What do you mean we owe China a trillion dollars?!

By Ker Zheng

These days it’s not uncommon to see news headlines saying that our public debt to China has risen to some astronomical amount and that each American household owes thousands of dollars to China. Now, you may be asking yourself, “What does this mean? I never borrowed money from China!” Well, to clear things up, the debt we owe to China is actually US government debt, a.k.a. US Treasury bonds that China’s central bank has bought up.  Today, China owns a disproportionately large amount of US government debt, currently amounting to just over $1 trillion.

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Embracing the new “ism”: Exploring New Possibilities for Human Advancement with Professor Partha Ghosh.

Interested in economic development? Whether it’s research in developing country markets or arguments challenging the status quo, current economic models may not be telling the whole story of future growth in these parts of the world. On a macroeconomic level, some believe that unrestricted free markets will not accomplish the goals necessary for developing economies to flourish to their full potential. On a microeconomic level, the eternal East-West debate continues: Is it truly possible to integrate Western ideologies with Eastern values? Professor Partha Ghosh of the Gordon Institute and Fletcher School attempts to answer all of these questions and more through his research.

The Big Mac Index: A (Tasty) Introduction to Exchange Rates

by Pierre Chalon

Some of you may be familiar with the numbers that often appear on television, websites or magazines regarding exchange rates, what they mean and what are their implications. If you’ve taken a course like International Economics or International Finance, this subject is one you’re likely to recognize.

Up until a few months ago, exchange rates and any statistics related to them meant very little to me. The Big Mac Index is a component of a little theory called “purchasing-power parity” (PPP) that may help you make some sense of something like:

£1 buys         change           %                    52 wk-h         52 wk-l

Euro               1.18100        +0.00070      +0.06             1.21280        1.10650

The theory suggests that that in the long run, exchange rates should move towards the level where the price of an identical basket of goods or services bought in two countries is the same. That point is known as the PPP exchange rate. These baskets of goods vary for every country depending on consumer preferences and spending patterns (what constitutes these baskets has often been a source of disagreement).

Here’s the interesting part. To simplify this theory and make it more accessible to people not necessarily knowledgeable about currency fluctuations, in 1986, The Economist magazine published the “Big Mac Index”, essentially a data table with prices of a single Big Mac burger in many countries in local currencies. The idea was to make the basket of goods merely a McDonald’s Big Mac burger so as to determine whether currencies were being over or under valued. How? Let me give an example. Let’s say the average Big Mac in America costs US$3.22 and 509 Kronur in Iceland (US$ 7.22 at the market exchange rate). This implies a PPP of 158 Kronur for a dollar (where they would equalize). We then compare the exchange rate of the currencies to the cost of a Big Mac to see where it would be cheaper overall to buy it. In this case, the actual dollar exchange rate is 68.4, meaning that the Icelandic krona is currently being over-valued by 131% and it should (in theory), depreciate against the US dollar.

Even though The Economist has stated many times that this indicator should not be taken seriously, many people closely follow the data given, as some believe it has currency fluctuation predicting capabilities. Over its twenty-year existence, the Big Mac index has come under a lot of scrutiny for its simplicity, but the magazine remains firm on their view that the data produced should not be interpreted extensively, that it is a simpler way of viewing PPP theory and has been continually publishing it several times a year. There is no doubt that its popularity stems from its simplicity and there have been other attempts that similarly dumb down the theory (i.e. the “IPod Index”).

Whether it is capable of predicting future trends in exchange rates is questionable but the Big Mac Index remains a useful (and tasty) modern economic theory that helps you understand currency fluctuations.

P.S. This type of analysis is also known as “Burgernomics” (no joke).

The Middle-Income Trap and China’s Future Prospects for Growth

By Ker Zheng

The Tufts Economics Society is hosting a lecture by Professor David Dapice about how nations grow fast for a while and then get stuck before becoming rich, and how that illuminates the shortcomings of standard development theory. The event will be happening on Wednesday April 4th at 6:00pm in Braker 001. Feel free to come check it out—it’s open to all Tufts students, and we’ll be serving Dave’s Fresh! This post is an interesting introduction to the middle-income trap, using China as a case study.

A few weeks ago the World Bank Group released a 400-page long report on China’s future economic prospects, termed “China 2030: Building a Modern, Harmonious, and Creative High-Income Society”. In the report economists analyze China’s current economic conditions as well as various risks that pose a threat to its economic growth. The report proposes a series of broad recommendations that should help China shift from a middle-income country to a high-income country, thus avoiding what is commonly termed the “middle-income trap”.

What is this so-called “middle-income trap”? Well, theories of economic convergence state that it is natural for low-income countries to grow faster than high-income countries, eventually allowing them to catch up in terms of per-capita income levels. Part of the reason is because an abundance of cheap labor in poorer countries and inward flows of advanced technology from advanced countries help propel rises in productivity and output. The middle-income trap occurs when developing economies, for some reason or another, run into difficulties after a certain point (say, when poorer countries approach the technology barrier) and growth in per-capita income levels stagnate, trapping these countries in the so-called middle-income category.

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