Macroeconomics for Managers Final Exam

Arturo Flores Márquez – OneMBA, Class of 2016

Macroeconomics for Managers Final Exam

1. Recently, the central bank of China decided to devalue their currency (Yuan) against the US dollar even though they have a substantial current account surplus in their balance of payments. This comes as an answer to the general depreciation of (almost) all currencies against the US currency that had started approximately a year ago.

1. What are, in your opinion, the main drivers behind such a decision?

This decision comes as economic growth in China is beginning to decline. This impact is seen on their exports, which have fallen around 8% in July 2015. By weakening their currency, then exporters have an easier time selling their goods abroad.  

1. Is this action justified based in the economic arena? Why or Why not?}

It is not justified. By doing this, China puts their companies at an advantage, while creating an economic distortion. A move like this is likely to bring criticism to the Chinese government, who artificially manipulated its currency, and could bring bans and/or punishments towards trading with China. This would make the situation worse than what it is today.

Additionally, this move puts pressure on other central banks to push down their own currencies to aid their exporters and to prevent destabilizing capital flows. The move is also likely to hurt the commodities markets, as it signals potential weak demand from China. It could also accelerate capital outflows out of China, especially if investors expect further devaluations.

1. What are the costs the Asian economy will face as a consequence of such policy action?

A move like this is likely to bring criticism to the Chinese government, who artificially manipulated its currency, and could bring bans and/or punishments towards trading with China. This would make the situation worse than what it is today. In the long run, this moves brings a very debatable question on China’s pledge to liberalize its economy.

1. You are part of the President’s economic advisor council of your country and among all participants there is a consensus with respect to the low level of the maximum potential growth of an economy?

1. Can you provide some examples of policy actions that could eventually make the economy grow faster on a sustainable way? If so, which ones? If not, Why?

Long-term economic growth comes from aggregated demand, as well as from aggregated supply. Given this I’d suggest the following;

Promote innovation and business development. Innovation fuels economic growth. Innovation comes in the form of start-ups and/or process evolutions that are genuine job creators. Additionally, they bring value to customer, who then spend more and further activate economy.

Migration reforms: We should allow qualified and skilled workers to come work in our country, when they come to build/start-up a new business. By doing this, with a right set of rules, e.g. create at least 10 jobs, invest at least 1 million pesos, we could foster competitiveness and attractiveness to our markets.

Legalize drugs and end the war on them: The war in drugs staggers economy, as massive amounts of resources are committed year-on-year to this fight. Additionally, this generates violence, which then scares foreigners to come to our country (for investment and/or leisure).  By legalizing drugs, we stop the violence, and stop the governments spend on this topic. Also, we could generate a potential revenue stream coming from established tax-paying corporations, and investors/tourists are more likely to come, since drug-related violence will be practically gone.