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Prisoners in Europe; The Spainundrum December 14, 2010

Posted by Avu in Section 4.
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The Spanish situation regarding their recent economic issues brings into light the negatives of having a single collective currency. However, perhaps ironically, Spain was a primary backer of the Euro, at least in the 1990s when the endeavor was first underwent. Therefore, there are a slew of pros and cons of having a single shared currency.

Spain experienced massive economic growth directly after the integration of the Euro. This is because European funds could pour into Spain, facilitating the spending required to catalyze economic growth. This is naturally a positive point of having shared single currency. Private sector spending is extremely important for economic growth, and for that reason, the influx of European funds into Spain were a great positive, and a pro towards having single currency.

However, there are naturally negatives related to having a single currency, as exemplified by Spain’s economic struggles related to the Euro. Due to the housing bubble burst in Spain, there were huge deficits that subsequently had to be dealt with. This is similar to the crisis in the United States with one key difference. The USA, with its own currency, can use its policies to devalue its currency to bring it back towards balance. However, being part of the Euro, Spain cannot do that, and is therefore a prisoner to its fiscal situation as a member of the Euro. The lack of direct control is a clear negative in having a single currency. Furthermore, Spain is now in a situation in which it is worse off than it would be if it never adopted the Euro. However, should it leave the Euro, the repercussions will be even worse than before. The quagmire that Spain is in is the epitome of the negatives of a single currency.

To balance the pros and cons, with the historical evidence, mainly driven by Spain’s issues, seems to indicate that a single currency is not an economically suitable endeavor.

China’s Current Account (via Hao’s Econ Blog) December 6, 2010

Posted by Avu in Uncategorized.
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That’s What’s Up

China's Current Account 1) China's deficit in the mid 1980s is explained through the surge in foreign direct investment in China. However the current account when back into surplus in the 1990-1991 due to heavy government budget cutbacks as well as bans on imports. China's current account has been relatively balanced until 2001. The current account has been in surplus 1996 due to low domestic demand and high exports, which lead to a surplus of about 30 billion dollars. … Read More

via Hao's Econ Blog

UK Widening Trade Gap. CTFO. December 6, 2010

Posted by Avu in Section 4.
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Though the United Kingdom is experiencing far worse deficits than previously expected due to increased imports and decreased exports, the Marshall-Lerner condition suggests that the issue will resolve itself, at least to a degree over the course of time. As the British pound depreciates and is devalued, the price of British exports will decrease. However, at this point in time, the demand for British exports remains, at least in the short term, quite inelastic. Therefore, the drop in price will, unfortunately, not result in a major increase in quantity demanded. In this case, within the short term, there has not been a correction in the account deficit.

However, naturally according to the Marshall-Lerner condition, should the price elasticity of demand be elastic for British exports, the price change will render a large increase in quantity demanded. This would result in an eventual correction of the deficit. Since the majority of goods are relatively elastic, at least in the long run, there will be a large change in quantity demanded with just a relatively small change in price, and this will eventually allow the account deficit to fix itself, ceteris paribus.

Furthermore, many of the imports, according to the article, are one time purchases in order to increase production within domestic UK industries. Therefore, the import levels are far higher than they will be in coming years, and do not accurately reflect changes.