Internal assessment portfolio D

Commentary 1

Title of the article: Australia would save $3.4bn if junk food taxed and
fresh food subsidised, says study

Source of the article: The Guardian

https://www.theguardian.com/australia-news/2017/feb/15/australia-
would-save-34bn-if-junk-food-taxed-and-fresh-food-subsidised-says-
study (Accessed 15 February 2017)

Date the article was published: 14 February 2017

Date the commentary was written: 14 March 2017

Word count of the commentary: 800

Unit of the syllabus to which the article relates: Microeconomics

Key concept being used: CHOICE

Economics assessed student work 1

 Internal assessment portfolio D

Article
Australia would save $3.4bn if junk food taxed
and fresh food subsidised, says study
Health experts tout health gains of taxing saturated fat, salt and sugar and subsidising fruits and
vegetables, with no dent on household food budgets
Australian researchers say subsidising fresh fruit and vegetables would ensure the
impact of food taxes on the household budget would be negligible. Photograph:
Dave and Les Jacobs/Getty Images/Blend Images

Tuesday 14 February 2017 19.44 GMTLast modified on Tuesday 14 February

2017 19.46 GMT
Health experts have developed a package of food taxes and subsidies that would save
Australia $3.4bn in healthcare costs without affecting household food budgets.
Linda Cobiac, a senior research fellow at the University of Melbourne’s school of public
health, led the research published on Wednesday in the journal Plos Medicine.
Cobiac and her team used international data from countries that already have food and
beverage taxes such as Denmark, but tweaked the rate of taxation and also included a
subsidy for fresh fruit and vegetables so the total change to the household budget would be
negligible.
They then modelled the potential impact on the Australian population of introducing taxes
on saturated fat, salt, sugar and sugar-sweetened beverages, and a subsidy on fruits and
vegetables. Their simulations found the combination of the taxes and subsidy could result
in 1.2 additional years of healthy life per 100 people alive in 2010, at a net cost-saving of
$3.4bn to the health sector.
“Few other public health interventions could deliver such health gains on average across
the whole population,” Cobiac said.
The sugar tax produced the biggest gains in health, followed by the salt tax, the saturated
fat tax and the sugar-sweetened beverage tax.
The fruit and vegetable subsidy, while cost-effective when added to the package of taxes,
did not lead to a net health benefit on its own, the researchers found.
A co-author of the paper, Prof Tony Blakely, said this was because although a fruit and
vegetable subsidy alone would encourage people to eat more fresh foods, previous studies
of consumer behaviour had found they would spend the money saved on sugary foods.
The researchers suggest introducing a tax of $1.37 for every 100 grams of saturated fat in
those foods with a saturated fat content of more than 2.3%, excluding milk; a salt tax of 30
cents for one gram of sodium above Australian maximum recommended levels; a sugar-
sweetened beverage tax of 47 cents a litre; a fruit and vegetable subsidy of 14 cents for
every 100 grams; and a sugar tax of 94 cents for every 100ml in ice-cream with more than
10 grams of sugar per 100 grams; and 85 cents for every 100 grams in all other products.
The taxes exclude fresh fruits, vegetables, meats and many dairy products.

Economics assessed student work 2

 Internal assessment portfolio D

“You need to include both carrots and sticks to change consumer behaviour and to
encourage new taxes,” Blakely said. “That’s where this paper is cutting edge
internationally.
“We have worked out the whole package of taxes with minimal impact on the budget of the
household, so you can see an overall gain for the government. The government would be
less interested in the package if it was purely punitive, but this provides subsidies and
savings to health spending that could be reinvested back into communities and services.”
He said taxing junk foods also prompted food manufacturers to change their products and
make them healthier to avoid the taxes.
“For those who might say this is an example of nanny state measures, let’s consider that we
don’t mind asbestos being taken out of buildings to prevent respiratory disease, and we’re
happy for lead to be taken from petrol. We need to change the food system if we are going
to tackle obesity and prevent disease.”
A health economist at the Grattan Institute, Stephen Duckett, said the researchers had put
together a careful and strong study and set of tax and subsidy suggestions. “This is a very
good paper,” he said.
“In my view, we should be starting to tax sugary drinks as a first step. Nearly every week
there’s a new study citing the benefits of a sugary drinks tax and nearly every month
another country adopts it as a policy. It’s quickly being seen as an appropriate thing to do
to address the obesity epidemic.”
A Grattan Institute report published in November found introducing an excise tax of 40
cents for every 100 grams of sugar in beverages as part of the fight against obesity would
trigger a 15% drop in the consumption of sugary drinks. Australians and New Zealanders
consume an average of 76 litres of sugary drinks per person every year.
In a piece for the Medical Journal of Australia published on Monday, the chair of the
Council of Presidents of Medical Colleges, Prof Nicholas Talley, wrote that “the current
lack of a coordinated national approach is not acceptable”.
More than one in four Australian children are now overweight or obese, as are more than
two-thirds of all adults.
Talley proposed a six-point action plan, which included recognising obesity as a chronic
disease with multiple causes. He also called for stronger legislation to reduce unhealthy
food marketing to children and to reduce the consumption of high-sugar beverages, saying
a sugar-sweetened beverage tax should be introduced.
“There is evidence that the food industry has been a major contributor to obesity globally,”
he wrote. “The health of future generations should not be abandoned for short-term and
short-sighted commercial interests.”
Commentary

Australians can choose for themselves whether to consume foods containing saturated fat
and salt, and sugared drinks. But consuming such items (“junk foods”) has high
opportunity costs, not just for themselves but for others. The government prefers that they

Economics assessed student work 3

 Internal assessment portfolio D

make the choice of consuming fruits and vegetables. Therefore it is planning to impose an
indirect tax on junk foods and a subsidy for fruit and vegetables, which will have the effect
of possibly changing the choices consumers make.

One reason for governments to do this is because consumers’ choices are not always
rational, ignoring the full opportunity costs to themselves of eating unhealthy food. Even if
they do know all the costs to themselves, there are also external costs of consumption.
Such negative externalities mean that costs are imposed on others when someone
consumes this product. These extra opportunity costs include limited contribution to the
nation’s economy, since health issues caused by overconsumption of these products can
lead to inefficient work or inability to perform certain tasks. Also, children consume much
junk food. If they have health issues or live a shorter life, they cannot drive the country’s
economy. Moreover, when people go to hospital because of health problems and use
insurance, insurance premiums will rise for everyone else.

These negative effects suggest that people’s choices are wrong and they should be
consuming less junk food. This can be shown in the diagram below, which focuses on the
sugar market.

Economics assessed student work 4

 Internal assessment portfolio D

Modeling the cost of sugar consumption

P (AUD) in Australia

S = MSC
Poptimum

Pmarket

D = MPB

MSB

Q (grams per
week)
Qoptimum Qmarket

The market price and quantity demanded (Qd) of sugar are where demand meets
supply. However, this demand curve does not reflect the external opportunity costs of
consuming sugar. These costs have to be subtracted from the marginal private benefits
(MPB), which are represented by the demand curve, and therefore the marginal social
benefit (MSB) curve lies below demand.

The optimum price and Qd of sugar is when MSB = marginal social cost (MSC). We are
assuming that there are no production externalities, so MSC = S. We see that Poptimum and

Economics assessed student work 5

 Internal assessment portfolio D

Qoptimum are not the same as Pmarket and Qmarket, leading to market failure due to allocative
inefficiency.

The Australian government is trying to resolve the market failure by imposing an indirect
tax, as shown on the next diagram. When the firm has to pay this tax per unit of output, it
adds to its cost of production, shifting the supply curve up. This puts upward pressure on

Effect of indirect tax on sugar market in

Australia
P (AUD)
Stax

Poptimum S = MSC

Pmarket

Tax per
gram

D = MPB

MSB
Q (grams per
week)
Qoptimum Qmarket

price, which becomes an incentive for consumers to change their choices, decreasing Qd.
With the right amount of tax, it is possible that the Pmarket and Qd meet the optimum,
reaching allocative efficiency. There is a welfare gain of the shaded area.

Economics assessed student work 6

 Internal assessment portfolio D

In addition, the government plans to subsidize fruits and vegetables. These

products have external benefits, such as improving concentration and performance at work
and school, which can lead to a growing economy. They also have external benefits of
production. Fields to grow crops provide green fields, nature, and clean air. Right now, not
enough fruits and vegetables are being chosen when considering these positive
externalities. Therefore the choices lead to allocative inefficiency.

A subsidy is money granted by the government to the firm. This decreases costs of
production making the supply curve shift down. This puts downward pressure on price
which in theory should act as an incentive for the consumers to increase Qd.

However, the article suggests that subsidies will not change consumers’ choices.
This may be because demand for fruits and vegetables is price inelastic, meaning that
price changes do not have much effect on Qd. Perhaps, this is because people are not
aware of the benefits vegetables and fruits have, so a decrease in price is not enough to
make the consumers choose to buy more. Similarly, consumers might not know what to
cook with the extra vegetables. Better ways to influence choices and increase demand for
fruits and vegetables can be educating people about the benefits and having posters
showing meal ideas using vegetables and fruits at stores.

However, the article assumes that taxing sugar will have success in affecting
choices. This may be because sugar demand is price elastic which means that Qd
decreases more relative to price increases. Often, sugar is contained in sweets and
desserts which are considered a luxury. Luxury goods have elastic demand. Similarly, the
children who buy sugary sweets have a very limited income. So when price increases,
they are no longer able to afford them. Their choices can be altered more easily.

Often, consumers of sugary, fatty, salty foods are low-income families, since these
goods tend to be cheaper. Therefore, is it possible that the low-income families carry the
biggest burden. Indirect taxes can lead to allocative efficiency but are perhaps not
equitable. Additional subsidies and education are necessary to help low-income families
make the “right” choices.

Economics assessed student work 7

 Internal assessment portfolio D

Commentary 2

Title of the article: Japan's manufacturing employment hits 7-year

high

Source of the article: Nikkei Asian Review

https://asia.nikkei.com/Economy/Japan-s-manufacturing-employment-
hits-7-year-high2 (Accessed 5 October 2017)

Date the article was published: 30 September 2017

Date the commentary was written: 15 October 2017

Word count of the commentary: 800

Unit of the syllabus to which the article relates: Macroeconomics

Key concept being used: Change

Economics assessed student work 8

 Internal assessment portfolio D

Article

Japan's manufacturing
employment hits 7-year high
Jobs revival comes as producers reverse offshoring
TOKYO -- Japanese manufacturing-sector employment
averaged more than 10 million workers from January to August,
exceeding that mark for the first time since 2010 as companies
bring more production home while exports recover on a mild
global economic recovery.

The manufacturing sector employed 10.03 million people on

average in the first eight months of 2017. The full-year average is
also widely expected to top 10 million for the first time in seven
years.

In August, when manufacturing employment totaled 10.02

million, the number of new manufacturing job openings climbed
11.7% on the year, compared with 6.3% in all sectors. Japan's
jobs-to-applicants ratio reached 1.52, the same as in July and
the highest since February 1974. Unemployment decreased 0.4

Economics assessed student work 9

 Internal assessment portfolio D

percentage point on the year to 2.8%, the Statistics Bureau said

Friday. At a time when Japan is already near full employment --
that is, when all those with the will and ability to work are doing
so -- expansion in manufacturing jobs serves as a primary force
behind further reduction in the unemployment rate.

Returning home

Robust exports of such goods as autos and computer chips, a

benefit of the global economic recovery, have led improvements
in overall production. At the same time, more Japanese
businesses are choosing to bring production back home rather
than raise it overseas. Capital investment by foreign units of
Japanese companies fell 10.2% on the year for the April-June
quarter, according to the Ministry of Economy, Trade and
Industry, continuing a slide that began in the April-June period
of 2014.

Persistent yen depreciation has made exports from Japan more

competitive in recent years. And labor costs in many Asian
nations are on the rise as their economies develop, lessening the
advantages to manufacturing in those countries. The per-unit
cost of labor when making goods in China is now 30% higher
than in Japan, according to SMBC Nikko Securities.

Such factors led JVC Kenwood to transfer production of certain

vehicle navigation systems for the Japanese market from plants

Economics assessed student work 10

 Internal assessment portfolio D

in China, Indonesia and elsewhere to a facilities in central

Japan's Nagano Prefecture in late 2015. Until then, nearly all of
its navigation systems were made abroad. Discount store
operator Daiso Industries used to obtain nearly all its household
goods and sundries from abroad but reports that those made in
Japan will increase.

Full speed ahead

The worsening labor crunch is also pushing companies to take

on more full-time workers rather than make do with part-
timers. Full-time employees in Japan rose 560,000 on the year
in August. The ranks of part-time and temporary workers grew
only 180,000. This trend could drive up household incomes as
part-timers secure higher-paying full-time positions and the
total number of these jobs increases.

Total wages paid to workers in Japan are growing 3% annually

in real terms, according to Tatsushi Shikano of Mitsubishi UFJ
Morgan Stanley Securities. As this measure goes up,
"households' sentiment is also improving, and consumption will
continue to climb," Shikano predicted.

A mixed blessing

Yet Japanese manufacturing's resurgence could hinder other

elements of an economic recovery, namely productivity growth.

Economics assessed student work 11

 Internal assessment portfolio D

"When labor is limited, the rational thing to do is import

tradeable commodities instead of producing them at home," said
Ryutaro Kono of BNP Paribas Securities (Japan). "But drastic
depreciation in the yen has brought about the reverse. Talent is
not flowing into nonmanufacturing growth fields, which
impedes the creation of new growth industries."

The manufacturing sector employed 16.7% of the Japanese

workforce in 2015, according to the government-linked Japan
Institute for Labor Policy and Training. The figure is the third-
highest among advanced nations, behind Germany's 19.3% and
Italy's 18.3%. The U.S., the U.K. and Canada have ratios of
around 10%.

Thailand and Malaysia have figures in the 16s, comparable to

Japan's. But in South Korea, only 12.2% of workers are in
manufacturing, giving other industries more room to snap up
talent.

Experts expect Japanese manufacturers to continue bringing

production home for now as labor costs elsewhere in Asia climb.
But significant appreciation in the yen, among other
developments, could halt or shift that trend yet again.

Economics assessed student work 12

 Internal assessment portfolio D

Commentary

As macroeconomic conditions change, firms need to adjust their production plans and employment
practices, governments will alter their budgetary and labour policies, and even economists may
have to change their models.

Recently, Japan’s unemployment rate fell and real wages rose. To be unemployed, one must have no
𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢
job and be willing and able to work. Unemployment rate = x 100.
𝑢𝑢𝑢𝑢𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑙𝑙𝑙𝑙 𝑓𝑓𝑓𝑓𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑓𝑓𝑓𝑓𝑢𝑢𝑢𝑢
Real wage refers to the wage after adjusting for the change in price levels.

One reason for these changes is that “more Japanese businesses are bringing production back home
rather than raise it overseas” due to changes in overseas’ labour costs. This raises demand for labour
in Japan, shifting the demand curve right in the labour market.

The increase in demand increases quantity of labour, increasing employment, and puts upward
pressure on wages.

As a result of these changes, in Japan, 𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢

𝑗𝑗𝑗𝑗𝑢𝑢𝑢𝑢𝑗𝑗𝑗𝑗 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑢𝑢𝑢𝑢𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑢𝑢𝑢𝑢𝑣𝑣𝑣𝑣
= 1.52, which means for every 100 unemployed,
152 jobs are available. In other words, there is tight capacity in the labour market and perhaps the
current unemployment rate, 2.8%, is below the natural rate of unemployment (NRU).

Economics assessed student work 13

 Internal assessment portfolio D

NRU contains frictional, structural, and seasonal unemployment and is said to benefit the economy
as it allows workers to find better jobs. On the diagram, NRU is represented by the horizontal
distance between the intersection of S and D, and the labour force. Firms will need to increase
wages further to attract new workers or to keep workers to stay in their company.

More employment + higher wages will lead to higher disposable incomes for households, especially
if housewives start working due to higher wages. Higher incomes incentivize people to increase
consumption. The marginal propensity to consume (mpc) is the proportion of spending on
consumption to extra income. Employees have a higher mpc compared with business owners and so
as wages increase relative to profits, consumption may rise strongly and lead to a stronger multiplier
effect. Moreover, the rise in real wages, especially in the manufacturing and construction sectors,
may narrow income inequality

A tight labour market may also incentivize firms to take “more full time workers rather than make
do with part time”, so workers will not quit jobs easily. This is a good thing for Japanese workers as
often there is underemployment among the “employed” because workers who wish to work full time
are only given part-time jobs. Full time employment means more stable income and job security,
boosting confidence levels and increasing consumption further.

All of these factors increase consumption, shifting Aggregate Demand (AD) to the right in the
AD/AS diagram, as consumption is a factor of AD. In addition, “exports are recovering globally”.
Exports are another AD component, shifting AD further right.

Economics assessed student work 14

 Internal assessment portfolio D

The shift of AD in theory, should raise both Price Level (PL) and real GDP, as shown in the
diagram. However, currently in Japan, price levels are only barely rising. The reason may be
because the aggregate supply (AS) in Japan is a Keynesian AS curve or very flat (almost
horizontal). With a Keynesian/horizontal AS, an AD shift does not lead to a PL change.

Economics assessed student work 15

 Internal assessment portfolio D

This situation can also be explained theoretically using a Phillips Curve, which outlines the
relationship between inflation (the sustained rise in average price levels) and unemployment.
Usually economists suggest they have an inverse relationship, as demonstrated in the original curve
based on historical data.

However economists need to change their theories, since the rise in price levels in Japan is very
small and it can be said that inflation is nearly zero. Therefore, there does not appear to be a trade-
off between the unemployment rate and inflation. Japan’s “Phillips curve” seems to be virtually flat,
although recently when the unemployment rate was higher, there was negative inflation = deflation.

Economics assessed student work 16

 Internal assessment portfolio D

In conclusion, Japan is able to enjoy both a falling unemployment rate and low inflation, despite
what traditional economic theories suggest. Because of high consumption and exports, the
government could now change its budgetary policies from expansionary to contractionary, reducing
its deficit and maybe even changing it into a surplus.

However, the tight labour market may not be sustainable in the long-run, especially due to Japan’s
shrinking population. S Labour will fall but D Labour may rise. Japan can only maintain the size of its
labour force, (thus maintaining output) by allowing more immigration by overseas workers. The
government is having to change its policies on immigration, which it has previously opposed.
However, bringing in foreign workers may widen income inequality again, especially if Japanese
firms take advantage of workers from underdeveloped nations by paying them low wages.

Economics assessed student work 17

 Internal assessment portfolio D

Commentary 3

Title of the article: We’re back to currency wars, and here’s why that is bad
for markets

Source of the article: The South China Morning Post

https://www.scmp.com/business/companies/article/2130983/were-back-
currency-wars-and-heres-why-bad-markets (Accessed 10 February 2018)

Date the article was published: January 29, 2018

Date commentary was written: March 15, 2018

Word count of the commentary: 799

Unit of the syllabus to which the article relates: The Global Economy

Key concept being used: Intervention

Economics assessed student work 18

 Internal assessment portfolio D

Article

We’re back to currency wars, and here’s why that

is bad for markets
The world’s leading economies are teetering into a forex free for all,
heightening instability among the G7

Who wants a strong currency these days? Apparently nobody does. Having a strong
currency appears out of favour, judging by the latest spat between global policymakers.
Once it used to be a talisman for national economic success, but these days having a
weaker currency seems the favoured tool for forging stronger growth and gaining an
edge over trade rivals. Trouble is, if everyone joins in, it becomes a no-win, zero-sum
game.

The US has suddenly declared it wants a weaker dollar and suddenly the euro zone is
flinching from a stronger euro. A weaker yen is part of Japan’s game plan to beat
deflation and all China wants is a more competitive yuan to squeeze as much export
success as possible. Everyone it seems is piling into the poor old British pound as
Brexit worries ease. It’s a fine old mess.

What has muddied the waters is a recent comment by US Treasury Secretary Steven
Mnuchin welcoming the dollar’s weakness while praising the euro zone’s best economic
performance in over a decade. It is no surprise the euro/dollar rate has surged over
US$1.25. It harks back to the bad old days of currency volatility, especially when US
policymakers actively sought a weaker dollar to snatch better export advantages for
corporate America. A hornet’s nest has been stirred up again.

European leaders are rattled as the last thing they want is a stronger euro denting
efforts to drag Europe away from deflation risk and low inflation. The shouting match
with Washington has already begun with European Central Bank President Mario
Draghi wading in with threats to change the bank’s currency position. After all, there
had been a decades-old pact not to stir forex tensions.

Pity the poor investor who has to make sense of these spats as governments and central
banks run around in circles playing beggar-thy-neighbour currency games. In the past,
global bodies like the G7 group of major nations would have come down hard on any

Economics assessed student work 19

 Internal assessment portfolio D

country indulging in any sharp currency practice. It would have earned a very public
wrap on the knuckles.

When currency markets got badly out of line with official thinking on exchange rate
stability, a burst of coordinated intervention would have done the trick. The US dollar’s
forex instability in the mid-1980s was brought back under control by the G7’s
celebrated Plaza and Louvre Accords. These days it is more a matter of no accord as
countries go their own way on currency policy thinking.
A forex free-for-all would be a bad move. After years of sacrifice to get economies jump-
started after the 2008 crash, it is in no one’s interest to see it blown away with
heightened instability. It would be a nightmare for markets, already confused about the
retreat from policy super stimulus in the next few years. Economic uncertainty,
financial volatility and political discord would be a lethal mix.

Economics assessed student work 20

 Internal assessment portfolio D

The world’s withdrawal from super stimulus is a cat’s cradle of risk – and timing it will
be critical. In theory the dollar should have a head start thanks the US Federal
Reserve’s early move on rate hikes to date and its well-flagged intention to tighten by a
further four quarter-point moves this year. But the dollar is being heavily weighed
down by unseemly politics back home.

The growing risk that President Trump could soon face possible impeachment charges
is deeply troubling for dollar confidence and pushing investors into perceived safer
havens like the euro and yen. Investors are trying to justify their currency bets by
looking for possible inflection points in policy by the ECB and Bank of Japan. In the
euro zone’s case, Germany’s growing anger towards the ECB’s monetary slackness only
encourages euro bulls even more.

Generally, things are coming to a head and investors can hardly be blamed for
following their gut for a weaker dollar feeding into stronger demand for euros, yen,
yuan and sterling instead. With Trump’s “America First” blamed for spoiling the spirit
of global policy co-ordination and unity, it is hard to believe a G7 bear trap might be
sprung near term.

But investors beware. It would be wrong to think the G7 is a spent force. While the
Trump administration’s weaker dollar bias may have the blessing of corporate America,
the rest of the world will still have its say. With or without the US, future forex
intervention must eventually be reckoned with.

Economics assessed student work 21

 Internal assessment portfolio D

Commentary
Throughout the article, the issue is whether or not governments should be intervening in their foreign

exchange (forex) markets, either in order to stabilize them or to manipulate the exchange rate.

A strong currency (i.e.a high exchange rate relative to other currencies) can be obtained by buying the

domestic currency and selling foreign currencies. For example, considering the market for US dollars, buying

dollars leads to an increase in demand shifting it to D 2 , as seen in the diagram below [Fig 1]. Governments

intentionally raising a currency is called revaluation or overvaluing the currency, and leads to more expensive

exports (in terms of foreign currencies) and cheaper imports (in terms of domestic currencies).

High export prices and low import prices, however, are not usually desired by governments for the negative

effects on real GDP; namely the hindrance on Net Exports (NX) and Consumption (C). Households are

attracted to cheap imports which lessens C and NX, leading to a Balance of Trade (BoT) deficit [Fig 2].

Aggregate Demand (AD) shifts left since AD consists of Government expenditure, Investment, C, and NX.

This shift to AD 2 would also cause deflation, due to the price level (PL) falling.

Economics assessed student work 22

 Internal assessment portfolio D

The governments of the US, Japan, China aim for a weak, devalued or undervalued currency, and they may

intervene in forex markets to maintain this. According to the article, “Japan’s game plan to beat deflation” and

China’s desire for “a more competitive yuan to (get) … export success” are intended to be accomplished via

undervalued currencies.

To undervalue a currency, the government sells the domestic currency and buys foreign currencies. If the

US government sells dollars, the supply increases, leading to the rightwards shift to S 2 [Fig 3]. This results

in cheaper exports and more expensive imports. In this case, AD shifts right to AD 2 due to increased NX

and C [Fig 4]. This leads to economic growth, as said in the article’s first paragraph, and to an advantage in

trade, due to lower export prices.

The table 1 below shows the depreciation of the US Dollar against the Euro . In the case of the US, the

government did not take action and yet the dollar depreciated. This is possibly due to speculators (or financial

“investors”) who sold their dollars while they were worth more, following the declaration that the dollar

1“Historical Rates for the EUR/USD currency conversion on 31 December 2017 (31/12/2017).” The Best Exchange
Rate Finder @ Pound Sterling Live ,
www.poundsterlinglive.com/best-exchange-rates/euro-to-us-dollar-exchange-rate-on-2017-12-31 . Accessed
February 28, 2018.

Economics assessed student work 23

 Internal assessment portfolio D

would depreciate, implying it would be worth less in the future. This could be another method of forced

currency depreciation, using speculators.

Following the example of the US and Europe, there are many problems if several countries intervene in order

to have an undervalued currency. A currency war is the competition of countries devaluing their currency in

order to have an advantage in trading over another country. This currency war can lead to tensions between

countries and investors/speculators, who have portfolio/financial investments. Europeans would be affected

negatively if they have assets such as bonds, stocks and bank savings in the USA. The depreciating dollar

means the values of their funds in terms of euros is decreasing , which would lead to losses for them.

In addition, there is a problem that the final outcome of a devaluing currency is a “no-win, zero-sum game.”

This implies that the governments would all devalue their currencies, balancing the devaluing of each other’s

country’s currency, negating the benefits of one country devaluing their currency.

Economics assessed student work 24

 Internal assessment portfolio D

Furthermore, there are problems with trade and how it impacts economies. By the US having a devalued

currency, the imports will be expensive( in terms of dollars) affecting AD for the exporting country, Europe

[Fig 5], leading to the possibility of recession. Furthermore, there is a possibility of cost-push inflation for the

US economy due to higher costs of imports, which may cause a recession in the US if the government reacts

to inflation with contractionary policies or firms invest less [Fig 6].

According to this article, “future forex intervention must eventually be reckoned with”, if there is

heightened instability of the market. The Lehman Shock has traumatized all countries, and so “it is in no

Economics assessed student work 25

 Internal assessment portfolio D

one’s interest to see it blown away with heightened instability.” The G7 could attempt to stabilize this

situation by having a managed exchange rate, by using reserves. The use of reserves can stabilize

depreciating currencies, in this case by buying the domestic currency in order to shift the demand

curve to the right, as seen in the diagram above.

Intervention which is aimed at stabilizing currencies can be beneficial to the global economy and is probably

necessary. But intervention aimed at devaluation will probably lead to a currency war and leave everyone

worse off.

Economics assessed student work 26