Econ 103 - Term Paper Example

China’s growth rate was 10.3% in the previous year, and an estimated 9.2% GDP growth is forecasted for 2012. One of the key concerns is inflation in China, which is expected to hover around the 4.3% mark in the following year, primarily due to higher commodity and food prices, and excessive liquidity in the market. China’s next 5-year plan has laid emphasis on reducing reliance on foreign investments due to risk profiles. Domestic consumption and services will be the target for this fiscal year.

Private consumption is expected to increase by 12.6% due to rising incomes and excessive spending patterns, while at the same time exports will target a growth of 20%. Japan’s disaster stricken economy is expected to increase at 1.5% post the earthquake, but the nature of the crisis appears to be short-term to medium term. Compared to other Asian nations, China’s economic performance is still laudable, but the creeping inflation threat must be addressed before it starts hampering growth. The slowdown in China’s growth will further exacerbate if inflation is kept unchecked.

The Asian Development Banks has emphasized that core inflation rising is an issue for most Asian nations are they house over 2/3rd of the worlds poor population, and hence corrective measures will be required from all facets to ensure that the problem does not spiral out of control. Theory Review & Analysis: There are a number of economic concepts are work here. Two of the most prominent ones include the GDP growth and the corresponding inflation rate in the country. China has witnessed phenomenal growth in recent times, primarily due to rapid increase in manufacturing and merchandising sectors of the country.

As the fastest growing economy of the world, there is always that element of keeping the pace of growth within acceptable levels to avoid the heating up of the economic business cycle. Given the case at hand, we need to understand the fundamentals which are applicable in such a scenario. This includes the relationship between money supply and inflation. Another feature in the article is the relationship between interest rates and GDP. China’s economic framework is built on the fact that their GDP grows at a steady pace, so that they can sustain this growth.

However, the excessive maneuvering of its key economic indicators has lead to a cause for concern. The first issue which is to be analyzed is the rampant increase in the money supply of the country. There has been a credit boom in China, and accessibility to money is no longer an issue for the common man. With banks pursuing easy lending policies and a positive outlook from the People’s Bank of China has left the money supply unchecked and has triggered an excess amount of liquidity in the system.

Now it’s an established fact that the money market is in equilibrium when money supply = money demand. In China’s case, the money supply went up and the demand for money adjusted itself by increasing. Thus the spike in demand for money began. With the interest rates on lower ebb, people realized that the opportunity cost of saving money was forgo able and opted for consumption instead. Another established economic theory is that when demand increases, the economy starts growing until a point is reached when more demand for money just pushes the