International Business Law Final Exam
Date: June 15, 2006 Pham Thi Thuy Ha
1. Distributorship Negotiation with Grande Trade (GT)
Unlike agency agreement with Zeller, by appointing GT as a distributor in Germany, IUJ ill have more benefits and fewer liabilities. For example, GT will take all risks in distributing products; IUJ needs to enter only in sales transactions to GT; IUJ can not held liability to its distributor; GT has an incentive to sell IUJ’s product and increase IUJ’s market share; IUJ does not face any fluctuation in terms of prices and market conditions. However, IUJ may have disadvantages such as loss control over prices and distribution situation in Germany, price reduction to GT, limited understanding of market demand and customers’ preferences. Therefore, IUJ should consider carefully conditions of the Distributorship Agreement with GT.
In response to the 5 requirements of GT, IUJ should analyze these requirements carefully and consider counter-solutions. From the point of view of IUJ’s overseas sales department head, he or she should consider the analysis below before entering the distributorship agreement with GT:
Type of distributorship: GT wants to become IUJ’s exclusive distributor in Germany. This requirement is reasonable and IUJ should accept because:
1) GT will take all risks and responsibilities to distribute GIZMO within German territory.
2) This arrangement assure that there will be no competition in this territory for distributing GIZMO and thus GT has strong motivation to effectively promote this product and bring IUJ secure financial return.
3) The excusive distributorship will motivate GT to expand fast the market for GIZMO by using its nationwide distribution networks and marketing experience. Therefore, IUJ can capture huge market in Germany without any investment in building distribution channel there.
4) IUJ should appoint only one distributor in one territory and should not distribute GIZMO to other firms for use or resale. This point is to avoid conflicts of distribution of GIZMO, secure the rights to make profits for GT and motivate it to use its best efforts to develop business in, to promote the sale of, and to sell the product.
However, IUJ should impose some restrictions on GT such as: not to enter into any distribution agreements involving competing products; not to sell GIZMO outside the German territory; not to remove or repack the product in this territory; follow recommended retailed prices provided by IUJ; be able to provide sale & customer support and maintain sales staff to expand the market. These restrictions help IUJ prevent GT from selling competitive products, marking up prices so high that GIZMO is much more expensive than competitive products or reducing too much prices to enter unfair competition, selling outside assigned territory and being unable to develop markets.
Buyer-seller relationship: GT requests that the seller-buyer relationship should be the relation between IUJ and GTHK. This relationship might not have any effect on the distributorship agreement with GT. However, IUJ might face a high financial risk in selling GIZMO to GTHK since it owns no property and other assets with substantial value. The other risk is that GTHK can resell GIZMO to other GT’s group members even though it has no sales to other outside parties. Therefore, IUJ could accept this requirement when imposing other conditions: 1) GTHK, under any circumstance, will not be allowed to resell GIZMO to any other parties; 2) the payment shall be made in L/C in advance to IUJ’s bank account (to make sure that IUJ receives payment before producing ordered quantity by GTHK); 3) sales contracts shall be made under the Japanese commercial law; prices and all other sales conditions are agreed by IUJ and GT; 4) GTHK shall not be GT’s representative in working with IUJ. It means that GTHK shall automatically follow the agreement reached by IUJ and GT and shall not intervene in any discussion and negotiation between the two parties. This condition allows IUJ to control over GT in terms of prices and selling conditions.
Delivery: GT requests that the delivery should be made directly from IUJ to its warehouses or retail shops or business customers in accordance with its designation to be made from time to time. This requirement seems to be unreasonable and unrealistic because IUJ could not know the specific locations in Germany designated by GT. If IUJ can know these places, the delivery costs will be very high as IUJ needs to hire a freight company to do such specific deliveries and IUJ could not have necessary control over those deliveries. Under general international trade practices, international delivery terms are commonly FOB and CIF. Therefore, IUJ should reject this requirement. Instead, IUJ should propose FOB Tokyo, and the date of the bill of lading shall be taken to be the date of delivery of the product. IUJ shall not be liable for delays in delivery or failure to manufacture due to strikes, lock-outs, riots, civil commotions, insurrections, wars, acts of God, operation of law or any other causes beyond its control.
Duration and termination: GT’s request on duration and termination is reasonable and IUJ should accept this proposal because a 5-year agreement and possible renewals will build a long term business relationship with GT, generate its loyalty and devotion to work with IUJ in the long term and motivate it to become IUJ’s reliable business partner who is willing to distribute IUJ’s products in Germany. However, IUJ should impose conditions on the sales performance such as the minimum monthly sales GT needs to achieve. Otherwise, IUJ shall have right to terminate the agreement at any time if GT fails to achieve this target.
Non-competition after termination of an agency contract: Because the case does not provide detailed information about the agency contract between IUJ and Zeller, I suggest two options:
- First option: if the agency contract between IUJ and Zeller has already imposed obligations on non-competition for a certain time after the termination of the agency contract, GT’s request on prohibition against Zeller from selling GIZMO is not necessary. In this case, I guess that the non-competition should includes prohibitions to manufacture products of the same type as GIZMO; to sell under trade marks and refrain from altering the products or packaging; to maintain adequate stocks to meet anticipated demand after termination; to continue to provide after sale service after the termination; to inform his clients about the termination and to settle consequences of the termination such as to clear remained stocks and stop to sell GIZMO right after the termination. Hence, the request to prohibit Zeller from selling other similar handled computer games and software in Germany is not reasonable because Zeller has the rights to re-organize his business and to become an agent or distributor of other manufacturers after the termination of agency contract with IUJ. Therefore, IUJ should reject this requirement.
- Second option: If the agency contract between IUJ and Zeller has not imposed obligations on non-competition for a certain time after the termination, a non-competition agreement with Zeller upon the termination is necessary to avoid potential conflicts of distribution of GIZMO between GT and Zeller in future. However, it is quite difficult to persuade Zeller to enter into such agreement as Zeller needs to re-organize his business after the termination and he has no obligation to sign such agreement. Thus, IUJ needs to negotiate with Zeller and if necessary sacrifice by giving him certain compensation or letting him sell GIZMO in markets outside Germany if possible. In this case, IUJ only can accept GT’s requirement after successfully signing a non-competition agreement with Zeller. However, this option is quite rare because in general every company should have non-competition clauses in their agency agreements.
Besides, IUJ should impose obligations on non-competition after the termination of the distributorship agreement as discussed above. IUJ also should request other conditions on intellectual property, confidentiality, consequences of termination, arbitration, notification, legal jurisdiction, currency & currency fluctuation, competition law and force majeure.
2. Analysis of the relationship between IUJ and Zeller
The relationship between IUJ and Zeller is the legal relationship between a principal and an agent engaged in an agency contract. IUJ and Zeller, through consent, signed a 5-year agency contract in June 2001 in which Zeller is IUJ’s agent to sell GIZMO product in Germany. Under the agent agreement, both IUJ and Zeller have legal duties toward each other. For example, Zeller has the duties to obey instruction from IUJ, to hold personal liability to IUJ, to act with skill to promote GIZMO in the German market, to avoid conflicts of interests with IUJ, to protect confidential information, to notify IUJ all information that may be useful for IUJ to evaluate the matter at hand, and to account financial report to IUJ. On the other hand, IUJ has duties toward Zeller such as to compensate Zeller for his service and effort to sell GIZMO and to support Zeller in selling GIZMO. However, IUJ is liable for contracts made by Zeller to the third party as he acts in a fiduciary to IUJ. It has both direct and indirect liability for the torts caused by Zeller to the third party and Zeller also has personal liability for any torts he committed. In case of disclosed principal, Zeller has no personal liability for contracts made on behalf of IUJ. In partially disclosed principal situation, Zeller is liable for the contract and IUJ may be liable on the contract also. But in case of undisclosed principal, IUJ is liable on the contract.
The agency contract will expire in July 2006. Due to Zeller’s limited capability to expand the market in Germany, IUJ want to terminate this contract when it expires. This termination is by the act of IUJ and legally right. Both IUJ and Zeller have responsibilities to settle all consequences of termination.
3. Copyrights and the Production and Distribution of Pocket Monster in Germany
According to the information in the case, Pocket Monster is new software invented by a copyright holder in which he features the characteristics of a famous Japanese cartoon. Under the copy right law, he has the rights to reproduce the original, make derivative versions and distribute copies. IUJ has had his permission to produce and sell it in Japanese language and in Japan. The legal relationship between him and IUJ is that he grants IUJ the right to reproduce and distribute those copies of Pocket Monster in Japanese language and in Japan under a copyright contract or a copyright agreement. But he does not grant IUJ the right to make derivative versions such as translated Pocket Monster in German language and to distribute copies of the original outside Japan.
The copyright prohibits IUJ from distributing copies of Pocket Monster in markets outside Japan and making translated versions of this software. Therefore, to produce Pocket Monster in German version and sell it in Germany, IUJ needs to enter a new copyright agreement or a new copyright contract with him in order to have the legal right to do 3 things:
1) produce a derivative software in German version
2) reproduce this derivative software
3) sell it in Germany
Only after having such agreement, can IUJ start to make a German version, produce it and sell it in Germany.
Thursday, June 22, 2006
Japan: Deficit, Demography and Deflation
Date: June 12, 2006 Pham Thi Thuy Ha
The bursting Bubble and Globalization:
The performance of the Japanese economy in 1990s was poor with slow growth. Banks needed to merger to reduce nonperforming debts. Firms needed to restructure their business activities such as seek viable strategy, reduce loans, improve corporate governance and begin to compete. Deflation began due to excess capacity, falling asset prices and stagnant consumer demand. In 1996, Hashimoto announced a grand plan to restructure administration, deregulation, education system, social security and fiscal policy. Japanese financial markets were deregulated to become free, fair and global. The government started to cut budgets, long-term spending and reduce public works. Bank supervision of the Ministry of Finance was taken away. The primer minister was granted more power and his cabinet could have final control over fiscal policy.
Demographic Crisis:
Aging population is one of serious problems Japan needs to address. Due to decrease in birth rate and increase in life expectancy, Japan’s population is getting older, shrinking labor force and leaving a heavy burden in social security, pension and medical care funds.
Pension system: The first pension system was created in 1940s with a single layer, remuneration-based, proportional pension. It was revised in 1954 to two layer system. The 3rd version was created in 1961 to add national pension for self-employed workers, agriculture, forestry and fishery workers. The basis pension system was financed by fixed amount of insurance premiums. The problem with the pension system is that there are more people enjoy pension benefits while there are fewer workers.
Health care: health care funds need to be risen due to rapid aging and longevity. In Japan, almost all people are insured by health care and elder people go to hospitals more often than elder people in other developed countries. As a result, Japan will face a problem in raising health care funds in the future.
The Koizumi Reform:
Koizumi took office in 2001 with a four-part economic reform: 1) privatize the post office; 2) force banks to write off bad debts; 3) accelerate the implementation of structural reforms; 4) cap the insurance of Japanese government bonds. To implement this plan, Koizumi used the Council on Economic and Fiscal Policy, which is the cross-ministry organization. This council changed the decision-making process for preparing the government budget by coordinating the policies proposed by different ministries to control the overall spending in line with long-term goal of reaching the budget balance in 2012.
1) Privatization of post office: to break the postal service into 4 parts: mail delivery and post office management parts would be under the government control; a bank and an insurance company would be spun off through IPO.
2) Force banks to write off bad debts: the government used three-pronged approaches: accelerate the disposal of nonperforming loans; strengthen loan-classification and provisioning practices; reduce exposure to the price risks of equity by issuing regulations that banks should lower their equity shareholding to 100% or less of their tier-one capital.
3) Pension reform: The pension reform was approved by the Diet in 2004. This reform package includes 3 issues: premium levels, benefits and government subsidies. Premiums rates would rise from 2004 to 2007 and the contribution rate of 13.85% would rise to 18.3% by 2007. Benefits levels would decrease gradually through an adjustment level tied to the CPI. Government subsidies would increase from one-third to 50%
4) Fiscal reform: The government would cut public investment, limit or cut education and defense, eliminate subsidies to local governments, cut social security expenses. By raising taxes to hold government spending constant, the government hoped to reduce deficits toward the balance in 2012. At the same time, the government would apply monetary contraction by issuing more bonds thus public debts increase. To achieve deficit reduction, one-third of primary deficits could be reduced by expenditure cut, the two-third by VAT tax raise.
The prerequisites for Japan to get back its high economic growth are completing structural reforms, refinancing social security, controlling fiscal deficits and ending deflation.
Compare with reforms in Vietnam from late 1980s to 2000s:
The former Soviet Union started to cut aids to Vietnam in early 1980s and the country needed to find a way to grow itself. The Vietnamese communist party decided to change from the close to open economy and the government implemented a compete reform package. Same as Japan in fiscal reforms, Vietnam reduced the number of ministries, reformed pension benefits, cut long-term spending and issued government bonds. However, Vietnam has done different economic reforms. For example, the Vietnamese government changed currency in 1986, from 100 Dong to 1 Dong, privatized SOEs and agricultural collectives, deregulated all economic sectors, broadcast, publishing, telecommunications, established new laws and promote private sector. Reforms were also done educational privatization, electricity production, medical service, transportation, banking system.
In my opinion, the recent massive reforms in Vietnam have helped the country achieve dramatic economic growth in the right direction that fits the situation of the country. Vietnam is continuing reforms to boost the economy. Reforms are always necessary for economic growth because the local and international environments are changing fast.
The bursting Bubble and Globalization:
The performance of the Japanese economy in 1990s was poor with slow growth. Banks needed to merger to reduce nonperforming debts. Firms needed to restructure their business activities such as seek viable strategy, reduce loans, improve corporate governance and begin to compete. Deflation began due to excess capacity, falling asset prices and stagnant consumer demand. In 1996, Hashimoto announced a grand plan to restructure administration, deregulation, education system, social security and fiscal policy. Japanese financial markets were deregulated to become free, fair and global. The government started to cut budgets, long-term spending and reduce public works. Bank supervision of the Ministry of Finance was taken away. The primer minister was granted more power and his cabinet could have final control over fiscal policy.
Demographic Crisis:
Aging population is one of serious problems Japan needs to address. Due to decrease in birth rate and increase in life expectancy, Japan’s population is getting older, shrinking labor force and leaving a heavy burden in social security, pension and medical care funds.
Pension system: The first pension system was created in 1940s with a single layer, remuneration-based, proportional pension. It was revised in 1954 to two layer system. The 3rd version was created in 1961 to add national pension for self-employed workers, agriculture, forestry and fishery workers. The basis pension system was financed by fixed amount of insurance premiums. The problem with the pension system is that there are more people enjoy pension benefits while there are fewer workers.
Health care: health care funds need to be risen due to rapid aging and longevity. In Japan, almost all people are insured by health care and elder people go to hospitals more often than elder people in other developed countries. As a result, Japan will face a problem in raising health care funds in the future.
The Koizumi Reform:
Koizumi took office in 2001 with a four-part economic reform: 1) privatize the post office; 2) force banks to write off bad debts; 3) accelerate the implementation of structural reforms; 4) cap the insurance of Japanese government bonds. To implement this plan, Koizumi used the Council on Economic and Fiscal Policy, which is the cross-ministry organization. This council changed the decision-making process for preparing the government budget by coordinating the policies proposed by different ministries to control the overall spending in line with long-term goal of reaching the budget balance in 2012.
1) Privatization of post office: to break the postal service into 4 parts: mail delivery and post office management parts would be under the government control; a bank and an insurance company would be spun off through IPO.
2) Force banks to write off bad debts: the government used three-pronged approaches: accelerate the disposal of nonperforming loans; strengthen loan-classification and provisioning practices; reduce exposure to the price risks of equity by issuing regulations that banks should lower their equity shareholding to 100% or less of their tier-one capital.
3) Pension reform: The pension reform was approved by the Diet in 2004. This reform package includes 3 issues: premium levels, benefits and government subsidies. Premiums rates would rise from 2004 to 2007 and the contribution rate of 13.85% would rise to 18.3% by 2007. Benefits levels would decrease gradually through an adjustment level tied to the CPI. Government subsidies would increase from one-third to 50%
4) Fiscal reform: The government would cut public investment, limit or cut education and defense, eliminate subsidies to local governments, cut social security expenses. By raising taxes to hold government spending constant, the government hoped to reduce deficits toward the balance in 2012. At the same time, the government would apply monetary contraction by issuing more bonds thus public debts increase. To achieve deficit reduction, one-third of primary deficits could be reduced by expenditure cut, the two-third by VAT tax raise.
The prerequisites for Japan to get back its high economic growth are completing structural reforms, refinancing social security, controlling fiscal deficits and ending deflation.
Compare with reforms in Vietnam from late 1980s to 2000s:
The former Soviet Union started to cut aids to Vietnam in early 1980s and the country needed to find a way to grow itself. The Vietnamese communist party decided to change from the close to open economy and the government implemented a compete reform package. Same as Japan in fiscal reforms, Vietnam reduced the number of ministries, reformed pension benefits, cut long-term spending and issued government bonds. However, Vietnam has done different economic reforms. For example, the Vietnamese government changed currency in 1986, from 100 Dong to 1 Dong, privatized SOEs and agricultural collectives, deregulated all economic sectors, broadcast, publishing, telecommunications, established new laws and promote private sector. Reforms were also done educational privatization, electricity production, medical service, transportation, banking system.
In my opinion, the recent massive reforms in Vietnam have helped the country achieve dramatic economic growth in the right direction that fits the situation of the country. Vietnam is continuing reforms to boost the economy. Reforms are always necessary for economic growth because the local and international environments are changing fast.
Japan: Beyond the Buble
Date: June 5, 2006 Pham Thi Thuy Ha
Fruits of the Miracle:
Although Japan was affected by the ending of the Breton Woods system of fixed exchange rates and the first oil shock, the 2nd the oil shock helped depreciate Yen so Japan gained export competitiveness at the end of 1980s. Due to the rise of U.S real interest rate in 1981, Yen was weakened again and Japan enjoyed export competitiveness and much cheaper imported materials to boost economic growth. However, under a threat of inflation and pressure of estate speculation, the Bank of Japan had to raise interest rate and cool off the economy in 1989. After a series of attempts to balance budget, the government implemented fiscal stimulus in 1992. As a result, deficit spending rose quickly but the economic growth was still stagnated. Then, the government lowered interest rate to 0.5% by 1995 and the Bank of Japan introduced a zero-interest rate policy in 1999 in order to have enough cash to raise price and reduce price deflation. The bank increased interest rate in august 2000 but implemented again this policy in 2001 to deal with deflation problem. However, the bank will gradually increase interest rate to turn monetary policy to normal.
Institutional Concerns:
The ministry of Finance (MOF) managed government fiscal policy and influenced over monetary and securities policy and therefore the Bank of Japan has not acted independently in monetary policy making. In the labor market, job security and seniority system were changed in the late 1990s due to recession. Labor costs were increasing. The bankruptcy of some companies forced employees to find alternative solutions. In the financial market, banks changed from book-value systems to marked-to-market accounting systems to increase their transparency. The government also changed its long-term policy not to allow banks fail to allow banks collapse in 1997. Still, individuals had limited opportunities in the capital markets and were limited in reporting foreign exchange transactions so their personal savings were held in personal saving accounts with very flat interest rates. As a result, unlike American firms, Japanese firms have had limited capital equity. Keiretsu, business groups, has been a dominant business practice in Japan. Keiretsu has 3 types: horizontal keiretsu, vertical keiretsu and satellite groups centered on banks for funds. Cross-holding of share is still common practice and thus, firms were not really under the pressure from shareholders. Japan also faced social issues such as aging problem, medical care, pensions, role of women, standard of living and education.
The Hashimoto Era and Structural Reform:
Hashimoto introduced a grand plan to restructure administration, education, the financial system, fiscal policy and social security among which the financial market reform was the most important reform. According to the plan, the administrative reform is to re-organize the governing structure to be more efficient and more responsive to the needs of the people by strengthening the power of the primer minister and cabinet, reducing number of ministries and limiting numbers of bureaucrats. The economic reform encompassed removal of restrictions on large-scale retailers, telephone deregulation, series of deregulations in 5 main areas: logistics, energy, petroleum and gas, telecommunications and trade/commerce. The educational reform was to reorganize educational system, cultivate a rich humanity, elicit prompt responses to changing social needs and increase schools’ cooperation with students’ families and communities. The financial restructure aimed at the financial market reform and disposal of the massive bad debts by lifting the ban on derivative and amending the Anti-Monopoly Law. The fiscal reform included five major principles: 1) reduce budget deficit; 2) devote to fiscal reform; 3) implement year-to-year reductions in general expenditures; 4) reduce all current long-term spending programs; 5) maintain the national burden below 50%. The social security reform received 5 different proposals and a pension reform bill was completed in 2000. This massive reform resulted in less power of MOF and the primer minister was granted the rights to submits policy proposals to the cabinet.
Structural Reform under Koizumi:
In early May 2001, Koizumi proposed structural reforms. The new reform agenda was: 1) force banks to write off all nonperforming loans in 2 or 3 years; 2) privatize the postal saving system; 3) a cap of government borrowing of $245 billion to halt Japan’ $5.6 trillion debts; 4) Reduce deficits by cutting government spending; 5) a government-subsidized unemployment plan to grant jobless benefits so that firms can lay off worker easily.
Lessons drawn from the case:
The government should change timely the policy in response to the changes of domestic and international macroeconomic conditions. In my country, a massive reform was done in late 1980s and 1990s in accordance with the change of the government’s policy from a close to an open economy after the collapse of the former Soviet Union. So far this reform has boosted economic growth at high rates and maintained political stability. The government continues reforms in all areas such as deregulation, legislation, education, health care, pensions, social security… and promotes privatization.
Fruits of the Miracle:
Although Japan was affected by the ending of the Breton Woods system of fixed exchange rates and the first oil shock, the 2nd the oil shock helped depreciate Yen so Japan gained export competitiveness at the end of 1980s. Due to the rise of U.S real interest rate in 1981, Yen was weakened again and Japan enjoyed export competitiveness and much cheaper imported materials to boost economic growth. However, under a threat of inflation and pressure of estate speculation, the Bank of Japan had to raise interest rate and cool off the economy in 1989. After a series of attempts to balance budget, the government implemented fiscal stimulus in 1992. As a result, deficit spending rose quickly but the economic growth was still stagnated. Then, the government lowered interest rate to 0.5% by 1995 and the Bank of Japan introduced a zero-interest rate policy in 1999 in order to have enough cash to raise price and reduce price deflation. The bank increased interest rate in august 2000 but implemented again this policy in 2001 to deal with deflation problem. However, the bank will gradually increase interest rate to turn monetary policy to normal.
Institutional Concerns:
The ministry of Finance (MOF) managed government fiscal policy and influenced over monetary and securities policy and therefore the Bank of Japan has not acted independently in monetary policy making. In the labor market, job security and seniority system were changed in the late 1990s due to recession. Labor costs were increasing. The bankruptcy of some companies forced employees to find alternative solutions. In the financial market, banks changed from book-value systems to marked-to-market accounting systems to increase their transparency. The government also changed its long-term policy not to allow banks fail to allow banks collapse in 1997. Still, individuals had limited opportunities in the capital markets and were limited in reporting foreign exchange transactions so their personal savings were held in personal saving accounts with very flat interest rates. As a result, unlike American firms, Japanese firms have had limited capital equity. Keiretsu, business groups, has been a dominant business practice in Japan. Keiretsu has 3 types: horizontal keiretsu, vertical keiretsu and satellite groups centered on banks for funds. Cross-holding of share is still common practice and thus, firms were not really under the pressure from shareholders. Japan also faced social issues such as aging problem, medical care, pensions, role of women, standard of living and education.
The Hashimoto Era and Structural Reform:
Hashimoto introduced a grand plan to restructure administration, education, the financial system, fiscal policy and social security among which the financial market reform was the most important reform. According to the plan, the administrative reform is to re-organize the governing structure to be more efficient and more responsive to the needs of the people by strengthening the power of the primer minister and cabinet, reducing number of ministries and limiting numbers of bureaucrats. The economic reform encompassed removal of restrictions on large-scale retailers, telephone deregulation, series of deregulations in 5 main areas: logistics, energy, petroleum and gas, telecommunications and trade/commerce. The educational reform was to reorganize educational system, cultivate a rich humanity, elicit prompt responses to changing social needs and increase schools’ cooperation with students’ families and communities. The financial restructure aimed at the financial market reform and disposal of the massive bad debts by lifting the ban on derivative and amending the Anti-Monopoly Law. The fiscal reform included five major principles: 1) reduce budget deficit; 2) devote to fiscal reform; 3) implement year-to-year reductions in general expenditures; 4) reduce all current long-term spending programs; 5) maintain the national burden below 50%. The social security reform received 5 different proposals and a pension reform bill was completed in 2000. This massive reform resulted in less power of MOF and the primer minister was granted the rights to submits policy proposals to the cabinet.
Structural Reform under Koizumi:
In early May 2001, Koizumi proposed structural reforms. The new reform agenda was: 1) force banks to write off all nonperforming loans in 2 or 3 years; 2) privatize the postal saving system; 3) a cap of government borrowing of $245 billion to halt Japan’ $5.6 trillion debts; 4) Reduce deficits by cutting government spending; 5) a government-subsidized unemployment plan to grant jobless benefits so that firms can lay off worker easily.
Lessons drawn from the case:
The government should change timely the policy in response to the changes of domestic and international macroeconomic conditions. In my country, a massive reform was done in late 1980s and 1990s in accordance with the change of the government’s policy from a close to an open economy after the collapse of the former Soviet Union. So far this reform has boosted economic growth at high rates and maintained political stability. The government continues reforms in all areas such as deregulation, legislation, education, health care, pensions, social security… and promotes privatization.
Foreign Exchange Markets and Transactions
Date: May 31, 2006 Pham Thi Thuy Ha
Foreign Exchange Market:
Started in 1970s, the foreign exchange market first enables the conversion of other currencies to US dollars at fixed exchange rate. This market has grown over time due to the expansion of international trade and became the largest market in the world with 1.2 trillion average daily turnover in 2001. The largest trading center is in UK with 16% of US dollars, 9% of Japanese Yen. OTC is the most popular trading method and transactions include spot transactions, outright forwards and swaps. Euro and world-wide consolidation of in the financial sector have reduced traded volume of the market. There was a trend toward fewer banks with larger market share in the exchange market. Electronic brokering systems account for increasing share of turnover in spot market.
What is an exchange rate?
An exchange rate is the rate at which one currency can be exchanged for another. On other words, it is the price of a currency in the exchange market. Direct quotes are exchange rates listed in the form of US $ Equivalent and give the price of a unit of foreign currency in US dollars. Indirect quotes are rates listed in the form of Currency per U.S. $ and give the number of units of foreign currency required to buy 1 U.S.$. Cross exchange rate are exchange rates in terms of two non-U.S. dollar currencies. For instance, the cross rate between RMB and Euro. Bid/ask spread is the service fees that banks or brokers charge for each currency transaction. A quote is a bank’s buy price and an ask quote is a bank’s sell price. The spread is the difference between these two prices. Therefore, bank currency quotes are usually given in pairs with the first rate being the bid quote and the second being the ask quote.
Exchange rate movements:
Prices of currencies fluctuate quite often in the exchange market like the prices of goods fluctuate in the good market.
Currency appreciation is the increase in the value of a currency relative to other currencies. When the value is decrease, currency is depreciated. When a currency is appreciated, its purchasing power increases.
Exchange rate fluctuations are measured in percentage relative to some reference currency, for example Euro could appreciate 10% relative to US dollars. Three steps to calculate percentage of fluctuation: 1) convert exchange rates into a standard form; 2) determine whether the studied currency is depreciated or appreciated; 3) calculate the percentage of changes of the original exchange rate.
There are 2 reasons why exchange rates fluctuate: 1) according to purchasing power parity theory, exchange rate fluctuate because of the changes of purchasing power of a currency to another currency; 2) according to interest parity theory, exchange rates fluctuate because of the fluctuation of interest rates. In other words, potential holders of foreign currency deposits should not be different between two currencies.
5 types of foreign exchange transactions:
- Spot transactions are foreign exchange transactions based on spot rates, daily exchange rates quoted in the Wall Street Journal and other news sources.
- Forwards are transactions made sometime in the future at forward rates and forward contracts, an agreement between buyer and seller to trade a particular currency on a date in the future for a fixed price regardless of the changes in spot rates. If the currency is expected to appreciate in the future, forward rates will contain a premium. If the currency is expected to depreciate in the future, forward rates will contain a discount. Forwards end with the purchase of currencies.
- Swaps are a series of forwards under a contract that hedges long-term, sustained foreign exchange exposure. It differs from forwards in the sense that swaps cover multiple future transactions until the mature date while forwards deal with one transaction. Swaps are arranged by brokers and banks in favor of two parties who have complementary foreign exchange to pair up and trade their currencies.
- Futures are contracts that specify a standard volume of a currency to be exchanged on a settlement date some time in the future. Futures are similar to forwards except the fact that futures are standardized for trading on markets like Chicago Mercantile Exchange. They are often used as a tool for currency speculation rather than a hedging tool. Future contracts are traded on the market and the holder can have gains or losses depending on the movement of spot rate over time and changing expectation about the spot rate’s value on the settlement date.
- Options are contracts that allow their owners to buy or sell a currency at a designated price within specific period of time. A currency call option is a contract that allows its owner the right to buy a specific currency. A currency put option is a contract that allows its owner the right to sell a specific currency. Exercising an option is to take the right to buy or sell the currency. Options are sold in standard volumes.
Lessons drawn from the case
1. Companies using foreign currency should have different strategies of foreign currency against unfavorable movements of exchange rates before making decisions on any transaction relating to foreign currency.
2. Corporations conducting international business should consider currency options to cover the risks of unfavorable exchange movements.
3. Call options are suitable for companies that need future foreign currency and want to hedge against currency appreciation
4. Put options are suitable for companies who hold a large amount of foreign currency and want to hedge against currency depreciation
Foreign Exchange Market:
Started in 1970s, the foreign exchange market first enables the conversion of other currencies to US dollars at fixed exchange rate. This market has grown over time due to the expansion of international trade and became the largest market in the world with 1.2 trillion average daily turnover in 2001. The largest trading center is in UK with 16% of US dollars, 9% of Japanese Yen. OTC is the most popular trading method and transactions include spot transactions, outright forwards and swaps. Euro and world-wide consolidation of in the financial sector have reduced traded volume of the market. There was a trend toward fewer banks with larger market share in the exchange market. Electronic brokering systems account for increasing share of turnover in spot market.
What is an exchange rate?
An exchange rate is the rate at which one currency can be exchanged for another. On other words, it is the price of a currency in the exchange market. Direct quotes are exchange rates listed in the form of US $ Equivalent and give the price of a unit of foreign currency in US dollars. Indirect quotes are rates listed in the form of Currency per U.S. $ and give the number of units of foreign currency required to buy 1 U.S.$. Cross exchange rate are exchange rates in terms of two non-U.S. dollar currencies. For instance, the cross rate between RMB and Euro. Bid/ask spread is the service fees that banks or brokers charge for each currency transaction. A quote is a bank’s buy price and an ask quote is a bank’s sell price. The spread is the difference between these two prices. Therefore, bank currency quotes are usually given in pairs with the first rate being the bid quote and the second being the ask quote.
Exchange rate movements:
Prices of currencies fluctuate quite often in the exchange market like the prices of goods fluctuate in the good market.
Currency appreciation is the increase in the value of a currency relative to other currencies. When the value is decrease, currency is depreciated. When a currency is appreciated, its purchasing power increases.
Exchange rate fluctuations are measured in percentage relative to some reference currency, for example Euro could appreciate 10% relative to US dollars. Three steps to calculate percentage of fluctuation: 1) convert exchange rates into a standard form; 2) determine whether the studied currency is depreciated or appreciated; 3) calculate the percentage of changes of the original exchange rate.
There are 2 reasons why exchange rates fluctuate: 1) according to purchasing power parity theory, exchange rate fluctuate because of the changes of purchasing power of a currency to another currency; 2) according to interest parity theory, exchange rates fluctuate because of the fluctuation of interest rates. In other words, potential holders of foreign currency deposits should not be different between two currencies.
5 types of foreign exchange transactions:
- Spot transactions are foreign exchange transactions based on spot rates, daily exchange rates quoted in the Wall Street Journal and other news sources.
- Forwards are transactions made sometime in the future at forward rates and forward contracts, an agreement between buyer and seller to trade a particular currency on a date in the future for a fixed price regardless of the changes in spot rates. If the currency is expected to appreciate in the future, forward rates will contain a premium. If the currency is expected to depreciate in the future, forward rates will contain a discount. Forwards end with the purchase of currencies.
- Swaps are a series of forwards under a contract that hedges long-term, sustained foreign exchange exposure. It differs from forwards in the sense that swaps cover multiple future transactions until the mature date while forwards deal with one transaction. Swaps are arranged by brokers and banks in favor of two parties who have complementary foreign exchange to pair up and trade their currencies.
- Futures are contracts that specify a standard volume of a currency to be exchanged on a settlement date some time in the future. Futures are similar to forwards except the fact that futures are standardized for trading on markets like Chicago Mercantile Exchange. They are often used as a tool for currency speculation rather than a hedging tool. Future contracts are traded on the market and the holder can have gains or losses depending on the movement of spot rate over time and changing expectation about the spot rate’s value on the settlement date.
- Options are contracts that allow their owners to buy or sell a currency at a designated price within specific period of time. A currency call option is a contract that allows its owner the right to buy a specific currency. A currency put option is a contract that allows its owner the right to sell a specific currency. Exercising an option is to take the right to buy or sell the currency. Options are sold in standard volumes.
Lessons drawn from the case
1. Companies using foreign currency should have different strategies of foreign currency against unfavorable movements of exchange rates before making decisions on any transaction relating to foreign currency.
2. Corporations conducting international business should consider currency options to cover the risks of unfavorable exchange movements.
3. Call options are suitable for companies that need future foreign currency and want to hedge against currency appreciation
4. Put options are suitable for companies who hold a large amount of foreign currency and want to hedge against currency depreciation
Singapore: Committee on Singapore’s Competitiveness
Date: May 27, 2006 Pham Thi Thuy Ha
Economy overview from 1959 to 1998:
From 1959 to 1956, Singapore adopted import-substitution policy while it was a member of the Federation of Malaysia. But right after becoming an independent country in 1965, the country moved from labor-intensive exports to high value adding industries while shifting manufacturing facilities to lower-cost neighboring countries. In 1990s, it changed the policy to become an international business hub international financial center to turn the country in a knowledge economy and enjoyed fruitful economic growth (about 8%/year) until 1997-Asia-economic crisis. Since the country’s economy was largely regional focus, it was drastically hurt by this crisis and economic growth was less than 1% by the end of 1999.
The Committee on Singapore’s competitiveness (CSC):
In May 1996, CSC was formed with most members from private sectors to:1) evaluate the country’s competitiveness in the next 10 years in the context of rapid globalization and emerging competition; 2) to detect problems and propose strategies and policies to maintain the competitiveness of Singapore in the future. However, due to 1997-crisis, CSC added one objective which is to examine short-tern issues and recommend solutions to help Singapore overcome the economic downturn. CSC’s 1998-report presented short-term and medium-term solutions to help Singapore stay competitive. Those solutions are:
- Short-term recommendations: 1) reduce business costs and help businesses survive; 2) remain strong financial system; 3) Maintain investors’ confidence; 4) Push economic restructuring; 5) make Singapore’ economy stay resilient; 6) seek business opportunities in the region through partnerships; 7) implement cost-cutting and tax-cutting measures
- Long-term recommendations: 8 key strategies:
1. Promoting manufacturing and service as twin engines: develop manufacturing in the regional hub; attract multinational companies; develop services sector in a premier hub in Asia through fast-growth services.
2. Strengthening the external wing: Diversify market dependency beyond the region; invade into the abundant resources overseas.
3. Building world-class companies: Nurture stable world-class companies by broadening the corporate profile and economic base of Singapore for sustained and resilient growth.
4. Strengthening the base of small and medium local enterprises: Help them remain resilient and reach maximum potential; underpin their role as strategic partners of multinational companies and government-linked companies.
5. Developing human & intellectual capital as key competitive edge: develop a world-class work force by providing world-class education for youth, promoting life-long learning for life-long employability and encouraging management, innovation & technology.
6. Leveraging science, technology & innovation: lever science, technology and innovation; construct the existing IT2000 program to turn Singapore into an IT hub in Asia.
7. Optimizing resources management: optimize the allocation of scare resources to increase supply and encourage efficient usage of those resources.
8. Reinforcing Government role as a business facilitator: Support private sector by providing consistent policies & regulatory environment.
Besides the 8 keys strategies, CSC also recommended strategies for 5 sectors to enhance each sector. In manufacturing: develop world-class work force move to R&D, and nurture enterprises. In financial and banking: develop fund management industry, expand domestic capital market. In service: develop international trading, transport and logistics, business & professional services, media, communications and tourism. In domestic business: help local enterprises to optimize scare resources and develop business.
Responses from Government and Public: the report was warmly welcomed by the government and public and the recommendations were quickly adopted with immediate or nearly immediate effect.
Lessons drawn from the case
1. Build a competitive society is the core of the sustained growth in globalization context
2. Education is the core strategy that each government should take to build a world-class work force, lever science, technology and innovation
3. Private sector and small and medium enterprises play an important role in economic growth so it is deserved to receive full support and assistance from government
4. Effective integration in international markets is a strong wing of the national economy
In Vietnam, the government has formed policies and strategies that cover all above areas to build a knowledge－based and competitive society.
Economy overview from 1959 to 1998:
From 1959 to 1956, Singapore adopted import-substitution policy while it was a member of the Federation of Malaysia. But right after becoming an independent country in 1965, the country moved from labor-intensive exports to high value adding industries while shifting manufacturing facilities to lower-cost neighboring countries. In 1990s, it changed the policy to become an international business hub international financial center to turn the country in a knowledge economy and enjoyed fruitful economic growth (about 8%/year) until 1997-Asia-economic crisis. Since the country’s economy was largely regional focus, it was drastically hurt by this crisis and economic growth was less than 1% by the end of 1999.
The Committee on Singapore’s competitiveness (CSC):
In May 1996, CSC was formed with most members from private sectors to:1) evaluate the country’s competitiveness in the next 10 years in the context of rapid globalization and emerging competition; 2) to detect problems and propose strategies and policies to maintain the competitiveness of Singapore in the future. However, due to 1997-crisis, CSC added one objective which is to examine short-tern issues and recommend solutions to help Singapore overcome the economic downturn. CSC’s 1998-report presented short-term and medium-term solutions to help Singapore stay competitive. Those solutions are:
- Short-term recommendations: 1) reduce business costs and help businesses survive; 2) remain strong financial system; 3) Maintain investors’ confidence; 4) Push economic restructuring; 5) make Singapore’ economy stay resilient; 6) seek business opportunities in the region through partnerships; 7) implement cost-cutting and tax-cutting measures
- Long-term recommendations: 8 key strategies:
1. Promoting manufacturing and service as twin engines: develop manufacturing in the regional hub; attract multinational companies; develop services sector in a premier hub in Asia through fast-growth services.
2. Strengthening the external wing: Diversify market dependency beyond the region; invade into the abundant resources overseas.
3. Building world-class companies: Nurture stable world-class companies by broadening the corporate profile and economic base of Singapore for sustained and resilient growth.
4. Strengthening the base of small and medium local enterprises: Help them remain resilient and reach maximum potential; underpin their role as strategic partners of multinational companies and government-linked companies.
5. Developing human & intellectual capital as key competitive edge: develop a world-class work force by providing world-class education for youth, promoting life-long learning for life-long employability and encouraging management, innovation & technology.
6. Leveraging science, technology & innovation: lever science, technology and innovation; construct the existing IT2000 program to turn Singapore into an IT hub in Asia.
7. Optimizing resources management: optimize the allocation of scare resources to increase supply and encourage efficient usage of those resources.
8. Reinforcing Government role as a business facilitator: Support private sector by providing consistent policies & regulatory environment.
Besides the 8 keys strategies, CSC also recommended strategies for 5 sectors to enhance each sector. In manufacturing: develop world-class work force move to R&D, and nurture enterprises. In financial and banking: develop fund management industry, expand domestic capital market. In service: develop international trading, transport and logistics, business & professional services, media, communications and tourism. In domestic business: help local enterprises to optimize scare resources and develop business.
Responses from Government and Public: the report was warmly welcomed by the government and public and the recommendations were quickly adopted with immediate or nearly immediate effect.
Lessons drawn from the case
1. Build a competitive society is the core of the sustained growth in globalization context
2. Education is the core strategy that each government should take to build a world-class work force, lever science, technology and innovation
3. Private sector and small and medium enterprises play an important role in economic growth so it is deserved to receive full support and assistance from government
4. Effective integration in international markets is a strong wing of the national economy
In Vietnam, the government has formed policies and strategies that cover all above areas to build a knowledge－based and competitive society.
GDP Calculation
Macroeconomics – National Economic Accounting: Past, Present and Future
Date: April 22, 2006
Student Name: Pham Thi Thuy Ha Student ID: 2A5026
Question 1: Three approaches to measure GDP:
- Value-added approach: GDP is the sum of the value-added at each stage of production, where value added is revenues minus material costs.
- Income approach: GPD is total income which is the sum of rent, wages and profits.
- Expenditure approach: GDP is total spending on final goods and services of a nation. In other words, GDP = C + G + I + X – M where C is consumption, G is government expenditure, I is investment, X is export and M is import.
Among three methods, expenditure approach is the most widely used because it provides policy makers with the most usefulness in formulating economic policies.
Question 2: In general the final results of these three approaches should be the same because GDP measures the value of output of a nation in a specific period of time (1 year). However, the results are not the same in reality. The reason is that the information on which the data is collected may come from different sources and inevitably contains inaccuracies and round-up data.
Question 3: Depreciation is a decrease in the value of a property as a result of wear and tear, obsolescence, accidental damage and aging. In macroeconomics, depreciation covers reductions of the capital stock by disasters. If the capital depreciation is very large, the investment might not be sufficient to support rapid growth in the long run. Therefore, the term Net Domestic Product (NDP), which is GDP minus depreciation, is used instead of GDP.
Question 4: According to Kuznet, the value of net output is the sum of Income Paid Out and Business Saving, where Income Paid Out is the sum of wages, salaries, rent and distributed post-tax corporate profits, and Business Saving is positive business saving (investment, reserves, additions to capital stock) and negative business saving such as depreciation, depletion of natural resources and withdrawals from reserves.
According to Keynes, the value of the net output is the sum of consumption, investment and government spending. This approach incorporates the relationship between employment, the quantity of money, the interest rate and aggregate expenditures.
Question 5: The reason why Kuznet was unhappy with the inclusion of government expenditures in the value of output is the double-counting problem in calculating the output value. Kuznet argued that most government spending was on intermediate goods crucial to the production process rather than on the final products. Therefore, if the government spending is counted, there would be double-counted products in the value of net output and the true value of output would be over-calculated.
Question 6: Challenges in accounting for aggregate output:
Inputting Output:
- How to count for new goods and services that were unsold in the formal economy or that were unpriced in the market. The challenge to count the value of unsold goods such as home-made clothes, unpaid household work and unpriced services like free bank services remains the most difficult challenge that each country faces in calculating their GDP.
- How to count the value of the informal economy. If a country has a big informal economy like Colombia, GDP would be under-calculated if this country ignores the informal economic sector.
- How to count the value of barter if the country still has barter systems.
- How to measure the quality of goods produced. The quality of goods is not fully reflected on the price.
Natural Resources:
- How and what to count the value and depletion of natural resources. Even though UN has provided guidance on how to estimate the annual value of natural resources used, this calculation remains inaccurate since natural resources are what we might not be able to measure accurately.
Question 7: Factors that should be considered:
- The value of non-tradable, un-owned aspects of the environment such as clean air, clean water and climate
- The value of non-market economy of household and community
- The value of informal economy
- Unpriced social cost associated with production such as pollution and environmental degradation
Question 8: Reasons for the importance of the traditional GDP: The traditional GDP suggested by Keynes reflects the relationship between employment, quantity of money, interest rate and aggregate expenditures. Therefore it is:
- An essential tool for analyzing and assessing the state of a nation’s economy.
- A valuable metric for short-term macroeconomic planning because the government can use fiscal and monetary policies to push or cool down the economy.
- An essential tool for formulating macroeconomic stabilization policies.
- An important indicator of the economic growth and potential for investors.
Question 9: Arguments for the environmental accounting:
- Economic growth must be sustainable, growth together with environmental protection.
- Sustainable growth is needed to ensure that our younger generations could have living standards at least as high as those of current generations.
- GDP will provide a more complete overview of economic performance and living standards than GDP without concerning about environmental matters.
- The value of output in environmental accounting (NNG) would be a better indicator of sustainable social well-being than traditional GDP.
- NNG would help policy makers make better decisions in planning the economic growth strategies for a nation.
Question 10: Reasons for “A higher GDP is not necessary mean a higher measure of welfare”:
- GDP might be over or under calculated, depending on the methods of collecting and interpreting data.
- GDP ignores the value of non-market economy of household and community such as recreation, intellectual capital, education…
- GDP treats depletion of natural resources, pollution, environment degradation, disasters as income because it measures expenses on those areas as economic gains.
- GDP takes no account for income distribution.
- GDP ignores the drawbacks of borrowing money from other countries.
Date: April 22, 2006
Student Name: Pham Thi Thuy Ha Student ID: 2A5026
Question 1: Three approaches to measure GDP:
- Value-added approach: GDP is the sum of the value-added at each stage of production, where value added is revenues minus material costs.
- Income approach: GPD is total income which is the sum of rent, wages and profits.
- Expenditure approach: GDP is total spending on final goods and services of a nation. In other words, GDP = C + G + I + X – M where C is consumption, G is government expenditure, I is investment, X is export and M is import.
Among three methods, expenditure approach is the most widely used because it provides policy makers with the most usefulness in formulating economic policies.
Question 2: In general the final results of these three approaches should be the same because GDP measures the value of output of a nation in a specific period of time (1 year). However, the results are not the same in reality. The reason is that the information on which the data is collected may come from different sources and inevitably contains inaccuracies and round-up data.
Question 3: Depreciation is a decrease in the value of a property as a result of wear and tear, obsolescence, accidental damage and aging. In macroeconomics, depreciation covers reductions of the capital stock by disasters. If the capital depreciation is very large, the investment might not be sufficient to support rapid growth in the long run. Therefore, the term Net Domestic Product (NDP), which is GDP minus depreciation, is used instead of GDP.
Question 4: According to Kuznet, the value of net output is the sum of Income Paid Out and Business Saving, where Income Paid Out is the sum of wages, salaries, rent and distributed post-tax corporate profits, and Business Saving is positive business saving (investment, reserves, additions to capital stock) and negative business saving such as depreciation, depletion of natural resources and withdrawals from reserves.
According to Keynes, the value of the net output is the sum of consumption, investment and government spending. This approach incorporates the relationship between employment, the quantity of money, the interest rate and aggregate expenditures.
Question 5: The reason why Kuznet was unhappy with the inclusion of government expenditures in the value of output is the double-counting problem in calculating the output value. Kuznet argued that most government spending was on intermediate goods crucial to the production process rather than on the final products. Therefore, if the government spending is counted, there would be double-counted products in the value of net output and the true value of output would be over-calculated.
Question 6: Challenges in accounting for aggregate output:
Inputting Output:
- How to count for new goods and services that were unsold in the formal economy or that were unpriced in the market. The challenge to count the value of unsold goods such as home-made clothes, unpaid household work and unpriced services like free bank services remains the most difficult challenge that each country faces in calculating their GDP.
- How to count the value of the informal economy. If a country has a big informal economy like Colombia, GDP would be under-calculated if this country ignores the informal economic sector.
- How to count the value of barter if the country still has barter systems.
- How to measure the quality of goods produced. The quality of goods is not fully reflected on the price.
Natural Resources:
- How and what to count the value and depletion of natural resources. Even though UN has provided guidance on how to estimate the annual value of natural resources used, this calculation remains inaccurate since natural resources are what we might not be able to measure accurately.
Question 7: Factors that should be considered:
- The value of non-tradable, un-owned aspects of the environment such as clean air, clean water and climate
- The value of non-market economy of household and community
- The value of informal economy
- Unpriced social cost associated with production such as pollution and environmental degradation
Question 8: Reasons for the importance of the traditional GDP: The traditional GDP suggested by Keynes reflects the relationship between employment, quantity of money, interest rate and aggregate expenditures. Therefore it is:
- An essential tool for analyzing and assessing the state of a nation’s economy.
- A valuable metric for short-term macroeconomic planning because the government can use fiscal and monetary policies to push or cool down the economy.
- An essential tool for formulating macroeconomic stabilization policies.
- An important indicator of the economic growth and potential for investors.
Question 9: Arguments for the environmental accounting:
- Economic growth must be sustainable, growth together with environmental protection.
- Sustainable growth is needed to ensure that our younger generations could have living standards at least as high as those of current generations.
- GDP will provide a more complete overview of economic performance and living standards than GDP without concerning about environmental matters.
- The value of output in environmental accounting (NNG) would be a better indicator of sustainable social well-being than traditional GDP.
- NNG would help policy makers make better decisions in planning the economic growth strategies for a nation.
Question 10: Reasons for “A higher GDP is not necessary mean a higher measure of welfare”:
- GDP might be over or under calculated, depending on the methods of collecting and interpreting data.
- GDP ignores the value of non-market economy of household and community such as recreation, intellectual capital, education…
- GDP treats depletion of natural resources, pollution, environment degradation, disasters as income because it measures expenses on those areas as economic gains.
- GDP takes no account for income distribution.
- GDP ignores the drawbacks of borrowing money from other countries.
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