Bibliography So Far

Time Magazine - Currency Conflict article
Economist - USA worrying about China
Economist - Valuation Of Currencies
China Report - https://www.phn.com/Portals/0/PDFs/ArticlesandAdvice/Publications/china_a_sleeping_giant_no_more.pdf
Personal Interview - Gilles Couturier

The Currency War

Traditionally, the Chinese Yuan was pegged very closely to the US Dollar. This means that the governments made the necessary economic changes to maintain the same exchange rate. Eventually, in July 2005, the peg to the Dollar was removed, and a floating exchanging rate emerged. This means that the macro-economic policy was no longer directed at maintaining the same exchange rate, but rather the exchange rate can change. Thus it floats. The Yuan was undervalued towards the Dollar, a situation that precipitated the change to a floating exchange rate. However, the United States is now claiming that the Yuan has not appreciated enough (8% since the change), and that the Chinese government is still keeping the Yuan grossly undervalued (40%). This is to the point where Congress has asked the US Treasury to label China a currency manipulator.

What US Congress wants the Chinese to do is revalue their currency. The US claims the exchange rate is hurting their foreign debt by inflating it. The fruitless efforts of the US Treasury Secretary has led Congress to pass a bill calling for the revaluation of the Yuan or subsequent trade tariffs of 20%.

This is quite obviously a form of protectionism, where the US is using trade tariffs as the method. The apparent motives for this is to stabilize the balance of payments and to protect employment. China currently holds US$232.5 in debt, and the US hopes that by imposing the trade tariffs, their trade deficit will decrease, and they will be able to regain control of their foreign debt. Also, the politicians want to stop all of the factory jobs flushing to China. By imposing trade tariffs, the Chinese goods become more expensive, so the consumers will buy more American-made goods.

However, these tariffs carry with them great risks. These are risks that will ultimately hurt the US. Firstly, it is worth mentioning that the United States of America is rather dependant on China, trade-wise. Since the US is one of China's biggest customers, the tariffs will firstly hit American consumers. The price level will rise because of this international tax, and the American firms will become less competitive. Also, there is the potential threat of retaliation from China, which may result in a trade war. This will hurt both the United States and China.

These tariffs would thus hurt the US, and create more foreign debt, higher inflation and less competitive American firms. This is exactly what the US wanted to avoid by imposing these tariffs. The opportunity cost of imposing the tariffs and the resulting carnage aftermath is greater than the status quo. It is quite obvious here that the US is trying to maintain a market share in manufacturing. However, it is also quite obvious that China has a comparative advantage in this industry. Thus, instead of adopting protectionism, which only delays and magnifies the effects of the problem, the US should consider switching to a slightly more service-based economy. Traditionally, the Chinese Yuan was pegged very closely to the US Dollar. This means that the governments made the necessary economic changes to maintain the same exchange rate. Eventually, in July 2005, the peg to the Dollar was removed, and a floating exchanging rate emerged. This means that the macro-economic policy was no longer directed at maintaining the same exchange rate, but rather the exchange rate can change. Thus it floats. The Yuan was undervalued towards the Dollar, a situation that precipitated the change to a floating exchange rate. However, the United States is now claiming that the Yuan has not appreciated enough (8% since the change), and that the Chinese government is still keeping the Yuan grossly undervalued (40%). This is to the point where Congress has asked the US Treasury to label China a currency manipulator.

What US Congress wants the Chinese to do is revalue their currency. The US claims the exchange rate is hurting their foreign debt by inflating it. The fruitless efforts of the US Treasury Secretary has led Congress to pass a bill calling for the revaluation of the Yuan or subsequent trade tariffs of 20%.

This is quite obviously a form of protectionism, where the US is using trade tariffs as the method. The apparent motives for this is to stabilize the balance of payments and to protect employment. China currently holds US$232.5 in debt, and the US hopes that by imposing the trade tariffs, their trade deficit will decrease, and they will be able to regain control of their foreign debt. Also, the politicians want to stop all of the factory jobs flushing to China. By imposing trade tariffs, the Chinese goods become more expensive, so the consumers will buy more American-made goods.

However, these tariffs carry with them great risks. These are risks that will ultimately hurt the US. Firstly, it is worth mentioning that the United States of America is rather dependant on China, trade-wise. Since the US is one of China's biggest customers, the tariffs will firstly hit American consumers. The price level will rise because of this international tax, and the American firms will become less competitive. Also, there is the potential threat of retaliation from China, which may result in a trade war. This will hurt both the United States and China.

These tariffs would thus hurt the US, and create more foreign debt, higher inflation and less competitive American firms. This is exactly what the US wanted to avoid by imposing these tariffs. The opportunity cost of imposing the tariffs and the resulting carnage aftermath is greater than the status quo. It is quite obvious here that the US is trying to maintain a market share in manufacturing. However, it is also quite obvious that China has a comparative advantage in this industry. Thus, instead of adopting protectionism, which only delays and magnifies the effects of the problem, the US should consider switching to a slightly more service-based economy.

Exchange Rates

Ceteris Paribus
The determinants for exchange rates are;
- If the demand for a nation's currency increases, that currency will appreciate.
- If the supply of a nation's currency decreases, taht currency will appreciate.
- If a nation's currency appreciates, some foreign currency will depreciate relative to it.

This means that in the years of 2002-2005, the Euro has appreciated relative to the RMB, or, the RMB has depreciated relative to the Euro.

From Unemployment to Investment

Since a relationship with unemployment will be rather hard to substantiate, I've decided that it might be better to look at investment into the Netherlands, more specifically perhaps, in the electronics area. Philips is a large Dutch electronics company. This could be a potential goldmine of economic theory.
Technically, when your currency is stronger, you are able to import more. Therefore you are able to buy more technology, and thus investment in Dutch Companies R&D departments should have increased.

MR WELKER!!! READ THIS!!!

Here we can see that the Euro has become stronger relative to the Chinese Yuan.The graph shows the value of the Chinese Yuan against 1 Euro in the last 5 years.

Netherlands Bureau for Economic Policy Analysis
Topic: press release
Number: 23
Date: March 21, 2006

(The three paragraphs cited do not necessarily come in order. Bold citations are present to emphasize information. They are not so in the original.)

Dutch economy is reviving thanks to more exports.....
CPB expects economic growth in the Netherlands to be 2.75% this year, accelerating to 3% in 2007. Exports will gain momentum as a result of growth recovery in Europe. Furthermore, the Dutch competitive position can improve somewhat, after five years of decline. Unit labour costs decrease faster than those of the competitors, thanks to the modest development of wages and the depreciation of the euro from $ 1.24 in 2005 to, on average, $ 1.20 this year and the next. Domestically produced exports will show the highest growth rate thus far in this decade. Partly as a result of the ascent of the Chinese economy in the world economy, re-exports will probably continue to grow by double digits. The value of re-exports will even surpass that of 'made in Holland' exports next year.

Unemployment has passed its top and decrease again
The number of people looking for a job has been declining steadily since the end of 2005.The number of jobs has also started growing again in the course of last year, especially because of a rise in the number of temporary workers. CPB expects employment to show a strong recovery this year and the next. As a result, unemployment will decrease by 115 000 jobs, to 5% of the labour force in 2007. This decrease is stronger next year than in 2006, because employment always reacts to production with some delay.

Purchasing power is picking up
After three years of a decline, purchasing power will probably show a positive development - at least on average: 1.5% in 2006 and 0.75% next year. Real wages are increasing and the burden on households will be eased this year. However, due to the new medical insurance system, differences in real net income development are substantial.

Interesting, but what does this all mean? Obviously we haven't covered exchange rates yet, but I can see that there may be a relationship between the increasing strength of the Euro and the decreasing unemployment in the Netherlands.

Ok, I think I got it now...

How about this as my topic:

Is there a relationship between the exchange rate of the Euro and the RMB, and the unemployment rate of the Netherlands, in the past 10 years?

specific? yes
interesting? yes
data exists? yes
could it work?

could it?

EE Topic: High Unemployment in Europe - Result of Deficient Aggregate Demand, or Socialist policies?

Mr Welker,
Shall I just do an extended essay looking into the cause for the high NRU of Europe? We already discussed it a little bit in class, and it seems really interesting.

No Nike

So Nike has decided to be secretive, and don't want to release their cost data to a student like me, doing a research paper.
I guess I'll try and see if my dad's company will do it. I think a business analysis is the best way to go.

Nike And Their Costs

Mr Welker, would it be enough to an Extended Essay to determine the amount of profit Nike makes? As in, percentage wise?
Naturally, I would have to explain the reasons why its possible. This would represent the theory part of the essay.

Nike And Their Shoes

Well, we all know that Nike is notorious for its ability to externalize their costs, thus maximizing their profits.
How much does a shoe from Nike actually cost to produce? Is that cost at all reflected in the final price? Could Nike feasibly produce their shoes in the West without experiencing losses?
Interesting questions... but do they merit an Extended Essay?

Much Learned From Mr. Lerner

After Mr. Learner's visit, I've decided that my extended essay has to be much less conceptual, and much less dependent on 'dubious sources'. Therefore I'd like to throw a few other ideas on the table.
Doing an extended essay on the externalities caused by large corporations is definitly a viable option seeing as I have many contacts within with Nike in Holland. The European headquarters is in my home town, so many of my school mates were Nike-children.
In any case, it appears we are back to the brainstorming...

Getting Serious About The Extended Essay

In order to proceed productively with my Extended Essay, I must formulate a point I would like to illustrate. From this the Thesis Statement can be derived, and eventually, my entire essay.

In previous posts, situations were always looked at with an eye which had detail to values. They were talking about the value of money, the value of craftsmanship, the value of entrepreneurial ability. However, these are concepts which cannot be easily graphed in an essay. Therefore, the situation calls for something a little more real-life.
In an attempt to focus my essay on the concepts which interest me, and at the same time be able to collect real data, and make graphs, I believe I have found a topic which incorporates the two.
I would like to propose a few potential titles title of my Extended Essay as;
1."Corporations & The Destruction Of Entrepreneurial Ability"
2."The Internet: The Entrepreneur's Last Refuge"
3."Making Chairs In China: Copycat or Craftsmanship?"

1. This would be based around the movie we saw in class, where corporations are shown in a light that reflects the way they foster repetitive, mechanical work. The sole goal is profits, and this destroys the creativeness of the worker. Schumacher talked about this in his book "Small is Beautiful," arguing that businesses should be smaller to do exactly the opposite of corporations: cultivate creative thinking.

2. The internet has quickly become one of the most important tools of our age. in this essay, it would be stated that corporations, which rule much of today's business world, do not allow for much entrepreneurship, other than by a small elite of people. On the internet, these barriers do not exist, as thousands of people work together to come up with collectively written programs (NeoOffice) and encyclopedias (Wikipedia). A good source for this would be an article Time wrote about the path of innovation (which I will need to find later, although I think it is this one).

3. As mentioned, with the Italian town that would make chairs, they have lost business to China. However, what about the people they lost the jobs to? Are they utilizing skill and passion to create quality goods, or are they just copying what the Italians and other Europeans have done for centuries in hope that consumers buy the product? Good source would be the workers themselves, as Mr. Welker pointed out in class; I could go to the antique store with a Chinese-speaking friend and interview the people who actually make the chairs. Also, Time wrote an article on a related topic, called "The Idea-Stealing Factory"

The X-Factor

In the last post, I placed a value on the work of human hands. The example was the village of chairs in Italy. The question is why we are letting ourselves become the slaves of the machine. Why we are sacrificing the beauty of the unique work of our hands for a mechanical, uniform product of the machine.
Firms are profit maximizers. In order to maximize profits, we must minimize losses. In order to minimize losses, we must minimize costs. What is typically the most costly resource? Labour. Not only is it costly, but it is not perfect. By this it is meant that there is human error where machines can do it right, every-time. So by eliminating the human factor, costs are minimized. Machines can make things faster and usually of the same quality, so why have humans.

This is a failure maybe of the market, but also of economics itself. Both failures lie in their under-allocation of value towards human work. By human it is not meant someone who operates a machine that makes cars, but a carpenter, a tailor, a shoe maker.
Although the firms are not externalizing their costs, they are getting reducing their costs in such a way that it does not benefit society, in any way. The result is more unemployment. Even those who remain employed find their work more tedious, because they have been made slaves of the machine.
Economics has not made matters better. On the contrary, the one-dimension that it provides, the simplicity of defining well-being as measured in terms of profits has cultivated this sort of behaviour. It has fuelled the industrial revolution, and now makes the transition into the technological revolution. Obviously then technology is the way of the future, as it has been the way of the past.
The role of government herein is therefore extremely important. The government is the regulation body, necessary because we have seen that an entirely free market, motivated by greed, results in negative externalities and large divisions of society and financial standing. Our governments must then find a way to shift the focus of technology. Research and development is essential, it is true. But research and development into faster micro-chips, while the world is on the brink of an energy crisis, is not essential. How are you going to use the micro-chip when we have no electricity to even power a calculator?
Government then needs to use its all its tools to encourage society to reconsider its values, and engage in discussion about the direction business is going in.

Value Of Craftsmanship

Still brainstorming on ideas (and this can definitely be incorporated into the ideas from the previous post), but I would like also to explore the value of craftsmanship.
In an age where we have technology doing everything for us, from building cars to architectural design, we are losing the value of work of the human hands.
In Italy, there is a town near Venice that exists solely because of its chair-making industry (actually, TIME did an article on it a year or so ago). This town, is - was the biggest producer of chairs in Europe and a competitor in the world. Not lawn chairs, but dining chairs; quality work. Quality work made by men who were carpenters. Men who took pride in their work, which gave them great satisfaction.
Then along came China, and companies that could produce the same chairs for a fraction of the price. There's one difference; the human touch. Now the future of the town is not so certain, as many shops have begun to close.

Needless to say, Schumacher wrote about this, and it was through his book that I was able to organize my scattered, previous thoughts on the matter.

Obviously my E.E cannot be focused solely on this (although a study of the town near Venice is feasible), but it is definitely something that I feel should be incorporated in my Extended Essay.

Small Is Beautiful - The Beautiful Truth

Although I do not yet know what my extended essay will be about, I already know which direction it will go in, and who has led me there.
Mr. E.F. Schumacher. This man is brilliant. His book "Small Is Beautiful" is very insightful, and can possibly help us explain many of the problems we see today.
As for the Extended Essay, I am particularly interested in two of the ideas that he puts forward.
These are found in pretty much all of the chapters, in one way or another. These are the ideas of;
- Development Economics; finding the correct way to develop a Third World country. This idea is explored very deeply in "Two Million Villages", "The Problem Of Unemployment In India", and others (on which these two chapters are based). I find very interesting the idea of intermediate technology, which leads me to the next point of interest:
- Technology. It seems to be the most important thing in the world right now. Even at SAS, we recently had the tech-fest. It isn't all bad, I mean, the reason why I am blogging is because of technology. However, in his chapter "Buddhist Economics" he explores the quality of modesty, stating something to the effect of "there are always societies who say they need more, but there is no society who takes a step back and says, 'we have enough'". Then there is the idea of more social technology in the accordingly titled "Technology With A Human Face".

What both of these ideas have in common is that they take a look at the situation of the moment, agree that it is undesirable (maybe not in the case of technology, but that's a different matter), and call into question the methods used, which have for so long been assumed correct.