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South Korea’s Export Analysis……………………………………………………………………………….. 5 Financial crisis

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South Korea and its Global Impact on Financial
and Trade Markets

Jeremy W. Strang

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Macro Economics Term Paper

Victor Valley College

December 2017

 

History and current state of the South Korean economy……………………………………………. 4

Economic history of South Korea……………………………………………………………………….. 4

Global involvements in the 21st
century and financial economic conditions…………………. 5

South Korea’s Export Analysis……………………………………………………………………………….. 5

Financial crisis and other
global factors…………………………………………………………………… 6

Specialized industries and
comparative advantage……………………………………………………. 6

Macroeconomic chart analysis of
South Korea’s consumption and production with trade 6

South Koreas Import Analysis of
US goods…………………………………………………………….. 7

What is the current minimum
wages……………………………………………………………………….. 7

South Korea labor and currency……………………………………………………………………………… 7

Macroeconomic chart analysis of
the effects of the minimum wage on South Korea’s workforce           8

South Korea GDP annual growth
rate from 2009-2014……………………………………………… 8

Unemployment rate and literacy
statistics………………………………………………………………… 9

Current political and economic
reform…………………………………………………………………….. 9

Economic changes in opinion and
laws………………………………………………………………. 10

South Korea’s future viability………………………………………………………………………………. 10

Current fiscal and monetary
policy issues………………………………………………………………. 10

Macroeconomic graph analysis of
an expansionary fiscal policy………………………………… 11

References…………………………………………………………………………………………………………. 12

Tables………………………………………………………………………………………………………………… 15

Table 1…………………………………………………………………………………………………………… 15

Figures………………………………………………………………………………………………………………. 16

Figure 1………………………………………………………………………………………………………….. 16

Figure 2………………………………………………………………………………………………………….. 17

Figure 3………………………………………………………………………………………………………….. 18

 

 

                                                                                      

History and current state of the South Korean economy

South Korea is a rapidly growing economy in South East Asia
and is considered one of the Four Asian Tigers who underwent high growth rates
and rapid industrialization from the early 1960’s until the 1990’s. The rapid
industrialization has put South Korea to the forefront of technological
advancement with South Korea a major exporter of technology globally. However,
its relationship with its culturally similar neighbor, North Korea, has
increased tensions in South Korea, its neighbors, and its major ally.

Economic history of South Korea

Following the Korea Armistice
Agreement that was signed in 1953, South Koreas’ economy was an
“underdeveloped, agrarian economy that depended heavily on foreign aid” (Lew,
Hahn, Lee, IM, & Yu, 2017). During the 1960’s the military controlled
country focused on developing its economy. This focused growth resulted in an
annual average growth rate of 9 percent. However by 1997, the economy growth
had slowed down and the South Korean government accepted a bailout from the
International Monetary Fund (IMF) for $57 billion. The economy had recovered by
2000 partly because of economic reforms passed by President Kim Dae-Jung. This
recovery was not for long as the economy experienced another setback during the
recessions that began in 2007. A reduction of the key rate by the Bank of Korea
(BOK) by a total of 3.25 percentage points was used to improve the economy
prior to February of 2009. According to Soo-yeon, South Korea started raising
the interest rates and withdrawing from the emergency measures it took to
weather the global financial storm of the late 2000’s (Soo-yeon, K, 2010). The economic growth in South Korea hit a
five-year high in the third quarter of 2015 even after a weakening global
demand for the country’s exports. The slowdown in exports was countered by
increased demand in the domestic market (2015). In the third quarter of 2017,
exports increased because of the overseas demand for semiconductors, steel, and
petrochemical products. This increase in exports and increased government
expenditure in the second quarter of 2017 led to the fastest growth rate since
2010 (Lee, 2017a).

Global involvements in the 21st century and financial
economic conditions

South
Korea is an open market, capitalist country. It is a major exporter of
technology and the largest producer of liquid crystal displays. Its role in the
beginning of the supply chain has allowed economists to use South Korean
exports as a measuring stick for the outlook of global trade in the future
(Shaffer & Yoon, 2017). South Korea has had close relations with the US
since the Korea Armistice Agreement and has been a major trade partner
subsequently. Another consequence of the Korea Armistice Agreement was the
isolation of its northern neighbor, North Korea, and the hostilities that
accompanied it. While they are similar in culture and language, tensions have
been on the rise between the two countries as North Korea pursues nuclear
armament.

South Korea’s Export Analysis

According to Workman (2017), South Korea’s top exports
include electrical machinery, vehicles, and machinery that includes computers.
As a percentage, electrical machinery makes up 27.1% of South Korea’s exports,
vehicles make up 12.6%, and machinery including computers makes up 11.8%
(Workman, 2017). South Korea’s top ten exports can be found in Table 1. Both
countries strengthened their economic relationship with the signing of the
United States-Korea Trade Agreement in 2006. By exporting $69.9 billion of
goods to the US, South Korea became the United States 6th largest
supplier of goods in 2016. South Korea also exported an estimated $10.9 billion
in services to the United States in 2016. Top exports to the US were: vehicles
($21 billion), electrical machinery ($16 billion), pharmaceuticals ($2.4
billion), and mineral fuels ($2.2 billion) (“Korea 2017”).

Financial crisis and other global factors

Within the last 20 years, South Korea has recovered from the
1997 Asian Financial Crisis and Great Recession that lasted from 2007- 2012.
One issue unique to South Korea is its relationship with its neighbor North
Korea. North Korea and South Korea were once a united country until the
surrender of Japan during World War 2. President Harry Truman signed General
Order No. 1 which led to the division of Korea across the 38th
parallel. North Koreas invasion of South Korea on the 25th of June
1950 led to the Korean War which eventually ended on the 27th of
July 1953. Ever since, South Korea and North Korea has had a turbulent
relationship. North Koreas hardline stance against South Korea and its allies
has caused some concern in recent months mainly due to its tests of nuclear
weapons and intercontinental ballistic missiles.

Specialized industries and comparative advantage

South Korea specializes in the production and development of
automobiles and high-tech industries. Electrical machinery, vehicles, machinery
including computers, and optical, technical, and medical apparatus production
make up approximately 57% of its exports (Workman 2017). South Koreas
comparative advantage in these industries allows it to focus research and
development to continue to improve its technological capabilities.

Macroeconomic chart analysis of South Korea’s consumption
and production with trade

Figure 1 shows the increase in consumption for South Korea with
trade. A represents South Korea’s
production with trade, B represents
South Korea’s consumption without trade, and C represents South Korea’s consumption with trade. In this example
when South Korea refrains from trade with the US, their consumption of vehicles
is $8 billion and their consumption of beef products is $12 billion. By
specializing in vehicles and trading for beef products, South Korea is able to
increase their consumption of vehicles to $10 billion dollars and their consumption
of beef products to $15 billion. This is obtainable without increasing the
production point at A. The increase
in consumption is visualized by the movement from point B to point C.

South Koreas Import Analysis of US goods

South Korea imported $42.3 billion of goods from the US in
2016 making South Korea the 7th largest goods export market for the
US in 2016. The US also exported an estimated $21.6 billion of services to
South Korea in 2016. The top imports were: machinery ($6.2 billion), electrical
machinery ($5.3 billion), aircraft ($5.2 billion), optical and medical
instruments ($2.9 billion), and vehicles ($2.2 billion). South Korea was also
the US 5th largest agricultural export market. Their largest import
categories of US agriculture products include: beef and beef products ($1.1
billion), corn ($865 million), fresh fruit ($389 million), prepared food ($370
million), and pork and pork products ($365 million) (“Korea 2017”).

What is the current minimum wages

South Koreas’ minimum wage was about $5.80USD per hour in
2016. However in July of 2017, the Minimum Wage Commission of South Korea
improved an increase for 2018 to $6.60USD per hour. South Koreas’ president,
President Moon Jae-in has pledged to increase minimum wage to approximately
$9.20USD by the end of 2020 (Lee, 2017b).

South Korea labor and currency

South Koreas’ labor force participation rate from 1982 until
2017 averaged 60.74 percent. An all-time record low of 48.50 percent was
recorded in January of 1984 and an all-time record high of 63.80 percent was
recorded in June of 2017. The labor participation rate has decreased recently
from 63.40 percent in September of 2017 to 63.30 percent in October of 2017 (“South
Korea Labor Force Participation Rate 1982-2017”, 2017). South Korea’s won
is up 7.8 percent against the US dollar in 2017. It is benefiting from the
growth of the global technology sector and President Moon Jae-in’s promises to
increase social programs such as minimum wage (Karunungan, 2017).

Macroeconomic chart analysis of the effects of the
minimum wage on South Korea’s workforce

Figure 2 shows the effects minimum wage has on the quantity
of labor and wages. S represents the
supply of workers and D represents
the demand of workers. Without minimum wage the equilibrium of wages would be
at W1 and the quantity of workers
hired would be at L1. However with a
minimum wage set above the equilibrium, the number of labor supplied would increase
to L3 and the number of workers that
employers would demand would move from L1
to L2. This would cause a surplus
of workers that are unable to find a job equal to L3-L2. President Moon Jae-in’s promise to increase minimum wages
could have adverse effects on South Korea’s workforce. The increase in minimum
wages will cause a surplus of workers that are unable to find a job.

South Korea GDP annual growth rate from 2009-2014

South Korea experienced a negative annual GDP growth rate of
-1.735% in 2009. The annual GDP growth rate jumped up sharply in 2010 to 4.327%
as their economy started to recovery from the Great Recession that started in
2007. In 2011, South Korea posted a growth rate of 3.156%. This was followed by
a growth rate of 2.439% in 2012, a growth rate of 2.601% in 2013, and a 2.831%
growth rate in 2014 (“GDP growth (annual %)”, 2017).

Unemployment rate and literacy statistics

The unemployment rate in South Korea was 3.6 percent in
November of 2016. However, the unemployment rate of people aged 25 to 29 rose
to 8.2 percent the highest since 1999 (Kanga 2016). After the Japanese
occupation of Korea, the Korean illiteracy rate was 78%. Koreans put a high
value on education because of their Confucian cultural influence. They were
able to change their literacy rate from 22% in 1945 to 87.6% in 1970 by passing
the Basic Education Law of 1949 and implementing a national strategic plan to
focus on education reforms in 1962. The literacy rate in South Korea is 97.9%
as of 2013 (“Education in South Korea Understanding South Korea’s Education
System”, 2017).

Current political and economic reform

On December 6, 2016 President Park Geun-hye was impeached by
the National Assembly as a result of being charged with influence peddling.
President Park Geun-hye had been accused of allowing an advisor, Choi Soon-sil,
to influence decisions over the selection of government officials and helping
Choi extort millions of dollars from South Korean companies (Sang-hun, 2016).
President Geun-hye was eventually removed from office on March 10th,
2017 via a unanimous ruling by the Constitutional Court. On May 9th,
2017 South Korea held an election to replace the impeached Park Geun-hye. Moon
Jae-in, a member of the Democratic Party of South Korea, won the election with
41.08 percent of the votes. President Moon Jae-in was a former human rights
lawyer and favored engagement with the North Korean government. He also
challenged the deployment of a US missile defense system. President Moon Jae-in
supported more liberal economic policies in wake of corruption charges against
the more conservative parties of South Korea (Boykoff & Griffiths, 2017).

Economic changes in opinion and laws

With high youth unemployment and corruption in the more
conservative parties, the South Korea people elected more liberal leadership in
President Moon Jae-in. President Moon Jae-in has promised to create 810,000
public sector jobs, a 16% increase in minimum wages, and an increase in corporate
tax rates to help stimulate the economy. This would be the first corporate-tax
rate increase since 1991. The tax rate is expected to help pay for an estimated
$160 billion increase in government spending over President Moon Jae-in’s five
year term (Jun, 2017).

South Korea’s future viability

South Korea has had rapid economic growth since the 1960’s.
The country has continued to invest in technology and education for its youth.
However, South Koreas population is starting to age with 12.7 percent of the
population aged 65 or above in 2014. 20.5 percent of the population is expected
to be aged 65 or over by 2026 (Sang Ok & Teck Boon, 2016). This aging
population will most likely cause a large increase in government healthcare expenditure
and put strain on the younger population. By investing in the youth and
technology, I believe South Korea can overcome this dilemma through automation
of jobs in the vehicle production and electronic hardware industries. I expect
South Korea to continue to be at the forefront of innovation and one of the
largest exporters of technology in the world.

Current fiscal and monetary policy issues

Officials from South Korea raised their benchmark interest rate
to 1.5 percent in November 2017 as the global monetary policy tightening cycle arrives
in South Korea. Policy makers have used the period of faster economic growth to
move interest rates from record lows. However, their high domestic debt has
made domestic demand more sensitive to rate hikes (Curran & Lee, 2017). The
South Korean government has taken an expansionary fiscal policy after the
election of President Moon Jae-in. The Moon Jae-in government laid out a road
map with four key principles: income-led growth, job-creating economy, fair
economy, and innovative growth. A tax code revision that involved hikes to high
earners and corporate taxes is expected to fund extra government expenditures
(Boram, 2017).

Macroeconomic graph analysis of an expansionary
fiscal policy

President Moon Jae-in and South Korea’s government have
begun to enact an expansionary fiscal policy. Figure 3 shows the effects of an
expansionary fiscal policy. An expansionary fiscal policy causes the aggregate demand
curve to shift to the right. This shift is represent by C. AD1 is the aggregate
demand before the shift while AD2 is
the aggregate demand after the shift. LRAS
represents the long-range aggregate supply and SRAS represents the short-range aggregate supply. The economy
begins at point A and moves to point B with the aggregate demand curve shift to
the right. In this example real GDP is lower than potential GDP. This means the
economy is in a recession. The expansionary fiscal policy would cause the
demand to shift to the right increasing real GDP from $17.2 billion to $17.4
billion and moving the price level from 108 to 110. This movement from point A to point B is the economy moving towards its potential GDP. President Moon’s
expansionary fiscal policy could offset an increased unemployment from the
increased minimum wages. The expansionary fiscal policy could lead to higher
production and an increase in employment opportunities.

References
Boram, K. (2017, August 29). (News Focus) Seoul takes
expansionary fiscal policy to spearhead ‘income-led growth’. Retrieved
December 11, 2017, from
http://english.yonhapnews.co.kr/news/2017/08/28/0200000000AEN20170828013000320.html
Boykoff, P., & Griffiths, J. (2017, May 10).
South Korea election: Moon Jae-in declared winner. Retrieved December 11,
2017, from http://www.cnn.com/2017/05/09/asia/south-korea-election/index.html
Curran, E., & Lee, J. (2017, November 30).
Tightening Comes to Asia as South Korea Raises Interest Rates. Retrieved
December 11, 2017, from
https://www.bloomberg.com/news/articles/2017-11-30/tightening-comes-to-asia-as-south-korea-raises-interest-rates
“Education in South Korea Understanding South Korea’s
Education System” . (n.d.). Retrieved December 11, 2017, from

Diversity and Access to Education


“GDP growth (annual %). (n.d.)”, (2017). Retrieved
December 11, 2017, from https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?end=2014&start=2009
Hubbard, R. G., & O’Brien, A. P. (2017). Macroeconomics (6th
ed.). Boston, MA: Pearson.
Jun, K. (2017, August 02). Tax Reform in Korea:
Higher Rates to Fund a Higher Minimum Wage. Retrieved December 11, 2017, from
https://www.wsj.com/articles/south-korea-plans-first-corporate-tax-rise-since-1991-1501653603
Karunungan, L. (2017, July 18). Asia’s Top-Performing
Currency Is Missile-Proof. Retrieved December 11, 2017, from https://www.bloomberg.com/news/articles/2017-07-18/low-yield-is-no-problem-for-south-korean-won-defying-the-bears
Kong, K. (2016, December 13). South Korea’s Youth
Unemployment Rate Rises to Record High. Retrieved December 11, 2017, from
https://www.bloomberg.com/news/articles/2016-12-14/south-korea-s-youth-unemployment-rate-rises-to-record-high
“Korea.” (2017). Korea | United States Trade Representative, Office of the United
States Trade Representative,
ustr.gov/countries-regions/japan-korea-apec/korea.
Lee, J. (2017a, October 25). S. Korea’s Fastest
Growth Since 2010 Bolsters Rate Hike View. Retrieved November 28, 2017, from https://www.bloomberg.com/news/articles/2017-10-25/exports-drive-fastest-growth-in-south-korean-economy-since-2010
Lee, J. (2017b, July 16). South Korea to Boost
Minimum Wage by 16%. Retrieved December 11, 2017, from
https://www.bloomberg.com/news/articles/2017-07-17/korea-s-minimum-wage-hike-keeps-moon-on-target-for-pay-pledge
Lew, Y. I., Hahn, B., Lee, C., IM, H., & Yu, W.
(2017, October 05). South Korea. Retrieved November 28, 2017, from https://www.britannica.com/place/South-Korea/Economic-and-social-developments
Sang-hun, C. (2016, December 09). South Korea Enters
Period of Uncertainty With President’s Impeachment. Retrieved December 11,
2017, from https://www.nytimes.com/2016/12/09/world/asia/south-korea-president-park-geun-hye-impeached.html
Sang-Ok, L., & Teck -Boon, T. (2016, March 24).
South Korea’s demographic dilemma. Retrieved December 11, 2017, from

South Korea’s demographic dilemma


Shaffer, L., & Yoon, E. (2017, September 05). Why
South Korea is a linchpin for all global tech. Retrieved November 28, 2017,
from
https://www.cnbc.com/2017/09/05/why-south-korea-is-a-linchpin-for-all-global-tech.html
Soo-yeon, K. (2010,
July 09). (News Focus) Rate hike heralds start of Korea’s stimulus exit.
Retrieved November 28, 2017, from http://english.yonhapnews.co.kr/business/2010/07/09/45/0503000000AEN20100709006500320F.HTML
South Korean economic growth hits five-year high.
(2015, October 23). Retrieved November 28, 2017, from http://www.bbc.com/news/business-34612397
South Korea Labor Force Participation
Rate  1982-2017 | Data | Chart. (n.d.). Retrieved December 11, 2017,
from https://tradingeconomics.com/south-korea/labor-force-participation-rate
Workman, D. (2017, November 08). South Korea’s Top 10
Exports. Retrieved December 10, 2017, from http://www.worldstopexports.com/south-koreas-top-10-exports/

 

 

Tables

Table 1.

South Korea’s Top 10 Exports

Export

Export in USD

Percentage of Exports

Electrical
machinery, equipment

$134.3 billion

27.1%

Vehicles

$62.7 billion

12.6%

Machinery
including computers

$58.3 billion

11.8%

Ships, boats

$33.2 billion

6.7%

Plastics,
plastic articles

$27.7 billion

5.6%

Optical,
technical, medical aparatus

$27.6 billion

5.6%

Mineral fuels
including oil

$27.4 billion

5.5%

Iron, steel

$18.9 billion

3.8%

Organic
chemicals

$17.9 billion

3.6%

Articles of
iron and steel

$11.1 billion

2.2%

Note:  Adapted from South Korea’s Top 10 Exports by Daniel Workman, retrieved from http://www.worldstopexports.com/south-koreas-top-10-exports/
Copyright 2017 by World’s Top Exports.

 

 

 

Figures

Figure 1.

                               

 

Figure 1. Production and
consumption with trade. Adapted from Macroeconomics (6th
ed.) (p. 49), by R.G. Hubbard & A.P. O’Brien, Boston, MA: Pearson.
Copyright 2017 by Pearson Education, Inc.

 

Figure 2.

 

 

 

Figure 2. Effects of minimum wage
on supply, demand, and surplus. Adapted from Macroeconomics (6th ed.) (p. 119), by R.G. Hubbard & A.P.
O’Brien, Boston, MA: Pearson. Copyright 2017 by Pearson Education, Inc.

 

 

Figure 3.

 

 

 

 

Figure 3. Expansionary fiscal
policy. Adapted from Macroeconomics (6th
ed.) (p. 563), by R.G. Hubbard & A.P. O’Brien, Boston, MA: Pearson.
Copyright 2017 by Pearson Education, Inc.

 

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