The current essay demonstrates the scenario of Indian economic crisis in 2014. Causes and impact to India was talked in the first section; influence on other economy especially to Australia was analyzed and Stolper-Samuelson Theorem was applied in section 2; similar situations in history were mentioned in the third section.
1. Describe its causes - economic or non-economic (2% for creativity). In 2014, many emerging economies are facing liquidity crisis, especially India. It was the aftermath of the US QE exit. The QE is the monetary policy applied by countries like US, UK, and some EU members, that to expand the money supply and leverage; it was an effective short-term fix to boost investment and economy growth, yet when it became too long, it caused negative influence in both domestic and the global economy. Indian economy is highly dependent on foreign capital inflows, and most of them are the cheap money brought from countries with QE policies. With vast investment, the India government spent a lot on infrastructures and manufacture plants that the government kept a deficit account these years. Deficits became problematic when investment capitals stopped. Economically, short of money directly make those on-going projects unfinished; quitting QE will appreciate foreign currencies like USD while make the India currency Rupee comparably depreciate; when Rupee is weaker, there will be inflation in domestic commodity price. Non- economically, delay or stagnation of projects along with weak Rupee drove a loss of confidence on India economy, bear stock and gold market caused the equity and houses prices dropped,. India is exposed under financial crisis bought by deep troubles at home and abroad: weak Rupee performance due to comparably strong dollar; market gloom due to foreign investment withdraws; domestic commodity price surge due to inflation caused by currency devaluation; GDP growth slowed and Indian government is facing questions on its creditability and huge deficit account. Below charts show the economic effects of how QE policies in the rest of the world affected India and caused financial crisis: First of all, when foreign currencies (like USD) tapered the investment injection to India (S0 to S1, q0 to q1), Rupee devaluated (as more Rupee need for 1 dollar, r0 to r1); as Rupee devaluated, price of imported goods increased, higher cost shift the aggregate supply leftwards and caused higher price level (P to P1) and lower real GDP (Y to Y1).
2. Describe its impact on world trade and commodity prices, and use the Stolper Samuelson theorem to predict the effect on income distribution in Australia.
As mentioned above, stagnation of foreign investment and weak Rupee caused slower GDP growth and higher commodities prices. Devaluation of Rupee makes Indian government even harder to repay its deficits, which in turn affected all the economy activities globally. As one of the two superpowers in Asia, India has considerable economic influence over Australia. Indians are less rich compare with the rest of the world; therefore less Indians would come to Australia for study. Education market is negatively affected and there will be job losses or even closing down in education sector in Australia. As a net energy importer, India has large demand for Australian energy products, especially for coal (for coal is the main energy resource in India). Comparably strong Australian dollar makes Aussie products less favored by India, expect the mining products, for those are necessities. According to Stolper-Samuelson theorem, assuming full employment and free labor mobility, as the demand for mining products stay steady while demand for luxury products or other non-necessities slowdown, there will be different changes in mining and other sectors. For mining as a capital-intensive industry, selling price increase will increase capital and rent costs, but lower the real wage; on the other hand,...
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