Customer center

We are a boutique essay service, not a mass production custom writing factory. Let us create a perfect paper for you today!

Example research essay topic: Current Account Deficit Cost Of Living - 1,741 words

NOTE: Free essay sample provided on this page should be used for references or sample purposes only. The sample essay is available to anyone, so any direct quoting without mentioning the source will be considered plagiarism by schools, colleges and universities that use plagiarism detection software. To get a completely brand-new, plagiarism-free essay, please use our essay writing service.
One click instant price quote

Introduction The purpose of this study is to examine the impact of the currency and financial crisis on Indonesia's international trade and trade-related economic performance. The focus is on trade-related economic activity and indicators, particularly on non-oil / gas exports and imports in the period of 1997, 1998 and early 1999. A summary of Indonesia's balance of payments in recent years, including the first three quarters of 1998, reveals the severity of the adjustment that has taken place in shifting from a deficit on current account to a surplus (Table 1). Within a period of one year, Indonesia went from a current account deficit of nearly $ 5 billion (1997) to a surplus of an estimated $ 3 billion (1998). The depreciation of the Indonesian rupiah in 1997 and 1998 went further than did that of the other Asian countries.

Taking June 1997 as a benchmark, the nominal depreciation of the rupiah against the US dollar reached 80 % in mid- 1998 (Today 1999, Bank Indonesia 1999). Although recovering somewhat over the remaining months of 1998 and again in mid- 1999, the rupiah was still down nearly 70 % from the benchmark in May 1999. In countries experiencing a twin currency and financial crisis, it is noted that the combination of massive currency depreciation and high domestic interest rates may lead to a vicious cycle that aggravates the severity of the banking sectors woes (Kamininsky and Reinhart 1999). This appears to be taking place in Indonesia and this has implications for the analysis of the impact of the crisis on international trade and trade-related economic activity. The massive currency depreciation and continued large fluctuations in the rupiah-US dollar exchange rate (the rupiah fell by 10 % against the dollar during one week in August 1999) defy conventional economic models of exchange rate behavior. The volatility in the exchange rate and the massive depreciation are far beyond what any reasonable model would have predicted, even allowing for overshooting of the equilibrium.

The assumptions made in standard models that purport to explain the response of the real economy to changes in the relative price of tradable and non-tradable goods and services do not apply to present circumstances in Indonesia or the other crisis-ridden Asian economies. The depreciation of the rupiah also undoubtedly contributed to the sharp rise in the cost-of-living as measured by the consumer price index (CPI). According to data based on a sample in 44 cities, one in each province, the CPI grew by 77. 6 % in 1998. This rampant increase in prices is thought to have impacted the poor, particularly those poor households in urban areas the hardest (Levinsohn, Berry and Friedman 1999). The households that suffered job losses in urban areas may have been particularly adversely affected by the cost-of-living increases. Import prices have surged as a result of the depreciation and have no doubt contributed to the general cost-of-living increase.

However, it is also important to recognize that other factors have also been at work including a serious drought that reduced agricultural production. Imports of essential commodities may in fact have mitigated the rise in the cost-of-living. The high inflation in 1998 has subsided. Even accounting for the effects of inflation and nominal wage increases in response to the inflation, it is apparent that there has been a substantial real depreciation of the rupiah. This is reflected in price data.

Wholesale prices of export commodities excluding oil and gas rose by 181. 6 % by the end of 1998 compared with 1997 (BPS, March 1999). Wholesale prices of import commodities rose by 130 % in 1998. In contrast, the general wholesale price index rose by 101. 8 % in 1998. This index does not include prices of most services only of commodities. The prices of non-traded services such as office rentals, insurance, infrastructure and public transportation did not rise as much as wholesale prices of commodities. As an example, wholesale prices of construction materials rose by only 68. 1 % in 1998, reflecting depressed conditions in the construction industry.

Economic Analysis and Currency Depreciation: A Brief Review In the original framework developed by Salter (1959) the devaluation of the exchange rate (the rise in the relative price of tradable's to non-tradable's) is modeled in the case of a small open economy. Within the Salter framework the demand and supply responses to a devaluation (expenditure-switching policy) and a contraction in domestic absorption (expenditure-reducing policy) are shown to lead to a shift in resources from production of non-tradable's to tradable's and a switch in consumption from tradable's to non-tradable's. The depreciation cum expenditure reduction enables a country to reduce a current account deficit because the relative price change encourages greater production of both exportable and import-competing goods and services while reducing home demand for both import-competing items and exportable's. Production is expected to shift in favor of tradable's, because they have become relatively more profitable to produce. The model provides one of the important the intellectual underpinnings for IMF structural adjustment programs. The approach implies the economy smoothly moves to a new equilibrium and maintains full employment all the while.

The Salter model rejects the view of export pessimists and assumes the relevant supply and demand elasticity values will satisfy the requirement for a devaluation to lead a countrys net exports to rise. Admittedly, in the short-run goods in transit and under contract have already been purchased so their prices cannot be immediately changed, thus devaluation may lead to a temporary lowering of net exports. This J-curve phenomenon has been infrequently observed, however, in actual cases of small developing economies undergoing currency devaluation (Cooper 1971 and Bahmani-Oskooee and Malixi 1992). The Salter model is based on assumptions of fixed exchange rates and absence of capital mobility, hence, it is not well-suited to the analysis of a depreciation in the exchange rate in an economy that is also experiencing financial sector problems and capital flight. A rather different approach such as Krugman (1979) in which a speculative attack forces a small open economy to abandon a fixed exchange rate and to adopt a floating exchange rate may be more relevant.

Furthermore, numerous studies have modeled the possible negative growth effects of a currency devaluation (e. g. , Krugman and Taylor 1978, van Wijnbergen 1986). These models hold that even if a country can rely on a devaluation to raise net exports, it does so at the cost of a lower level of economic activity caused by higher costs of imported investment and intermediate goods. Further, if there is low substitutability in production between imported inputs and primary factors of production the possibility that devaluation will reduce real output increases. In the present context of flexible exchange rates, studies of discrete currency devaluation may provide some insights, but are not sufficient to analyze currency fluctuations of the magnitude occurring in the Asian crisis economies. The very large fluctuations in nominal exchange rates coupled with the uncertainty in the financial markets may have consequences that make the restoration of stability and growth more difficult than implied by existing models.

One can readily envision difficulties in shifting resources from non-tradable to tradable sectors, particularly when the depreciation coincides with a banking crisis. The run on banks and other financial institutions may lead to paralysis in the financial markets. A collapse of credit may impede operation of industrial capacity, as firms may be unable to obtain working capital. If producers of non-traded goods rely on imported intermediate inputs, they will be forced to reduce output as a result of the currency collapse and rising import prices.

Imports of investment goods will also become more costly in real terms for producers of non-tradable's. Very high interest rates that result from the effort to stabilize the currency may aggravate the problems in the banking sector and further choke off investment demand. Even if producers of tradable's would like to increase capacity, in practice they may face difficulties because of high rates of interest and inability to obtain credit to pay for imported capital and intermediate goods. This coupled with a fall in the level of investment in the non-traded goods sector implies an overall reduction in investment demand. Yotopoulos (1996) models a case where devaluation creates an excess supply of non-tradable's, resulting in a type of low-level equilibrium trap. The emergence of unemployed resources contraction ary devaluation has also been documented in previous empirical studies (Cooper 1971, Branson 1986, Edwards 1989, and Agenor 1991).

Agenor argues that an anticipated depreciation of the real exchange rate reduces output, but the opposite holds for an unanticipated depreciation. The implosion of effective demand brought about by depreciation may result in recession and unemployment rather than an improved balance of payments with continuous full employment. Lack of effective demand coupled with the putty-clay model of capital, means that an excess supply of labor can emerge even when the domestic real-wage rate is in equilibrium (Power 1973). Machinery idled in one sector (with resulting lay-offs of production workers) cannot be used in other sectors in the short-run. Hence, unemployment may exist even if there is no distortion of real wages. The emergence of short-run unemployment or underemployment in Indonesia (and elsewhere in the region) is one of the serious social consequences of the twin crisis.

Economic activity measured by real GDP growth slowed in 1997 and became sharply negative in 1998. Another manifestation of the wrenching situation that is captured in recent trade statistics is the compression of imports. An Overview of Recent Economic Performance Real GDP (constant 1993 prices) growth fell from over 7 % in 1996 to under 5 % in 1997 and became negative (- 13. 2 %) in 1998 (BPS 1999). Private consumption expenditures (- 3. 3 %) and government consumption expenditures (- 15. 4 %) declined in 1998 compared with 1997 levels. Gross fixed capital formation (- 35. 6 %) collapsed in 1998. Net exports of goods and services went from being negative (equivalent to 4. 3 % of GDP) in 1997 to becoming slightly positive (equal to 0. 6 % of GDP) in 1998.

This change in the overall balance of trade (measured in constant 1993 rupiah) thus helped to moderate the decline in overall real GDP and GDP growth. The composition of real GDP by industrial origin (Table 2) has changed in 1998 compared with 1997. The severest contractions have occurred in construction (- 39. 74 %), quarrying (- 39. 67 %) and back...


Free research essays on topics related to: net exports, current account deficit, consumption expenditures, cost of living, goods and services

Research essay sample on Current Account Deficit Cost Of Living

Writing service prices per page

  • $18.85 - in 14 days
  • $19.95 - in 3 days
  • $23.95 - within 48 hours
  • $26.95 - within 24 hours
  • $29.95 - within 12 hours
  • $34.95 - within 6 hours
  • $39.95 - within 3 hours
  • Calculate total price

Our guarantee

  • 100% money back guarantee
  • plagiarism-free authentic works
  • completely confidential service
  • timely revisions until completely satisfied
  • 24/7 customer support
  • payments protected by PayPal

Secure payment

With EssayChief you get

  • Strict plagiarism detection regulations
  • 300+ words per page
  • Times New Roman font 12 pts, double-spaced
  • FREE abstract, outline, bibliography
  • Money back guarantee for missed deadline
  • Round-the-clock customer support
  • Complete anonymity of all our clients
  • Custom essays
  • Writing service

EssayChief can handle your

  • essays, term papers
  • book and movie reports
  • Power Point presentations
  • annotated bibliographies
  • theses, dissertations
  • exam preparations
  • editing and proofreading of your texts
  • academic ghostwriting of any kind

Free essay samples

Browse essays by topic:

Stay with EssayChief! We offer 10% discount to all our return customers. Once you place your order you will receive an email with the password. You can use this password for unlimited period and you can share it with your friends!

Academic ghostwriting

About us

© 2002-2024 EssayChief.com