Venezuela is a country located in north South America and is one of the largest producers of oil and natural gas in the world. It mainly produces petroleum oil, which is a key of Venezuelan economy. According to National Statistical Coordination Board, it takes to almost 28% GDP in 2009, 82% of exports, and over 50% of government revenue (Nation Statistical Coordination Board, 2010). Exports of petroleum make Venezuela mostly trade surplus. Along with petroleum, Venezuela has other natural resources, such as coal, nickel, diamonds, and gold and exports of these natural resources are currently growing and developing (Bureau of South America, 2009). Venezuela has mixed economy and its main economic sector is petroleum. As National Statistical Coordination Board stated, it has been made rapid growth: 16.8% of economy growth reported in 2004. Its GDP growth rate was 4.8%in 2009 and GDP was $326 billion in 2009 (Nation Statistical Coordination Board, 2010).
Mercosur is a largest trade bloc of South America and is established by Argentina, Brazil, Paraguay, and Uruguay in 1991 and Venezuela recently signed a membership agreement (Bureau of South America, 2009). It is purposed to make economic integration, political agreement, and free trade between the member nations (Bureau of South America, 2009). They mainly eliminated barriers to regional trade, such as tariffs, custom duties, and taxed and involve free movement of goods and services of member nations.
Benefits and drawbacks as country As Venezuela has been accepted as a member nation of Mercosur, there are some benefits are drawbacks from country’s point of view.
According to the report of exports of Venezuela and Mercosur by regions, Venezuela and Mercosur have major exports in different industry (Nation Statistical Coordination Board, 2010).
A report showed that Venezuela exported 75% of mineral fuels, 10% of manufactured goods and related products, and 5% of chemical products and Mercosur exported 25% of food and live animals, 19% of machine and equipment, and 18% manufactured goods and related products in 2009 (Nation Statistical Coordination Board, 2010).
While Venezuela exports mainly Petroleum and natural resources, such as coal, iron, and nickel and chemical products Mercosur exports food and machine and equipment more. Since they have different strong economic sectors, it will create comparative advantages within the member nations and competitive power to other non-member countries.
According to Bureau of South America, the free trade and easy movement of not only goods and services, but also employment by joining Mercosur would create more jobs with reasonable hours and decrease unemployment rate (Bureau of South America, 2009). It gives the chance individuals to work in better environment and eventually boost economy of each member nations. However, it may create trade diversion. By joining Mercosur, chance of dealing right supplier would lose and get less efficient suppliers within Mercosur. Since tariffs and other custom duties from international trade are eliminated, Venezuela might lose some of its tariff revenue. In addition, while free movement creates mobility of employment along with more jobs, business looks for lower employment within Mercosur and it might result less jobs or working opportunities in their own nations.
Benefits and drawbacks as company Beside all the benefit and drawbacks from country’s point of view, there are also benefits and drawbacks for the company itself. By joining Mercosur, company would be able to make other foreign company relationship that already established with member nation of Mercosur. Although less tariff and custom duties would result in decreasing government revenue, it would allow company trade goods and services with less cost and more profit. The company might lower their price and create competitive power and make more revenue. In addition, free movement of employment within the member nations of Mercosur would increase mobility for the employees. Thus, company would hire better skilled and qualified employees and employees hired from other countries would give the benefits of foreign market to the company. Company also expands or changes its work field to lower employment wage so they can create more revenue with less employment costs. If company makes money and expands its business, economy also grows accordingly.
Benefits of something always can be the drawbacks in other side. Company would acquire foreign relationship and eliminations of barriers within the member nations of Mercosur would make company less cost. However, at the same time, it means that more competitors would enter into the market and they might have better products with lower price. If a company don’t have any specific competitive power, it might be hard to survive without more investment in R
The phillips curve on inflation and unemployment
One of the most recognized milestones in macroeconomics history was when A.W.H. Phillips presented what is now known as the Phillips Curve. Phillips studied the relationship in the United Kingdom between inflation and rates of unemployment. While doing this study he found a steady inverse relationship between the two. Phillips then concluded that there is a tradeoff between inflation rates and unemployment; that is, when there are higher inflation rates, there is lower unemployment and when there are lower inflation rates, there is higher unemployment. The Phillips Curve stayed true for many years until the early 1970’s when a team of economists, lead by Milton Friedman, attacked the Phillips curve and began to alter it.
Who is William Phillips? William Phillips is a New Zealand born economist who wrote a paper in 1958 that stated a persistent inverse relationship between wages and rates of employment. His theory was first applied to the population of the United Kingdom from 1861-1957 (Phillips curve, October), and was then used to find similar patterns in other countries around the world. Soon after Phillips’ article was published, many economists used the Phillips Curve to relate towards overall price inflation related to unemployment, not just wage increases.
Who is Milton Friedman? Milton Friedman was born on July 31st 1912 in Brooklyn, New York. He studied mathematics at Rutgers University, earned a M.A. from the University of Chicago, and did a fellowship at Columbia University where he studied statistics (Theroux, 2006). Friedman then became a professor of economics at the University of Chicago. He was awarded a Noble Prize in economics in 1976 and is best known for his work on the Quantity Theory of Money and the expectations-augmented Phillips Curve.
Phillips Curve Equation Before we look at Friedman’s analysis of the Phillips Curve, it is important to first take a look at the fundamentals of the Phillips Curve. Phillips estimated that the lower the unemployment rate is, the lower the number of eligible employees there would be for a job. Companies would then increase the wages to attract any scarce people that are available. When the unemployment rate was higher the opposite would occur, companies would lower wages because more people were available to work. The model that Phillips represented illustrated that a certain percentage of unemployment would result in a certain percentage of wage inflation.
The equation that is associated with the Phillips Curve is demonstrated in figure 1.
This is the formula associated with the diagram in figure 1.
Ï€t is inflation in year t
is a variable denoting exogenous economic shocks
is a constant
Ut is the unemployment rate in year t (The Phillips Curve, 2009)
Friedman’s Opinion on the Phillips Curve The main issue with the Phillips Curve that Friedman had was that it didn’t take into account stagflation. Stagflation is “the simultaneous occurrence of high rates of inflation and unemployment” (Arnold, 2005-2008). Phillips believed stagflation could not occur. In other words, Phillips suggested that there could only be a tradeoff between inflation and unemployment and that both could not be high. Friedman found from his studies that this theory was not true (See Figure 3). As you can see from Figure 3, Phillip’s theory holds true from 1961-1969 but from 1970-2003, we can see that stagflation can in fact occur. Why is this? Friedman suggests that “there is always a temporary tradeoff between inflation and unemployment; (however) there is no permanent tradeoff”. Thus, he came up with the theory of having not one, but two Phillips Curves: one for the short-run and one for the long-run (See Figure 4). Friedman’s theory was based on the premise of expectations; more specifically, expected inflation rates. We can see how this theory works by looking at Figure 4.
If the government unexpectedly increases aggregate demand, the actual inflation rate will increase while the expected inflation rate will remain the same because in the short-run, individuals will not be aware of the actual inflation rate increase. Because of this increase in aggregate demand, prices will increase and therefore suppliers will want to produce more so output will also increase. More output will require more labour therefore, companies will hire employees who will be willing to work for the expected wage rate rather than the actual wage rate. This results in an increase in the actual inflation rate and a decrease in unemployment thus moving along the short-run Phillips Curve. However, Friedman argues that this point on the curve is unstable due to the fact that actual inflation rate and expected inflation rate are not equal. Eventually, the workers will realize the inflation rate increase, due to the increasing prices, and will either quit their jobs or ask for more money. Ultimately, this will cause wage rates to increase resulting in a decrease in short-run aggregate supply which will bring the unemployment rate and inflation back to equilibrium. In summary, Friedman is saying that in the short-run, a tradeoff between inflation and unemployment does occur however it does not in the long-run. This is called the Friedman Natural Rate Theory (or Friedman fooling theory, See Figure 5). It is also called the fooling theory because individuals are actually tricked into thinking the wage inflation rate is lower than it actually is.
Key Takeaways By examining the Phillips Curve and Friedman’s expectations-augmented Phillips Curve, we discovered that there is an important inverse relationship between unemployment rates and inflation rates. We’ve learned that there is both a short-run Phillips Curve and a long-run Phillips curve and that equilibrium is achieved at there intersection. But more importantly, we’ve learned that economics is not solely base on numerical factors. Although inflation rates, interest rates, GDPâ€¦etc are important, behavioural economics and the perceptions of individuals is crucial in determining the outlook of an economy.
Appendix Figure 1
(The Phillips Curve, 2009)
Figure 3 – Friedman’s Data ( Arnold, 2008)
Figure 4 – Long- Run and Short-Run Phillips Curve (Arnold, 2008)
Figure 5 – Friedman Natural Rate Theory (Arnold, 2008)