• 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. Comprehensive Anatomy of China

    This marked a significant turnaround for China because Xiaoping believed in the idea of alleviating poverty via economic development. He led the economic reform with a simple slogan that promoted the "Four Modernizations" of agriculture, industry, technology and national defense.

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

    It is true that most developing and all least developed countries have legitimate implementation issues to address, given the complexity of the Uruguay Round agreements and their limited capacity to give effect to them domestically; and they need a helping hand to participate more effectively in the WTO.

  1. Why has GDP growth been so slow in Somalia?

    costs and help ensure she's fit to work, but this is too expensive. And her problems go on... Mara's life is a combination of many regrettable factors. She received little education as a child because going to school was too expensive.

  2. Environmental Economics HSC Notes

    * Gov seeks growth because it provides higher SOL and reduces unemployment and increases government revenue. The Price Mechanism * In a market economy, decisions about the price and quantity of goods are determined by the price mechanism. This involves the interplay of market forces.

  1. 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.

  2. Free essay

    Globalisation and changing career patterns

    In its simplest sense, globalisation refers to the 'widening, deepening, and speeding up of global interconnectedness' (Held et al, 1999, pg 16). This basically refers to the fact that communication (the interconnections) is now on a wider scale, and is almost instantaneous.

  1. Globalisation: Economics and Society

    For example, if the UK were to allocate all its resources to the production of fridges it would be incurring an opportunity cost where each extra fridge is 4 t-shirts, in contrast India has an opportunity cost of 2 t-shirts, clearly India has a comparative advantage in producing fridges, and the UK in t-shirts.

  2. Generalized role of a purchase manager

    In addition to the firm's own value-creating activities, the firm operates in a value system or vertical activities including those or upstream suppliers and downstream channel members. To achieve a competitive advantage, the firm must perform one or more value creating activities in a way that creates more overall value than do competitors.

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