Eco: Q's (1 Viewer)

[-pari-]

1) Doesn’t rules of origin divert trade?

2) How do subsidies redistribute income away from taxpayers to small section of eco?

3) can someone explain this "daily turnover" thing in the foreign exchange markets?

 

[williamc]

1) Doesn’t rules of origin divert trade?

2) How do subsidies redistribute income away from taxpayers to small section of eco?

3) can someone explain this "daily turnover" thing in the foreign exchange markets?

2) The government collects income from taxpayers, and redistributes the money into business' that arn't efficent or "internationally competitive." This inefficient allocation of resources into a small sector in the domestic economy will have a negative flow on effect on the global economy as prices will rise and will weaken the international business cycle.


(I completely winged that dunno if its right.)

 

[ilovecommunism]

This inefficient allocation of resources into a small sector in the domestic economy will have a negative flow on effect on the global economy as prices will rise and will weaken the international business cycle.

In fact, this will only lead to decrease in prices of certain products in the global economy, because costs by domestic producers will decrease when they receive extra asistance from the government, and therefore, lower the price. The best example is the conflict between the USA and the EU, these two dudes had/have been fighting each other on the prices of their agricultural exports. That really hurts other countries' farmers.

For the first and the last question, I really have no impression that I'd met these words and phrases(Daily turnover? rules of origin?) ever in the past in class...= =

 

[williamc]

Thinking deeply about this. Say if every country in the world gave finanical support (subsidy's) to domestic producers wouldn't the prices for goods and services fall globally? If so, i don't see how this form of protection could be bad. There would be a higher level of employment and developing coutries would have a dramatic increase in finanical flows improving their quality of life. This would even cancel out the postive effects of reduced protection, if EVERY country provided subsidy's to domestic producers.

If i am right, why don't all countries increase subsidy's?

 

[ilovecommunism]

But it's a kinda burden on governments in many countries. Not every government has the ability to give their producers financial assistance. So, unemployment would increase in countries without subsidies if domestic producers in these countries can not compete against imports on prices.

To consumers it's a good thing, but to industries it can be damaging.

 

[-pari-]

also, subsidies cause an excess of supply, so if every country provided subsidies it would mean this massive excess in supply yeah? because all the producers can produce at a lower cost.

and then remembering that eco growth is about demand, not supply - u kinda realise that in the long run, this excess supply isn't going to help anyone since there won't be enough demand.
i dont know if this would happen but i think it's possible that producers would then have to continue to cut prices so low....that there could be a world recession?

not sure on that last bit. but yeh, subsidies are def. not good

 

[williamc]

also, subsidies cause an excess of supply, so if every country provided subsidies it would mean this massive excess in supply yeah? because all the producers can produce at a lower cost.

and then remembering that eco growth is about demand, not supply - u kinda realise that in the long run, this excess supply isn't going to help anyone since there won't be enough demand.
i dont know if this would happen but i think it's possible that producers would then have to continue to cut prices so low....that there could be a world recession?

not sure on that last bit. but yeh, subsidies are def. not good

If prices continue to fall how could that cause a WORLD recession, in countries that arn't able to export may experence a recession but they would be the small developing economies.

Oh yer if there was an excess of supply, producers who couldn't drop their prices to those low levels would go bankrupt. Which leads to the advantages of free trade such as specialisation, efficent allocation of resources etc. So you could still say if every country adopted subsidies as a main government expenditure it would still benefit the global economy, similair to the effect of free trade?

Edit: I know we don't need to know this stuff, but i was wondering if my logic was right.

 

[ilovecommunism]

What would happen if all governments in the world give financial assistance to their domestic producers (now just imagine this is possible), I think, is one thing called deflation. Under a deflationary circumstance, prices fall as more products are produced. At a global scale, the competition among producers of a homogeneous product (let's say footwear), will then appear over the world, because they now have to compete against each other more on prices, instead of purely the competition in productivity (which determines the amount of a certain type of product produced). This competition would not easily be ceased, since every producer wants to gain money through attracting consumers with a lower price. For a moment, this works, but it might also lead to a vicious cycle in which producers will continue to compete over prices. Once the price of a product falls to a certain level due to this competition, a businesses might start losing money instead of gaining. This is because the costs of buying resources putting into the production process might not fall at the same time, and, as a business has produced a large amount of products, it needs to sell them in order to gain profits back, at least to cover all your costs generated, because the govt. can only support you with limited funds, and that wouldn't be enough to cover all your costs(What is the point of gratuitously supporting a non-govt. enterpirse?). Or, in other words, "to gain your lost money back through the sales of products produced with your lost money" (...lol...) Unless a government gives sufficient subsidies to all other industries in relation to this specific industry, so the prices of raw materials will also fall. Otherwise, a business has to bear most of its costs in the production process. So, at the end, if a business starts lossing and can not turn this situation back, what will happen is bankrupt of this business, then, at a larger scale, a large number of industries and businesses will experience bankrup by the same factor, not just those ones with higher prices than the others.

And then, as you've said, if a producer does not reduce its price for a certain product, it will also lose competitiveness at the end. So, that means all producers involving in this "price competition" will be forced to reduce their prices until the point when they start lossing. Who doesn't want to live longer than the others...xD

Well... as I stuffed all my essays up in the HSC exams last year, I know that I've typed lots of craps, so...... well...... What I had been saying is: low prices mean less profits from sales. Government assistance is limited, but price competion can be UNLIIMITED in the global economy, as it can not be controlled by a central govt. of the world. Therefore, if all nations provide subsidies, prices fall, profits reduce. Then, as producers cannot regain their "lost money" through their own sales of products, the govt. assistance will finally become exhausted or insufficient to cover their costs, and businesses will start lossing. The long term result can be bankrupt.

lol...... just what I think...

 

[williamc]

What I had been saying is: low prices mean less profits from sales. Government assistance is limited, but price competion can be UNLIIMITED in the global economy, as it can not be controlled by a central govt. of the world. Therefore, if all nations provide subsidies, prices fall, profits reduce. Then, as producers cannot regain their "lost money" through their own sales of products, the govt. assistance will finally become exhausted or insufficient to cover their costs, and businesses will start lossing. The long term result can be bankrupt.

lol...... just what I think...

Lower prices doesn't less profit, the subsidy means producers can operate at lower costs of production therefore they don't necessarily make less money.

 

[ilovecommunism]

for "low prices means less profits", i think we are viewing this statement at different viewpoints. my point of view is not the consequence caused by factors in the market, but the most direct consequence of reducing prices. i mean, i'm standing on the viewpoint of the consequence of reducing the price of only one product, and the profit that this single product can generate to the producer.

lower prices under the circumstance of deflation can cause losses of profits, because, if consumers' damand does not grow as fast as the growth in products produced, many products will be plugged in the market as no one wants them. but during the production process, producers had already spent lots of inputs in producing them. so, if these products can't be sold, producers won't get money back from their outputs, that means, to themselves, they had produced useless products which won't give them any profits.

and then, they will need to lower prices in order to do the clearance of these plugged stuff. in some cases, especially when the amount of supply is too excessive, producers might need to cut prices to a level below cost, because recieving only 50 cents from the sale of a product which costs 1 dollar to make, is still better than getting nothing at all. however, this is still a loss, and the business will only try to minimize this loss, but cannot avoid it.

so, now, relate the above situation to the govt. assistance. what i was trying to state was: if the govt assistance or subsidies increase the amount of products produced, at a global scale, first of all, even though the consumer demand is theoretically unlimited, the pace of its growth is still unpredictable, it can be fast or slow. HERE is one crucial thing i didn't mention earlier and sorry about this: standing on a monetary point of view, low level of demand can be caused by different levels of money supply by each country's central bank, which will influence the demand level of the consumer and the value of currencies in different parts of the world, and the income level is another factor that would affect demand for products; since people in many countries are suffering from low purchasing power of their incomes, which means they will consume less, and adding the effect of exchange rates into it, the purchasing power of these people's incomes might be much lower. one thing should be noticed is that, wage levels in many NICs and developing nations are mainly determined by laws rather than union, which means the minimun wage levels in these countries are often set by the govt. therefore, if every country gives subsidies to their industries, the global outputs of certain types of products will increase rapidly, and the increased amount of products would not immediately be fully consumed by all consumers, generating excessive supply, and prices will largely fall, and those excessively supplied products will then be plugged in the market. in order to minimize the loss, firms will have to cut prices, but they will still lose. but at this stage, their losses still include govt. assistance.

even though the subsidy can minimize the cost, but the point is that, the govt. can only pay for a part of your cost in production. If the situation above occurs, in a short run, it probably won't matter at all, but in a long run, if the govt. increases the subsidy in order to finance the extensive costs by private firms, the govt. will also face extensive budget deficit. therefore, the govt. won't increase the amount of subsidies any more, but retain it at a certain level. but here is a problem, which is, once such deflationary phenomenon appears, the govt. spending on the subsidy will seem like wasting money, because even though you are supporting your firms to produce more and more products, but these products cannot be exchanged in the market and gain profits as producers from other nations are also competing against your own industries by also recieving subsidies. if you regard a govt. as a business enterprise, and regarding industries as machines provided for production, you might find that the govt. now is like a business spending lots of funds but gaining less. so, at this stage, the govt. might stop supporting domestic industries financially.

so, then, in the global economy, as the level of competition increases and finally evolves into a vicious competition due to the excessive supply of a homogeneous product, and many products are plugged, exporters in different nations will face the loss of money, and they have to cut their prices on this product in order to do the clearance, or say, to minimize the loss. some firms might also reduce the number of people employed, because, at this stage, the govt. assistance cannot compensate for their losses even though the govt. is still assisting private firms.

ANYWAYZ...... all these things above are my own opinions and my analysis according to my own reading and my interpretation of the things i'd read... so if there are any errors, please point them out...

 

[Paladin6000]

examine the changing directions and composition of australia's trade, evaluating the impact of this change on economic policy and economic performance

help on the second part of this question would be much appreciated
thanks^^

 

[-pari-]

Lower prices doesn't less profit, the subsidy means producers can operate at lower costs of production therefore they don't necessarily make less money.

yes. but the point is that eventually this subsidy will be rendered inefficient/useless because lower COSTS of production are meant to enable producers to supply MORE at a lower consumer price while maintaining the same profits.

but eventually, with all this excess supply, there'll be more than the demand for the product so producers will have to cut consumer prices even lower - and this will start cutting into the company profits because it's eve lower prices than what is allowed for by the subsidy.

hope that makes sense..

rewording my initial Q: i meant - local content rules instead of "rules of origin" - doesn't "local content rules" where part of the product is to be produced in the domestic country to avoid being subject to tariffs...divert trade?

 

[ilovecommunism]

it will reduce revenues recieved by foreign investors, or they might have to buy certain parts of their products from the local firms, therefore it does divert trade i think, but probably not as much as tariffs and other methods.

PS: oh... one thing I think I forgot to say is, the main reasons for the losses of firms caused by deflation here, are price competition and the goal of minimizing costs under such circumstance...

 

[Ozza]

Ok so Question 1. do local content rules divert trade?

Answer: Yes, they do.. they divert trade away from the more competetive foreign markets to local inefficient producers, but this is a form of protection, which is popular because it keeps jobs in the country, so governments will employ such rules to stay in favour.

Question 2. Subsidies are a form of protection, it is important to remember this, the only reason gov'ts introduce subsidies is so that domestic producers can lower their prices to match those of foreign firms importing into that country whose goods or serives are cheaper. This does not mean that the countries will engage on a price war. It does mean however, that taxpayers money is being redistributed to an inefficient industry that is not internationally competetive. For example, the EU and the US subsidise their agricultural production only because by themselves those industries are not very competetive. The enormous amounts of subsidies that those farmers receive is so that those industries can keep costs, and therfore make prices as low, or a little lower even, than foreign imports. This does not mean that countries will engage in a price war with other countries leading to ridiculously low prices which somehow you've deduced leads to world recesssion, because adding to gov't expenditure for no reason is pointless. If they want their goods to be cheaper than imports, they'll put a tariff on imports, they won't increase expenditure on subsidies... You can't think of economics so narrowly that you only think in terms of subsidies.. why spend money when you can make money? So why do they use subsidies in the first place? because consumers like things cheap, so raising the tariffs ridiculously high is not really an option, plus goverments that keep jobs in their country are more popular. For example, how unpopular has John Howard's new IR laws been? So governments use a mixture of subsidies, tarrifs, local content rules and many other forms of protection to keep prices down and keep domestic employment...

Anyways, that answer was way off the question, but i thought i should just throw some of that in because you guys have been arguing about supply and demand only in terms of subsidies, I hope I've cleared a few things up.. if not, just say.

Question 3. Sorry, I'm not all to clear on daily turnover myself, all I recall on that subject is that forex markets are worth US 1.9 trillion dollars in daily turnover which is approximately the same worht as the RBA's foregin currency's holdings which is why it's hard for us to dirty the float of our exchange rate nowdays... but sorry I don't really know. I'll grab my textbook later and look it up.

examine the changing directions and composition of australia's trade, evaluating the impact of this change on economic policy and economic performance

Good grief you've asked an essay question!

How can I keep this short? umm, Since ww2, australia's imigration levels have meant changing directions of trade... the emergence of japan as a manufacturing giant, the lower reliance we've had on the uk etc. and since the creation of the EU trade has shifted more towards south east asia. Preferential trading agreements that we're in (4 of them) and the ones that exclude us force our trade to certain nations.

Next pert of teh question, we have a narrow export base that nowdays consists mainly of raw materials, and services such as tourism and education. Less domestic production of ETMs and agricultural goods as exports, something about how our agricultral exports were once worth 35% or total exports in the 80s and are now only worth 13%. (sorry if my statistics are bad.. it's the holidays). and as for our imports, mostly the same except less of a focues on intermediate goods which are used on production and increased volumes of consumer goods.

Seriously, I'm getting so lazy now, basically look up the impacts ofreductions in protection and how employment in industries has been shifted to more competetive ones. Actually now that I think about it... basically you can throw anything in from chapter 4, like how australia needs to implement structural change factors and our terms of trade, and it's correlation with the balance of payments. (Getting a bit of hand, but the question did ask you to note australia's economic performance)

 

[-pari-]

^ thanks ozza - that was really good. you obviously know your stuff really well

another Q:

does net foreign debt = the principal loan borrowed + the interest payed on it? or is it just the principal?

 

[Robbeh]

^ thanks ozza - that was really good. you obviously know your stuff really well

another Q:

does net foreign debt = the principal loan borrowed + the interest payed on it? or is it just the principal?

Out of the text book.
Net foreign debt refers to the level of outstanding loans owed by Australian residents to overseas residents minus the level of outstanding loans owed by overseas residents to Australian residents.

So I guess, that's how much we owe them subtracting how much they owe us.

As I read it, the definition ("outstanding loans") implies interest repayments as well as the amount borrowed.


Net foreign liabilities are equal to Australia's financial obligations (foreign debt plus foreign equity) to the rest of the world minus the rest of the world's foreign obligations to Australia.

Because it's stated as "obligations", I would have to assume that it is interest repayments inclusive!

CORRECT ME IF I"M WRONG!

 

[wce06]

Out of the text book.
Net foreign debt refers to the level of outstanding loans owed by Australian residents to overseas residents minus the level of outstanding loans owed by overseas residents to Australian residents.

So I guess, that's how much we owe them subtracting how much they owe us.

As I read it, the definition ("outstanding loans") implies interest repayments as well as the amount borrowed.


Net foreign liabilities are equal to Australia's financial obligations (foreign debt plus foreign equity) to the rest of the world minus the rest of the world's foreign obligations to Australia.

Because it's stated as "obligations", I would have to assume that it is interest repayments inclusive!

CORRECT ME IF I"M WRONG!

Yep, NFD includes both principal and interest. That's why a depreciation can hurt our level of NFD and debt servicing ratio so badly, because not only does it raise the AUD amount of the principle, but the interest paid as well.

 

[wce06]

Thinking deeply about this. Say if every country in the world gave finanical support (subsidy's) to domestic producers wouldn't the prices for goods and services fall globally? If so, i don't see how this form of protection could be bad. There would be a higher level of employment and developing coutries would have a dramatic increase in finanical flows improving their quality of life. This would even cancel out the postive effects of reduced protection, if EVERY country provided subsidy's to domestic producers.

If i am right, why don't all countries increase subsidy's?

Think a bit more deeply - if all countries increase subsidies there would be no net difference. Subsidies are only of any effect because they make one country (or industry) more protected than others.

Think about the basic premise of a subsidy - domestic producers cannot compete on the global stage, thus govt intervenes to cover some of the costs. If every govt subsidised, this would not change the fact that some countries are more efficient at producing certain goods/services, thereby not changing anything (no net difference). What it would mean is a massive encouragement of inefficient industries, and forcing other parts of the economy to pay (through taxation) for this.

Subsidies do not reduce the total cost of producing a good, they just take some of the cost away from the producer and the government pays for that. This money must come from somewhere; the overall effect of a subsidy, therefore, cancels out in the long run. Subsidies don't just suddenly make things cheaper and make costs vanish, they simply transfer the costs of production to another sector of the economy.

 

[williamc]

^ ohh ok thanks.