JAPAN. SURPLUS or DEFICIT? (via Moeko IB Economics Year 1′s Blog)

This is a blog post which illustrates the current account deficit in Japan.

1) Historical Trends: In 1980 Japan was in a deficit of 10.75 billion dollars. Yet from 1981, the currency came out of the deficit and started to balance out, but gradually kept going into a surplus. In 1986 it reached nearly 90 billion dollars. From then on, there were contractions and expansions on the graph, but overall the country is more in a surplus than in a deficit.         2) In terms of GDP,since 1981, the country ha … Read More

via Moeko IB Economics Year 1's Blog

The J-Curve

The country has a current account deficit when it is at the starting point (the very left side of the curve) of the J curve. The exchange rate of the currency is lowered to rectify this. In the short term, because of existing contracts and imperfect knowledge, the deficit worsens to the minimum point on the curve. However, int he long term, if the Marshall-Learner condition is fulfilled, exports revenues will begin to increase and import expenditure will start to fall. The current account deficit will get smaller, moving in the positive section of the J-curve.

Subsidy

When the government gives a subsidy to domestic producers, the domestic supply curve shifts downwards from S1 to S2. S2 represents the domestic supply with the addition of the subsidy. The price to consumers remains the same but imports will fall while domestic production will increase. Though the overall quantity supplied does not increase in terms of world supply, the ratio of imports to domestic changes.

Tariff

This diagram illustrates the effect of imposing a tariff. In this case, we are looking at a tariff imposed on the imports of Chinese paper into the European Union. A tariff is a tax that is imposed on each unit of import brought into the country. Because the price has increased, China will export less of their paper to the EU which causes the supply of Chinese paper to shift up. By doing so, there is a dead-weight loss as there are some competitors that will no longer be able to produce at given price level P1. This is represented by the orange coloured area. Also, the blue section represents the government revenue which is gathered from the tax.

Free Trade

This diagram illustrates the supply of paper in the European Union. In this case, the European Union is importing paper from China. Because there are imports, there is a kink in the supply of paper. The quantity supplied by the EU is represented by 0 to Q1 whereas the quantity supplied by foreigners or, in this case, China, is Q1 to Q2.

Production Possibility Curves (PPCs) comparative advantage

China has an absolute advantage in the production of both shoes and cloth. It can produce more of both than India with the same factor inputs. However, India has a comparative advantage in producing shoes, since they only give up 2.5 meters of cloth for each pair, whereas China gives up 4 meters of cloth. China should specialize in cloth and India should specialize in shoes.