• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Ib Economics Internal Assessment

Extracts from this document...

Introduction

Ib Economics Internal Assessment Commentary Anton Malyshev 22/01/06 Since 1994, the Chinese Yuan has been pegged to the U.S. dollar (8.28 Yuan/USD); this period has caused the Chinese economy to experience an average 8% annual increase in GDP. In order to sustain the undervaluation of the Yuan (by maintaining the peg), Chinese consumers have to keep their savings artificially high and the government has to intervene by buying out U.S. dollars from the United States daily. Lately, the U.S. has been pressuring China to revalue or float their currency while Chinese economists believe that such an action would cause disastrous effects to their economy. Even though a fixed exchange rate does not violate WTO or IMF rules it disrupts WTO agreements or is used to gain a comparative advantage. It is arguable that China's peg to the USD is somewhat bending the rules if not breaking them. By keeping their exchange rate lower than market equilibrium, China is able to increase the demand and consumption of their exports because all of the exports have to be bought in the producing country's currency. ...read more.

Middle

Perhaps a better parallel of a currency peg can be made by comparing it to a subsidy. A subsidy is the process in which the government pays the producers (usually domestic) to produce less and the loss of revenue from a decrease in production is paid by the government. In this case, consumers who purchase the exports receive benefits but the domestic firms that have to compete against the low-priced import suffer. Having the potential negative effects of the undervalued Yuan in mind, many critics of the peg assume that the trade United States trade deficit with china is caused by the low exchange rate and harms the United States economy. However there are several important things to note on this issue. Firstly, a large amount of foreign investment in China comes from international companies who take advantage of China's cheap labor. Also, besides the fact that the U.S. deficit with China has been growing increasingly, it is also important to keep in mind that China has become one of the fastest growing markets for U.S. ...read more.

Conclusion

What seems most appropriate is floating the currency in order to provide automatic adjustment of the exchange rate to reach market equilibrium. In the long run, the both the U.S. and Chinese economies will benefit. 1 The Economist print edition, Nov. 17,2005 2 Because of the rise in certainty, ceterus paribus, there is an rise in trade patterns of trade in terms of capital and trade integration. Thus the statement, "[Schumers] proposal is justified based on the effective tariff China places on foreign goods via a forcibly undervalued currency" is false. 3 China's Exchange Rate Peg: Economic Issues and Options for U.S. Trade Policy, may 10, 2005, Congressional Research Service-The Library of Congress 4 http://www.msnbc.msn.com/id/8129284/ 5 It is important to note that there is a crucial assumption that is made here. The assumption, and in this case it seems to be fairly true, is that the demand for exports is price elastic because if this is true, then the fall in the price of exports will lead to a proportionately greater increase in quantity of exports demanded. ?? ?? ?? ?? ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level UK, European & Global Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level UK, European & Global Economics essays

  1. Environmental Economics HSC Notes

    * Environmental resources are often difficult to allocate according to the usual behaviour of markets, since private property rights are difficult to establish. The mobility of a market to bring about optimal resource allocation is termed MARKET FAILURE. * Environmental resources are often open access resources in that they can

  2. Can there be certainty?

    This shows that The Body Shop is willing to increase custom by showing what they offer for free, as they are attracting customers to buy goods by showing that they have free services. Franchises are legal agreements by which local businesses are allowed to setup using the name, logo, and trading methods of a well-known company.

  1. Free essay

    Globalisation and changing career patterns

    The world has become increasingly interconnected leading to interdependency between nations, groups and individuals (Giddens, 2006). Hirst & Thompson (2002) consider globalisation as the 'increasing flows of trade, investment and communication between nations' and one constant throughout the numerous definitions available is 'communication'.

  2. Globalisation: Economics and Society

    Student Number: 06032336 Before Specialization T-Shirts Fridges UK 2,000 500 India 4,000 2,000 Total Output 6,000 2,500 After Specialization T-Shirts Fridges UK 4,000 0 India 2,400 2,800 Total Output 6,400 2,800 As you can now see, after both countries switched resources to producing goods they possess a comparative advantage in

  1. Where does the World Trade Organisation fit in the overall scheme of international public ...

    in procedural circles, appointments made according to informal developing country quotas and not on merit -- are vexing signs of the UN-isation (or UNCTAD-isation) of the WTO. The GATT escaped the pitfalls and egregious failures of other international organisations, particularly within the UN system, because it had a reasonably clear

  2. China Staves Off Devaluation

    Also, we will project how devaluing may have provided positives and negatives to China's own economy. Background By the 20th century China had become a politically and economically weak nation, dominated by foreign powers. The Chinese Communist party emerged in the 1920s in the midst of a mounting economic crisis

  1. Generalized role of a purchase manager

    More than 800 firms, located in cities like Bangalore, Hyderabad, Pune, Chennai, and New Delhi provided a range of software services, mostly targeted at foreign customers. The United States accounted for nearly 60 percent of Indian software exports, followed by Europe with 23.5 percent and Japan with just 3.5 percent.

  2. Comprehensive Anatomy of China

    Tianjin, the gateway to Beijing, has an abundance of natural resources, vigorous industry and commerce with exceptional communication and transport services. Thousands of years of cultivation in this region have created a land ripe with agricultural development due to the wind blown silt that has built up over the years creating fertile soil.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work