AS micro essays (8)

Food is necessary to life and to maintain the national security. Efforts are often made to stabilize price and incomes of farmers. Most of the governments intervened to the agricultural market to ensure that an adequate amount of food is supplied at the acceptable price. The impact can be positive or negative to the economy depends on how the consumers and producers reflect to the policies. However, to the end, the circumstance is that the intervention of the government spill over the international trade in food products.

Intervening into the agricultural market by setting a barrier always is carefully considerable by the government. The price in free market has to be set by the demand and supply forces. We always have question that whether we are using our resources in the most efficiency way. The low price in the free market needs to be made by the increase in the productivity or the achieving economy of scales, not by supporting from government. So therefore intervening into the agricultural market often contents the fear that market fails in achieving productive and allocative efficiency. But in the other hand, appropriate policy at suitable time will bring benefit to the economy.

The most common type of trade barrier is the tariff. Tariffs discourage imports by rising

the price of the imported good, thus discouraging consumer purchases. Domestic

producers benefit from reduced competition and higher prices, and producers in exporting

countries are harmed by the reduction in the level of exports.

Unlike tariff, which allows goods flow into the market without limit, quota fixes the quantity of import products that can go legally to the economy. The function of the quota is, by reducing the available of import goods in the market, the price of import product will rise and therefore it brings to domestic products more competitiveness.

Quotas can have unintended side effects, as illustrated by the U.S. sugar program. Selected countries are each allocated a fixed quantity of sugar which they can legally export to the U.S. These quotas protect U.S. producer prices, which are higher than world prices. Over time, high U.S. sugar prices have encouraged increases in domestic sugar production. Corn growers have become major supporters of the U.S. sugar program because the higher U.S. sugar price resulting from the quota led food manufacturers to substitute high fructose corn syrup (HFCS) for sugar. Therefore, with the sugar program, production of HFCS has been highly profitable; without the sugar program, sugar prices would have been lower and HFCS production might not have been profitable.

Barrier entries also bring to the war in economy. In most cases, losses equally taken by both countries. . For example, the EU has banned the use of growth hormones in cattle production in member countries and has banned meat imports from animals which have been given growth hormones. This essentially eliminates all meat imports from the U.S., where use of growth hormones has been judged safe. The U.S. has challenged the ban and both sides claim to have a scientific basis for their position. Similarly, the U.S. has banned imports of all fruits and vegetables treated with ethylene dibromide, but other countries disagree with this decision.

In conclusion, international trading should be liberated. Each country has its comparative advantage, and the trading will have the circumstance that both economies will gain benefit. By eliminating the barrier in the agricultural market, it will bring benefit to the whole economy even though the cost is some domestic sector might get worse off. And more important, it will avoid the trading war which just will damage the economy

Phillip Curve

Phillip Curve shows the relationship between level of unemployment and level of inflation. It is a trade-off between them, which means that if there is a rise in unemployment, therefore it would be a fall in inflation rates and vice versa.
When there is an increase in unemployment rates, more people now are not spending much as before. Therefore it could be a decline in the consumption, which is one factor, determined the aggregate demand. The rate of unemployment strongly depends on the aggregate demand. So a raise in unemployment rate would lead to a fall in aggregate demand and therefore, the rate of inflation will be reduced.

However, this model is not always true. It can’t explain the situation of the economy when there is a stagflation, which means that there is slower economic growth (or recession) combine with higher level of unemployment. So that new model has introduced base on the idea of Phillip Curve to explain it.Supposing the rate of inflation is now at 0, and therefore the rate of unemployment is at U. After time, the government realised that it is a high level of unemployment and they want to intervene to fix it. What they might do is to boost the demand for the market. After intervention, the unemployment rate is improved, it contracts from U to V. As there is a rise in demand, the inflation rate will increase as there is a rise in price level. Therefore prices get higher, and workers now required a higher real paid for their works.

However as there is a rise in their wages, workers now realised that their increase is just a nominal increase, therefore they might stop supply more labour and the output will return to its original. And finally, in the long run of Phillip Curve, there is a rise in inflation but a sustained in level of unemployment.

But.....
If inflation rises then exports become uncompetitive and so they fall. Exports are injections so AD falls which means unemployment raises.
If there is inflation then demand for Imports will rise and so leakages increase and so...unemployment rises.
If unemployment is low then exchange rates are high which makes imports competitive, exports not so...so unemployment raises.
So, really, inflation is high and unemployment is high; inflation is low and unemployment is low.
The exact opposite.
Or is this wrong...?
.... Absolutely true ...

Output gap

An output gap is said to exist when an economy is not producing at full capacity. So a negative output gap occurs when the economy’s actual output bellows its potential output. Illustrating the negative output using PPF diagram, the point has to lie within the curve, which means that the economy is not using all of its capacity.

Some problem might rise from it. The economy doesn’t achieve the allocative and productive efficiency. The productivity of workers might be low or there is the wrong target of producing, when the supply doesn’t meet the demand in market, or we can say that the consumer satisfaction isn’t maximised.



But I think the output gap is not so harmful for the economy. Well it’s not when the gap is not so large. When there is an output gap, it will lower the inflationary pressure for the economy. The economy can increase their output without rising in price level because they have capacity. We might say that when the negative output occurs, there is a high level of unemployment, because the economy doesn’t use all of its resources, here is workers. It might not be true because some people work as waitresses, bankers, bus-drivers, street cleaners, and teachers as well, doesn’t actually ‘produce’. Therefore their contribution will not take into account of output of the economy.

When the output gap is getting wider, we can assume that the economy is failing to achieve the allocative and productive efficiency. To deal with it, the government might use the supply side policy. Training is needed more to increase workers productivity. Or government might subsidise firms to reduce their production cost, therefore they can produce more.

In the other hand, the positive output arises when an economy’s actual output is higher than its potential output. It seems to be impossible because when the economy is at full capacity, the output will not raise even the aggregate demand shifts to the right. For a short time, however, an economy might be able to produce more if workers work overtime, some people who are not usually in the labour force enters it, and machinery is used flat out. It contains a danger of inflationary and it can’t be hold for a long run, according to the diminishing returns law unless the economy potential output increase.