RSS

Category Archives: Economics

Distinguishing between uncertainty and probabilistic risk:

Keynes explicitly developed a ‘general theory’ as an alternative to classical theory. Keynes argued that the difference between probabilistic risk and uncertainty had important implications for understanding (a) the operations of a market-oriented entrepreneurial economy and (b) the positive, active role of government in influencing market outcomes through deliberate legislative policies.
Keynes’s concept of uncertainty, therefore, reflects the fact that the future is transmutable or creative in the sense that future economic outcomes may be permanently changed in nature and substance by the actions today of individuals, groups or governments, often in ways not even perceived by the creators of change.
To summarize, following Samuelson, mainstream economic theory imposes the ergodic axiom for its ‘scientific’approach. Requiring this ergodic axiom as a basis for scientific analysis dictates a laissez-faire policy philosophy by assumption. On the other hand, if one invokes Keynes’s concept of uncertainty as involving a non-ergodic environment, then, logically, there can be a positive role for government in deliberately using monetary policy, and if that fails, fiscal policy, to encourage the full employment of resources and promote economic growth. Proposition evidence treatise

Source: The Philosophy of Keynes’s Economics—Probability, uncertainty and convention

 
Leave a comment

Posted by on June 12, 2012 in Economics

 

The absence of uncertainty in nineteenth-century classical economics

Ricardo (1817), the father of nineteenth-century classical economics, assumed a world of perfect certainty. On this view, all households and businesses were assumed to possess a full and correct knowledge of a presumed pre-programmed external economic reality that governed all past, present and future economic outcomes. The external economic environment was assumed to be immutable in the sense that it was not susceptible to change induced by human action. The path of the economy, like the path of the planets under Newton’s celestial mechanics, was regarded as determined by timeless natural laws.

Economic decision-makers were assumed to have complete knowledge of these laws. Accordingly, while pursuing their respective goals of utility maximization and profit maximization, households and enterprises never make errors in their spending choices among all the goods available in the competitive market place. Theses’ economic agents’ always spend everything they have earned on things with the highest ‘known’ future pay-off in terms of utility for households and profits for businesses. Accordingly, within the capacity of the economy to produce, there could never be a lack of demand for the products of industry or for workers who wanted to work. In this manner, classical economics justified a laissez-faire philosophy for the economic system. No government action could ensure a higher pay-off than the decisions of individuals with complete knowledge of the pay-off of each of their decisions made in free markets.

 
Leave a comment

Posted by on June 12, 2012 in Economics

 

The Economist commodity-price index

 
Leave a comment

Posted by on August 23, 2011 in Economics

 

Tags:

Trade, exchange rates, budget balances and interest rates

 
Leave a comment

Posted by on August 23, 2011 in Economics

 

Tags:

That’s yuan way to adjust

AHEAD of a looming Sino-American summit, it’s once again time for newspapers to allocate ink to coverage of the spat over the value of China’s currency. Happily, we seem to be seeing an improved understanding that movement in the nominal dollar-yuan exchange rate is not the most important factor shaping imbalances. Tim Geithner (who, bless him, once got in trouble for saying that the dollar needed to decline) declared today that the yuan is “substantially undervalued” and needs to strengthen. But he later elaborated:

“This is a pace of about 6 percent a year in nominal terms, but significantly faster in real terms because inflation in China is much higher than in the United States,” Geithner said. Taking inflation into account, the yuan is rising at a rate of about 10 percent a year, “so if that appreciation was sustained over time, it would make a very substantial difference,” he said in response to a question after the speech.

Yes, China continues to manipulate its currency. This much is clear from the latest data on Chinese reserve accumulation. Here’s the Washington Post:

At issue is the imbalance in their financial relationship. China’s central bank said Tuesday that Beijing’s holdings of foreign cash and securities amount to $2.85 trillion – a jump of 20 percent over the year before – despite Chinese promises to try to balance its trade and investment relations with the United States and other countries.

China added $200 billion to that stockpile in the last three months of the year alone, as the country socked away capital from the rest of the world at a torrid pace.

That reserve accumulation is directly connected to China’s interventions in currency markets to keep the yuan cheap against the dollar. But the Post makes a mistake in saying that:

The reserves are so large and the recent run-up so rapid that it’s casting new doubts over whether Beijing is reforming the handling of its currency and curbing its heavy reliance on exports as a source of jobs and growth.

And the reason has everything to do with China’s limited ability to control its real exchange rate. A cheap yuan makes for dear Chinese imports and excess demand for Chinese goods, leading to rising Chinese inflation. That’s makes Chinese goods more expensive to foreign buyers—just what a nominal appreciation would accomplish.

When garment buyers from New York show up next month at China’s annual trade shows to bargain over next autumn’s fashions, many will face sticker shock.

“They’re going to go home with 35 percent less product than for the same dollars as last year,” particularly for fur coats and cotton sportswear, said Bennett Model, chief executive of Cassin, a Manhattan-based line of designer clothing. “The consumer will definitely see the price rise.”

Chinese inflation is running consistently higher than American inflation, which is scarcely above 1%. That translates into rapid real appreciation despite the slow movement in the nominal exchange rate. And that should produce a decline in Sino-American imbalances, which seems to be emerging. In December, China’s trade surplus fell sharply its November level, from $22.9 billion to $13.1 billion.

It appears that markets are pushing the real exchange rate in the appropriate direction, despite Chinese intervention. That will help bring trade between the countries closer to balance. But it’s up to the governments in China and America to facilitate this process and reduce its cost to citizens by removing structural obstacles to adjustment.

 
Leave a comment

Posted by on August 23, 2011 in Economics

 

Tags:

Currency comparisons, to go

A beefed-up version of the Big Mac index suggests that the Chinese yuan
is now close to its fair value against the dollar

THE Economist’s Big Mac index is a fun guide to whether currencies are at their “correct” level. It is based on the theory of purchasing-power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalise the prices of a basket of goods and services around the world. At market exchange rates, a burger is 44% cheaper in China than in America. In other words, the raw Big Mac index suggests that the yuan is 44% undervalued against the dollar. But we have long warned that cheap burgers in China do not prove that the yuan is massively undervalued. Average prices should be lower in poor countries than in rich ones because labour costs are lower. The chart above shows a strong positive relationship between the dollar price of a Big Mac and GDP per person.

PPP signals where exchange rates should move in the long run. To estimate the current fair value of a currency we use the “line of best fit” between Big Mac prices and GDP per person. The difference between the price predicted for each country, given its average income, and its actual price offers a better guide to currency under- and overvaluation than the “raw” index. The beefed-up index suggests that the Brazilian real is the most overvalued currency in the world; the euro is also significantly overvalued. But the yuan now appears to be close to its fair value against the dollar—something for American politicians to chew over. 

 
Leave a comment

Posted by on August 22, 2011 in Economics

 

Tags:

China remains a magnet for FDI

BEIJING, Aug. 17 (Xinhuanet) — China remains an attractive destination for foreign direct investment (FDI) despite a decline last month, experts said.

FDI fell to $8.3 billion, with year-on-year growth of 19.8 percent, the Ministry of Commerce said on Tuesday.

“The monthly FDI figure is relatively volatile and a decline does not mean anything substantial,” said Zhang Zhiwei, chief China economist of Nomura Holdings Inc.

Compared with other emerging economies, China remains competitive in attracting investment and FDI inflows should be positive for the full year, he said.

Emerging industries in China will be a new engine for economic growth and attract more capital inflows, analysts said.

With support policies for the strategic emerging industries to be launched during the second half, foreign investment in manufacturing will continue to grow, said Luo Jun, chief executive officer of the Asian Manufacturing Association.

Golden opportunity

China has designated industries such as energy conservation and environmental protection, new information technology, advanced equipment and new energy as the keys to sustainable growth.

“The development of emerging industries will spark a new round of foreign investment, as these sectors offer golden opportunities that foreign investors can’t pass up,” Luo said.

China is also revising its guidelines for foreign investment to expand market access for overseas companies. These guidelines are expected to be announced in the coming months.

FDI jumped 18.6 percent year-on-year in the first seven months to $69.2 billion. Foreign investors set up about 15,600 new companies during the period, up 7.89 percent.

The Ministry of Commerce didn’t give detailed information on FDI for July.

During the first half, however, FDI from the US contracted 22.32 percent year-on-year.

“Signs of US economic weakness mounted in the past few months. Both the negative outlook for the US economy and the decelerating PMI have contributed to the decline in investment from the US,” said Zhang.

According to the Institute for Supply Management, the US Purchasing Managers Index (PMI) fell from 55.3 percent in June to 50.9 percent in July.

“Many US firms are facing financial difficulties due to the turbulent financial market in the US and that has affected their investment in overseas markets, including China,” said Li Zhongmin, an investment researcher with the Chinese Academy of Social Sciences.

But the discouraging prospects for economic recovery in the US and Europe will make the growing Chinese market more appealing to investors from those areas, he said.

 
Leave a comment

Posted by on August 19, 2011 in Economics