Analysis (how it will be detrimental to macroeconomic performance)
-Short run: C+I+G+(X-M). An increase in M will reduce AD. (diagram)
-It’s a leakage from the circular flow
-Could increase unemployment as domestically produced goods are replaced by cheaper imported substitutes
-Means our BoP is worse
Evaluation (how it may help performance)
-Could lead to lower prices and increased variety of goods (as long as it’s not just the price that has increased
-May reduce inflation
-If it’s combined with a subsequent rise in exports, then we could reap all the rewards as well as not losing out on AD
-May kill off inefficient industries that shouldn’t have existed
-Could be due to a time of economic boom which in itself is good
Hi,
ReplyDeleteWas just reading your blog and there's just one thing I'd like to discuss about..
I do know that according to the theory the AD demand curve shifts to the left, and therefore (ceteris paribus) both real GDP falls and the general price level.
However, I think that nowadays we should not rely too heavily on this theory. We currently see that due to the imports (from e.g. China) the US have been able to keep prices low.
However; now that the Chineze government is allowing the CNY to appreciate, imports will become more expensive.
Now, after the failing of certain industries because of the low wages in China e.g. the textile industy, the US basically needs the imports from China.
Thus, in my view, an increase in imports will lead to imported inflation and NOT to a lower price level.
Please note that this is just an example; looking at general commodity prices, (of which the US is a huge importer) we see huge imported inflation. (Obviously created by themselves via the QE's)
What do you think about this?
Why have you not considered as part of evaluation WHY imports may be rising?
ReplyDeleteHi guys thanks for comments.. I think you'll find, Thomas, that my last point was that it "could be due to time of economic boom"
ReplyDeleteSorry if this wasn't clear, my essay plans don't tend always to make sense to other people..
And Pepijn.. thanks for the analysis.. I hadn't thought of that, but it's a useful evaluative point
I saw the bit about boom but you did not put what else it could be due to....lack of competitiveness? Increase in money supply? Fiscal stimulus? reduction of trade barriers?
ReplyDeleteAlso is an economic boom 'good' if the effect is high imports?
Doesn't it depend on WHAT the imports are? Benign and malign deficits?
The theory of benign and malign imports is, indeed, relevant here..
ReplyDeleteIf a country imports goods such as machinery and primary goods which help the industrial sector of your economy and perhaps boost exports then this would lead to a benign deficit.
Malign deficits are imports of things like food and toys that just get consumed.
Therefore what you're getting at is that if the deficit is benign then it matters less than if it is malign (in fact a benign deficit is normally not a problem at all.)