Big Max Index and Burgereconomics

Economist Article Link: http://www.economist.com/news/finance-and-economics/21571165-currency-wars-burgers-verdict-bunfight

Recently in IB HL Economics, we have been studying exchange rates and protectionism; in particular we have explored the determinants of changes in exchange rates and discussed the advantages and disadvantages of under/overvalued exchange rates and different exchange rate regimes. The advantage to a undervalued currency is obvious; the exports of an economy with an undervalued currency are significantly aided by their relatively lower prices abroad, which simulates economic growth. However, this comes at a cost to the people importing the goods, who are spending their money overseas instead of supporting their local producers and growing their own economy. The article discusses fears amongst many economists that there are emerging "currency wars," battles between nations to devalue their own currencies to give their economies a boost, a phenomenon that could result in a vicious spiraling price war reminiscent to those seen in the 1930's. The Big Mac Index presents a casual, humorous look at these claims, and looks at how certain economies, such as those of Brazil, India, the EU, and Switzerland, have seen movements in the relative valuation of their currencies, and what might have caused those movements.

The impact this has on my life is obvious; while Thailand is not covered in this article, it is currently significantly undervalued, which means I can enjoy junk food at much lower prices! I'm still not sure if that's a good thing. However, the "currency wars" could be a threat to the economy of Thailand; if other countries start rapidly devaluating their currencies, there could be severe damages to Thai exports. This article provides a fascinating look into the politics of exchange rate manipulation through a simple analogy, and it shows us how the real-world movements in exchange rates closely reflect the theory we study in our textbooks.

Thai Exchange Rate

BangkokPost Article Link: http://m.bangkokpost.com/business/333483

In this article, the Central Bank of Thailand is unwilling to cut interest rates further from 2.75 percent. However, Chairman Ramangkura believes that the differences in the US and Thai interest rates are causing too much appreciation to the Thai baht (since Americans are investing in Thailand due to the higher interest rates, causing high demand which is spurring the appreciation of the baht), and he is supported by economist Mr. Suthiwart-Narueput, who believes that lowering the interest rates is a cheaper way of decelerating the appreciation of the baht, which is important because of the harm that unmitigated appreciation could do to local businesses by hurting their capability to export. However, the central bank and Chulalangkorn University's Mr. Manprasert, think that such a low interest rate could fuel a rapid increase in asset prices and create a financial bubble, and that injecting the baht into the foreign exchange market is a safer means of preventing appreciation. Additionally, changes in the interest rate might not have the impact on investors that Chairman Ramangkura hopes for.

While the manipulation of interest rates is an effective tool at manipulating the exchange rate, I believe that the expense of injecting and then rebuying a currency is not significant enough to resort to interest rate manipulation. Injecting large quantities of the Thai baht is a reliable approach to increasing the supply of it on the market (and thus lowering its price), and does not carry the risk of potentially creating a bubble of asset prices. Changes in an interest rate might also have too slow or too unsubstantial an impact on foreign investors, so I would recommend forgoing the interest rate cut and instead pursuing an injection of the Thai baht into the foreign exchange market.

World Trade Organization Podcast - About the Organization

Income Inequality - Thailand vs. BoliviaLorenz Curves

Virtual Chancellor Simulation

1. How well did you manage the economy?

While I was quite satisfied with my macroeconomic goals, boosting the GDP by a huge amount, tearing apart inflation, and lowering government debt (at a cost to things like exchange rate which I feel don't matter as much), my families struggled massively. I used very socialist policies, putting large taxes on the rich, lowering regressive, consumption-based taxes, and increasing pocket money, which helped my employed singles, but hurt poor families and pensioners, which I feel isn't worth at all, not to mention that devastating chunk of income I took out of the rich.

2. What were some of the consequences of your actions?

Like I mentioned above, the primary damage of my actions was to families, most importantly poor families with children and old pensioners. My economy as a whole did fairly well, but I did go into an account deficit and hurt my exchange rate index quite a bit.

3. How much influence do you feel policy makers have on how the economy performs?

I feel policy makers have a massive impact on an economy's performance; they can't "control it", but their actions can definitely have huge consequences on an economy, as demonstrated by the massive shifts in macroeconomic goals and family wealth that occurred as a result of a few of my changes.

Thailand's Tax Rate

1. Progressive Tax (Thailand, 2014) -
   100000 - 0 - 0%
   500000 - 27500 - 5.5%
   1000000 - 115000 - 11.5%
   5000000 - 1315000 - 26.3%
2. Proportional Tax (30%) -
   500000 - 150000
   1000000 - 300000
3. Regressive Tax (30%) -
   100000 - 7.20%
   1000000 - 0.72%

1. Tax Rates in Thailand (2014) - http://www.rd.go.th/publish/6045.0.html - Section 3
2. Tax Rates in Thailand (Old) - 0% for 0-150k, 10% for 150k-500k, 20% for 500k-1m, 30% for 1m-4m, and 37% for 4m and beyond.

Most importantly, the new tax rates split up the larger brackets from 0-1 million into much smaller ones, which makes for lower average rates on lower incomes. Additionally, they also break up the multimillion brackets and have adding increments of 5%. These changes essentially result in tax cuts across the board for all income levels for 2014. The lowered taxes could have been established to increase aggregate demand by encouraging consumption and working.

Unemployment Videos

Song 1: Mockingbird - Eminem
https://www.youtube.com/watch?v=OthLwh5Gtvw

Song 2: Brother, Can You Spare a Dime? - Bing Crosby, Yip Harburg, and Jay Gorney
https://www.youtube.com/watch?v=eih67rlGNhU

Song 3: If We Make It Through December - Merle Haggard
https://www.youtube.com/watch?v=Z-IJxTd8dCo

My primary song choice for this blog is Eminem's "Mockingbird". Mockingbird has been one of my favorite songs since my childhood, but after recently rereading the lyrics, I only recently recognized the references it has to unemployment. Low unemployment is perhaps the most important macroeconomic goal, since a long period of high unemployment leads to several dire consequences, other than those that are just purely based on economic theory. There are few things more soul-crushing than an utter sense of worthlessness, which stems frequently from feeling like one has no contribution to make to society or anything that they've achieved in life. Rampant unemployment can easily cause previously well-off families to lose all their savings, or their standard of life, and unemployment that lasts for too long often forces families to sell off houses, cars, and other absolutely essential requirements for functioning in society. At that point, even a recovery period makes it impossible to get a job or comeback from the devastation, and this leads to higher suicide and crime rates.

Some of the lyrics in Mockingbird that I felt had a connection to unemployment were "I'm trying to give you the life that I never had", "Daddy's always on the move", but this entire passage was very heartbreaking and significantly referenced the struggles of unemployment:

"I remember back one year when daddy had no money
Mommy wrapped the Christmas presents up
And stuck 'em under the tree and said some of 'em were from me
Cause daddy couldn't buy 'em
I'll never forget that Christmas I sat up the whole night crying
Cause daddy felt like a bum, see daddy had a job
But his job was to keep the food on the table for you and mom."

Unemployment Rate in Thailand

How does the government define and calculate the unemployment rate?

The unemployment rate is typically defined as the percentage of the active working force currently out of a job and seeking one. The Thai government essentially follows this definition, and their unemployment statistics are calculated by the Labor Force Survey (LFS).

Give some statistics on the unemployment rates for different regions, age groups, ethnic groups and gender in Thailand.

While Thailand has a total population of 67 million, it's labor force is roughly 40 million. Thailand actually has the FOURTH lowest unemployment rates in the world at 1%. Here is a breakdown by different categories, as well as a chart depicting Thailand's unemployment rates from 1986:

agriculture: 38.2%

industry: 13.6%

services: 48.2%

Female Unemployment rate: 0.60%

Male Unemployment rate: 0.60%

North: 0.48%

South: 0.53%

Central: 0.85% 

Bangkok: 0.26%

Northeast: 0.93%

How extensive are the labour market regulations in Thailand (e.g. minimum wage, job security, safety standards, length of workday/week/month and paid holidays)

Thailand is a developing nation, and there is still a lot of child labor that goes on in low income regions, especially industrial, factory-abundant areas. Despite it's relative lack of prosperity, however, Thailand has fairly generous labor standards. There is compensation for sick, pregnant, and young workers, and children under the age of 15 are not allowed to work. A minimum wage exists, around 300 baht (~10 USD) per day, and work hours cannot officially exceed 8 per day.

What does the government do to reduce the level of unemployment? Can you identify which policies are interventionist or market oriented?

The government has enacted various policies since the late 1900's to combat unemployment in Thailand. Most significantly, the Thai government has started several market-based programs to increase the quality and quantity of their workforce, providing cheap, accessible education in low income regions and ensuring quality public education for all. They've attempted to subsidize struggling farmers with interventionist policies like the infamous "rice scheme". Another example is using the military to improve the quality of infrastructure throughout Thailand (market based).

Business Cycle

This image shows us an excellent example of a typical business cycle. As time goes on, the level of output in an economy fluctuates between two constantly evolving extremes: the boom and the bust. While the oscillation is constant, the economy (in most cases) is still ever growing. Even if there's a temporary recession (the downward decrease in growth from a boom),  the economy eventually recovers (period of increased economic growth from a bust), and reaches an even higher boom. As this cycle goes on, with ever increasing peaks, the long term trendline is one of constant growth, usually slightly below potential output (unless the economy is undergoing a phenomenon like an inflationary gap).

Circular Flow of Income

As we can see from the above diagram, the flow of income throughout an economy travels through four primary routes. Households and individuals supply businesses with the factors of production to create goods and services, and in return those businesses supply the goods and services. To pay for these goods and services, consumers use money and spend money; this expenditure is used to fund the businesses' production costs. To repay individuals and households for their labor and factors of production, businesses provide income in the form of wages, rent, profit, and interest in the fourth and final route. And thus, income flows from the households and businesses in an economy in a complete, repetitive cycle.

Tragedy of the Commons

The article "Can Free Market Economies Boost Amazonian Land Rights?" describes the issues that indigenous communities are having with commercial fishermen who steal their food. Since the resources have no designated owner, people are free to take as much as they want; the "Tragedy of the Commons" describes this phenomenon, where it is both rational to take as much of the resource as you want and irrational to drain the source of food. To solve this issue, Hernando de Soto suggests giving property rights to the indigenous people, but some people worry that private ownership would make them liable to being bought out by big businesses.

Video
Link

Another example: Indonesian Reef Fish

This article talks about another common access resource: Indonesia's reef fish, which are quickly becoming less and less abundant because of the high demand from South China and Hong Kong, at a rate of 30% per year. This is irrational, since the fishermen's usage of unconventional farming methods is setting them up for starvation in the future. Organizations are trying to educate fishermen, but it seems without proper government manage or property rights, the Indonesian reef fish is doomed for extinction.

Examples of Government Intervention

1) Indirect Taxes: "Indirect Tax Becomes Levy of Choice for Governments"

http://www.ft.com/intl/cms/s/0/d1957616-cdf4-11e3-9dfd-00144feabdc0.html#axzz3FZdi8aOW

In this article, Houlder discusses the rise in indirect taxes across the world, with over 13 countries increasing their indirect taxes with none cutting them. It seems that governments around the world are finding them one of the most efficient ways to increase revenue, for reasons like low cost of collection. This is in line with a trend of aiming or more transparency with taxes. However, with a variety of amendments made to the laws regarding income tax, the process of recording it is becoming increasingly complex.

2) Subsidies: "UK Cleared to Heavily Subsidize $39B Nuclear Plant"

http://abcnews.go.com/International/wireStory/uk-cleared-heavily-subsidize-39b-nuclear-plant-26038633

This article describes the EU's approval for Britain's bid to subsidize a new nuclear plant, despite arguments from people questioning it's hefty price tag. To make this decision, the EU ensured the subsidy wouldn't distort the energy market (a problem with subsidies is that they often negatively impact the product of any competitors). This subsidy will ensure the investors of the plant will break even, especially since the past few plants have all failed financially leading analysts to claim their usage is impossible without subsidies from the government. The only problem is environmentalists are furious that billions of taxpayer dollars are being used to fund an arguably nonrenewable, "dirty" source of energy.

3) Price Controls: "Panama's President-Elects Plans Price Controls on Basic Foods"

http://articles.chicagotribune.com/2014-05-06/news/sns-rt-us-panama-election-20140424_1_price-controls-panama-city-basic-foods

In order to lower the costs of basic "basket food necessities" (such as rice, cheese, and meat) Panama's new President is planning on applying price controls to 22 different food items, a policy change that appears to be specifically aimed at the outgoing President, who was a supermarket tycoon. It is estimated that these price controls can save the people of Panama $600 million! These moves are being made to combat the leaps in prices that food and drinks are making, contrary to inflation and the rest of the market (due to Panama's informal economy).