Effects of American Economic Decline on Vietnam

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Readers Question: What are the effects of the economic decline in America to the country of Vietnam?

If the US economy entered into a recession the main effects on other countries would be:

1. A decline in exports. American consumers are a key component of world trade. If there was a decline in exports to America it would lead to lower growth in countries like Vietnam. In certain sectors, it could cause a rise in unemployment. There could also be a negative multiplier effect ‘knock-on effect’/ The initial fall in exports could cause a bigger fall in Aggregate Demand.

However, it depends on what % of exports are to America. For Vietnam, exports to the US are important, but not a huge %.This page shows that Vietnam exports to us totalled $7.6bn in 2005. link US – Vietnam trade

This is not a huge amount, it is about 20% of exports.

It depends on how the rest of the economy is affected. For example if domestic demand remains strong then this might offset any fall in exports

It depends on whether Vietnam is able to increase its exports to other Asian economies. For example, it may be that China’s economic growth takes the place of US exports. China is nearer.

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Should Government Cut all Taxes?

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Readers Question: What the benefits and the negative effects of reducing all taxes? I wrote an Essay on the advantages and disadvantages of tax cuts The idea of cutting all taxes is key element of libertarian politics. Cutting taxes is often a mantra repeated by conservative parties, although in practice, they usually find it more …

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Sorry, I lost £3.5bn on the Stock Market

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Yesterday, I mentioned future contracts could be used as a way to insure against risky commodity prices. This is one way that future contracts can be used. Unfortunately, future contracts and options can also be used to speculate on the stock market. Stock market options enable investors to take a position on the stock market rising or falling. If you expect the stock market to buy you can take out a contract to buy at a certain price. If the stock market rises you can then buy at the fixed price and immediately sell for the higher price. Options enable an investor to magnify his gains, but also can magnify his losses.

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Economics of the Fire Service

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Readers Question: Why the fire service is a public domain and how is the fire service a merit good

I think you mean why is the Fire Service a public good?

A public good has 2 aspects.

  1. Non rivalry – Once consumed doesn’t reduce the amount available to others
  2. Non excludability – Once it is provided you can’t stop anybody using from it.

In a free market public goods are often not provided because there is difficulty getting everyone to pay for it due to the free rider problem

The fire service shares some aspects of a public good. If the fire brigade put out a fire, they can still go to another fire. Once you have instituted a fire service, they are prepared to put out anybody’s fire. When you dial 999 and ask for Fire, you don’t get asked “but, have you paid your annual fire payment”. They just come and are financed out of government taxation.

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Can Tax Cuts avoid a recession?

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About £77 billion was wiped from the value of leading FTSE 100 companies over fears of a US recession. The FTSE 100 index is now down to its lowest level in 19 months.

In particular, stock markets were unimpressed by President Bush’s plan for tax cuts. In American politics tax cuts are often seen as the ‘solution’ to many economic ills. Reagan, Bush and many other politicians have hoped tax cuts both increases labour productivity and boosts demand. Some have even gone so far as to suggest that tax cuts pay for themselves. (people are so happy to have lower taxes they work many more hours ending up paying more tax)

Alas tax cuts may not increase Supply and they may have little impact on demand – it depends on when and how they are cut. See also: Can UK and US avoid recession

What is the impact of a cut in Income Tax on the labour Market?

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Stock Market in 2008

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Already since the start of the year the FTSE-100 has fallen 7%. Yesterday, the stock market fell 3% of 190 points on fears related to the growing credit crunch. In particular, American bank Citibank wrote off $18billion from its mortgage defaults. It hopes this will draw a line under the losses in the derivatives market.

Although, mortgage defaults in the UK are not such a problem in the UK. The UK is been squeezed by the shortage of capital as investors are unwilling to risk purchasing any ‘subprime’ related debt. This has caused the cost of borrowing to increase, it means that mortgage costs have increased despite the cut in interest rates.

What Factors Will Affect the Stock Market in the Coming Year

  1. Slowdown in Growth. A slowdown in growth is now widely expected. Lower growth will lead to smaller profits and therefore lower earning this will have a negative impact on share prices. However, the lower growth is probably already built into the share prices. Often stock markets can do surprisingly well in recessions – usually because the stock market anticipates the falling growth

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Economics of Scale

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  • Economies of scale occurs when increased output leads to lower long run average costs.

Diagram of Economics of Scale

economies-of-scale-growth-in-firm

Note Economies of Scale occurs upto Q2. After Q2 dis-economies of scale starts to occur

Basically as a firm expands it receives increasing returns to scale. To understand why economies of scale occur it is useful to think about large companies and how they benefit from their size.

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