10 thoughts on “Economics Essays”

  1. ” we will find that a relentless increase in import prices will erode living standards.”

    Not necessarily. Not if the economy is managed correctly.

    Say we have two economies A and B which for political reasons have maintained a high degree of economic separation until a certain time. Let us assume that the populations of A and B are equal. We can assume that the working hours are approximately the same in both. Suppose A is twice as rich as B in GDP terms. So on average wages in A will be double that of B.

    So the political situation changes and A and B agree to start trading freely. There will be some initial disruption in A as the cost of items imported from B will be cheaper due to the lower wage costs. So we can expect some industries in A to become noncompetitive and close down. If A can reallocate the spare resources created it need not see its GDP fall. It will be looking to see continued growth. Lets say that is 2%.

    If A does have an economic crisis it’s really its own doing and has nothing to do with B although many who may have had their livelihoods displaced may not see it that way.

    Exports are always real cost to the economy and imports are always a real benefit. So there has to be real costs to B in providing extra goods and services for A to use. We haven’t assumed anything about whether A or B should run a surplus in trade. We might think that it is natural for B to export more to A than it gets back in return. But that doesn’t have to be the case. If A is still producing twice as much stuff as B then it could well be the other way around. If the exchange rate were left to float freely then trade would balance.

    But whatever happens on trade balances, let us suppose that B does have a higher growth rate and does catch up with A so that they then are both equal in terms of GDP. Does this mean that A has to be worse off because they have lost their supply of cheap labour?

    Well no it doesn’t if trade is always balanced. Essentially the standard of living in A and B will then be determined by what can be produced in A and in B. A can’t ever be better off because B is poorer! If trade is unbalanced then the standard of living in the net exporter will always be lower than it could be. So if trade goes from being unbalanced to balanced, that could have an effect.

    1. It becomes clearer if you work through the numbers – it wasn’t top me until I did so on a spreadsheet, to produce the numbers in my essay. I am looking at gains from trade based on comparative advantage. For those gains to materialise there must be differences in opportunity costs for different products. These differences may arise from the economies being at different stages of development. But these will disappear as the economies converge. The developing economy finds that it can produce advanced economically products for itself. The developed economy loses its export market, and also finds that the developing economy’s products are becoming more expensive (both as the latter’s wages rise, and as the exchange rate moves more towards purchasing power parity). So there’s less trade, and fewer gains from trade. The developing economy won’t notice because its productivity is advancing; but the developed economy will unless it also finds compensation from elsewhere. We are assuming balanced trade throughout, it should be added.

      Without having tried to use real economy numbers to try and prove it, my belief is that this effect, from the advance of the Chinese economy in particular, is one of the explanations for the drag on economic growth in the developed world since 2008 and the so-called productivity crisis. I remember taking a close look at Britain’s inflation figures in the mid 2000s. It was striking how the costs of manufactured goods were falling, and how important that was to understanding why living standards were advancing. That deflation was largely explained by trade, and it has disappeared. I can’t see how a “correctly” managed economy can change that. A window closes.

      1. I’m fine with a more detailed numerical approach but there has to a some basic principles established to make sure we aren’t losing sight of the fundamentals. And that the numbers and details are meaningful.

        And you haven’t included the effects of trade deficits.

        Our living standards, in any given time period, are determined by what we can make and do for ourselves plus what we can borrow.

        That has to be an axiom for further modelling. If the detailed modelling tends to suggest otherwise there must be something wrong somewhere.

        1. Our living standards, in any given time period, are determined by what we can make and do for ourselves plus what we can borrow.

          In a world of trade and different opportunity costs between differing nations that is an over-simplification. Australia’s wealth, for example, depends in part on iron ore that it ships to China in exchange for consumable goods. That is neither what the Australians are making for themselves nor what they are borrowing. It depends entirely on an opportunity for advantageous exchange existing. My suggestion is that one source of such advantageous exchange between Britain and China, for example, is temporary. A bit like Australia running out of iron ore, or China deciding it can meet all its needs from recycling. The Australians can’t eat their iron ore or use it to heat their homes… If they can’t sell the surplus, they are poorer, and it’s not their fault. Bringing trade deficits into the picture is a whole new complication that obscures the dynamics rather than illuminating them.

          1. Yes I agree that there would be no point Australia digging out the iron ore if it didn’t have a customer who was willing to pay the right price. But, once they have found the right customer, the shipload of iron ore is essentially a product of Australia. Or a tanker full of oil is essentially a product of Saudi Arabia.

            I’m not arguing against the theory of comparative advantage. That makes sense. What I’m getting at here is that international trade is a lot more like barter than is generally realised. We all swap what we can make and do well for what others can do better than us. If we are lucky enough to be sitting on top of iron ore or oil reserves then so much the better.

            If every country allowed its currency to float freely and everyone only saved in their own currency all international trade would balance. But because that doesn’t happen, and some countries depress their own currency to run an export surplus they end up being less well off than they could be relative to what they make. The deficit countries end up being better off than they should be relative to what they make.

        2. Of course if China is happy to export at a massive surplus based on something other than the economics of exchange, then my predictions have less validity. But my assumption is that as their appetite for imports diminishes, and their appetite to consume what they produce increases, then export volumes will fall. They may also seek to divert exports to developing markets if the terms of trade are better there. The business of surplus and deficit is best looked at in a separate analysis I think. But if the opportunity costs change, so will the opportunities for advantageous trade, and if they diminish then somebody will be poorer.

  2. “UK personal debt is at record levels and economists wonder at the sustained levels of consumption that they see. Surely people want more, more, more? ”

    I’m not sure they do its just that there is always the problem of overproduction to be solved. To keep the economy moving, everything that is for sale in the economy has to be sold. If it isn’t we see increasing levels of unemployment as companies reduce their production levels to suit. Obviously the managers in charge of making these decisions haven’t read the right economic text books. They should follow the ‘unseen hand’ and, hey presto, all prices and wages should self adjust to ensure the economy is always working at full capacity.

    But maybe the reason the hand isn’t seen is because it isn’t there?

    So how to ensure it is sold? Of course the Government doesn’t want wages to rise, or spend itself to buy up what is available. So it encourages you and I to borrow to excess to create the purchasing power. If we want a home of our own we don’t usually have a choice to not borrow quite so much.

    “Technological advance may create more leisure, not more income.”

    Not under capitalism as we have today it won’t. We heard the same sort of thing at least 40 years ago and it just hasn’t happened. So unless something changes there’s no reason to expect any different in the next 40 years.

    I agree that something does need to change though. The GDP per person now is probably just about the same as it was before the GFC. We were a lot happier then than we are now though.

    We need to explain why this should be and work out what we need to do in future to stop us all having to run ever faster just to stand still.

    1. Well I think that conservative politicians would be quite happy for wages to rise, with some caveats in the public sector – in Japan the highly conservative government is quite vocal about this. But they won’t legislate to make sure it happens. Meanwhile, I think you are slowly winning the argument that the government is the best consumer of last resort, rather than trying to get more personal borrowing to do the same job. But ultimately the problem of overproduction will only be solved by producing less… which is the main message of the essay.

      You may think that people are working more hours and are less happy, but I’m not sure such evidence as we have supports this. It wasn’t so very long a go when six day working week was standard, and you might get a week of annual leave if you were lucky. And there is a lot of early retirement around (even if others don’t get that choice). And data on well-being has not been remarkably stable since before the GFC, I understand. It remains a very mixed picture, I have to admit though. And we have to find better ways of distributing the benefits of technological advance.

  3. Yes I think you’re right about early retirement. The problem with that is that many people don’t want to completely retire. But they don’t have a choice. They’d be happy to make some contribution to the economy. Say working fewer hours, with longer holidays etc. But we aren’t very good at allowing that flexibility and consequently we are losing a valuable resource in accumulated skills.

    As life expectancy increases, it isn’t unreasonable for everyone to work a bit longer. That’s not to say we ask 80 year olds to work down the mines, though! Its just requires a little common sense to determine who’s capable of doing what.

    Up until the mid 70’s there were general reductions in working time but that has pretty much stopped since then. It used to be possible for one parent to work while the other looked after the children. That’s not possible for most people any longer.

    So it would make more sense to remove some of the burden from the 20-50 year old age group. They have to work long hours to pay their bills and bring up the next generation too.

    Just quite how we do that is the difficulty though!

    1. I would agree with that. The worry is that new technology makes that process harder, but I am actually not so sure. I haven’t got my head round it, to be honest!

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