphics on each country and products are superb and include:

  • Exports
  • Imports
  • Trade Balance
  • Destinations

It also includes Economic Complexity Index which measures the knowledge intensity of an economy by considering the knowledge intensity of the products it exports. Below are some images on New Zealand trade.

New Zealand Exports – 2015

NZ Exports 2015.png

New Zealand Imports – 2015

NZ Imports 2015

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Categories: Teaching visuals, Trade

China’s changing trade dynamics

September 15, 2017 Leave a comment

On 7th April 2008 New Zealand became the first OECD country to sign a free trade deal with China, an economy which in the 1970’s was one of the poorest countries in the global economy. Today China is the world’s second largest economy and the fastest growing at a rate around 7% per year. However China’s trade composition has changed significantly over the years as its economy has developed. Two main trends stand out.

The decline in importance of primary goods (mainly food) as a proportion of China’s total commodity trade.  China’s exports have changed from being dominated by labour-intensive manufactured products in the mid 1990’s to more sophisticated manufactures today. 1994 – 40.6% of exports were miscellaneous manufactured articles. 2014 45.8% of exports were machinery and transport equipment.

A changing comparative advantage

A country’s comparative advantage refers its production of a good or service at a lower opportunity cost than another. Instead of every country trying to produce a wide of goods , countries can grow faster by specializing in the goods they can produce most cheaply and trading for others. Many Asian countries – Japan, Korea, Taiwan – have gone through 4 stages (as shown below) of development through a specialization index. It shows the first stage is the Developing Country stage, where Primary commodities are more competitive than both Other manufactures and Machinery. The second and third stages are the young and mature NIEs (newly industrialised economies) respectively, where for both stages Other manufactures is the most competitive sector, but the ranking of Other manufactures vis-à-vis Machinery is opposite. At the fourth stage – the pinnacle of trade structures – Machinery is most competitive.

Stages of Development.png

*NIE = Newly Industrialised Economy

A country’s trade structure can be classified into any of these 4 stages according to the relative magnitudes of the country’s specialisation indices across 3 sectors:

Three Sectors - China Trade.png

The figure below illustrates the evolution of China’s trade structure during 1984-2014. It can be seen that China became a young NIE in 1990 – when the specialisation index of Other manufactures surpassed that of Primary commodities – and then a mature NIE in 1999 – when Machinery passed Primary commodities. This pattern is consistent with the changing composition of China’s exports, from labour-intensive products to a more sophisticated mix led by various types of machinery and equipment.

China change in specialisation.pngImplications for the global economy
China’s rapid rise poses both challenges and opportunities for other countries as they are exposed to increased competition at home and abroad. For many firms in rich countries, intensifying competition from China’s exports has reduced demand for the goods they produce, with a corresponding decline in workers employed. Such changes in the global economic environment affect the allocation of factors of production and cause sectoral productivity fluctuations, as well as driving changes in comparative advantages among nations. Trade between developing (e.g. China) and developed economies (e.g. US) has been on the rise. Developed countries with high wages and expensive welfare programmes are having trouble coping with the effects of developing countries becoming major global players. It is estimated that 2.0-2.4 million people in the US lost their jobs as a result of increasing Chinese import competition during 1999-2011.

Source: China’s changing comparative advantage: Trends and implications by Murat Ungor. EcoNZ@Otago – August 2016

 

Categories: Development Economics, Trade Tags:

What is the Trade Weighted Index?

July 20, 2017 Leave a comment

Trade Weighted Index (T.W.I)

  • An index that measures the value of $NZ in relationship to a group (or “basket”) of other currencies. The currencies included are from NZ’s major export markets i.e. Australia, USA, Japan, Euro area, UK and China. – $A, $US, ¥, €, £ RMB
  • Each of the currencies included in the TWI is “weighted” according to how important exports to that country are ( = % of total exports)
  • From the TWI we can see if the $NZ has appreciated or depreciated against our major trading partners currencies overall.

TWI - NZ 17.png

The interpretation of the effective exchange rate is that if the index rises, other things being equal, the purchasing power of that currency also rises (the currency strengthened against those of the country’s or area’s trading partners). That will reduce the cost of imports but will undermine the competitiveness of exports.

TWI NZ

Internationally, global growth is continuing to improve, suggesting that excess global supply is easing. However, offshore political uncertainty has grown and continues to cast a shadow on NZ’s inflation outlook. Further, the NZ Trade Weighted Index (TWI) is hovering around 78 again, in part due to NZ economic fundamentals but also in part due to the above offshore political events.

Source: ASB Bank

 

 

Africa’s Resource Curse

July 1, 2017 Leave a comment

Below is a link to an excellent podcast from the BBC World Service. I have blogged on the resource curse before and the falls in commodity prices – oil and mining – over the last year have affected the sub-Saharan African countries that are dependent on their primary industries. There is also mention of GDP being a stupid model. Worth a listen – click on link below.

Africa: The Commodity Curse Returns

In the balance - Resource Curse

For most economies that have natural endowments like oil (Nigeria) or minerals, there is the risk of the economy experiencing the ‘resource curse’. This is when a natural resource begins to run out, or if there is a downturn in price, manufacturing industries that used to be competitive find it extremely difficult to return to an environment of profitability. According to Paul Collier, Nigeria has a resource curse of its own, the civil war trap in which 73% of the low income population have been affected by it, as well as a natural resource trap- where the so-called advantages of a commodity in monetary value did not eventuate – on average affecting only 30% of the low income population. It seems that in Nigeria there is a strong relationship between resource wealth and poor economic performance, poor governance and the prospect of civil conflicts. The comparative advantage of oil wealth in fact turns out to be a curse. governments and insurgent groups that determines the risk of conflict, not the ethnic or religious diversity. Others see oil as a “resource curse” due to the fact that it reduces the desire for democracy.

Click here for more on the Resource Curse from this blog

Categories: Growth, Trade Tags:

Teaching why the Balance of Payments equals zero.

June 7, 2017 Leave a comment

A HT to colleague Nick Lloyd for this great explanation of the relationship between the current account and the capital and financial accounts. In theory the balance of payments should equal zero and this is one area that students find hard to comprehend. Hope you find it as useful as I did.

The Relationship between the Current Account and the Capital and Financial Account

A few starting points:

  1. Gross Domestic Product (GDP) = C + I + G + (X – M)
  2. Gross National Product (GNP) = GDP plus Net Income (Income Credits (Yc) – Income Debits (Yd))
  3. Saving/Investment Gap (S – I) = Balance on Capital and Financial Account (Capital Outflows (Ko) – Capital Inflows (Ki))
  4. Current Account Balance = Trade Balance (X – M) + Net Income (Yc – Yd)
  5. National Savings = GNP – (Private Spending (C) + Government Spending (G))

Now:

GNP                                      =               GDP + (Yc – Yd) =  C + I + G + (X – M) + (Yc – Yd)

GNP – (C + I + G)                 =               (X – M) + (Yc – Yd)

GNP – (C + G) – I                 =               (X – M) + (Yc – Yd)

S – I                                    =               (X – M) + (Yc – Yd)

Balance on Capital & Financial Account               =               Balance on Current Account

 

Another way to arrive at the same conclusion:

Assuming freely floating exchange rate is in equilibrium:

Demand for Currency = Supply of Currency

Demand comes from:     X + Yc + Ki

Supply comes from:        M + Yd + Ko

Thus when the forex market is in equilibrium:

Demand                         =               Supply

X + Yc + Ki                    =               M + Yd + Ko

(Ki – Ko)                        =               (M – X) + (Yd – Yc)

Balance on CFA               =               Balance on Current Account

 

So, if as a nation you earn more than you spend (current account surplus), you are in effect lending to the rest of the world (exporting savings) by accepting IOUs in the form of your increased holdings of foreign assets (shares, land, government bonds, etc.)

If as a nation you spend more than you earn (current account deficit), you must borrow from the rest of the world (import savings) in the form of increased foreign holdings of your domestic assets (shares, land, government bonds, etc.)

 

 

Categories: Trade Tags:
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