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Macro & Micro economics - Essay Example

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The Chinese economy has been growing at a significantly high rate since the last three decades. It is the second-largest economy in the world and is one among the fastest growing economies (Chiang and Standing, 2013). …
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Macro & Micro economics

Download file to see previous pages... However, the growth rate slipped immediately in the next year. This fluctuation in the growth rate of the economy has been a cause of concern for the government of China. It prompted the government to make policy changes that would boost up economic activities in the country. This paper has been presented with the purpose of representing an analytical study of an article named “China May CPI slows, gives room for easy monetary policy” written by Chiang and Standing and published by One America News on June 8, 2013. The article is a report on the Chinese economy, its economic growth and the responses of the government with regard to such fluctuation in the growth of the economy. The Central Bank of China has adopted easy monetary policy as well as expansionary fiscal policy to heighten productive activities. This paper revolves around the major issues that have been identified as the primary reasons behind slackening of the country’s growth rate and presents a discussion of the relevant government policies. The effect of the economic downturn on the Chinese society has also been discussed in this paper. Discussion on the economic problem issue China showed an average growth rate of 7.7% in the first three months in 2013 (BBC, 2013). Although this is not a very poor growth rate, the main concern is fall in growth rate and weak aggregate demand as shown by the country’s purchasing power index (PPI) (Chiang and Standing, 2013). Q2 has reflected slower growth rate than Q1 in the current year (2013). In May 2013, annual inflation rate of consumer price index (CPI) has reduced to 2.1% from 2.4% in April (Chiang and Standing, 2013). This has aroused concern that the economy might further slowdown in the third quarter of 2013. According to forecasts by some economists, it would become difficult to attain the target annual growth rate of 7.5% (Chiang and Standing, 2013). The measure of different variables representing the output of different sectors in the economy is showing a downward trend. This implies that there is not much chance for the economy recover immediately. Private investors are facing high cost of financing business activities which is discouraging entrepreneurs to make new investments. This highlights the room for possible interest rate cuts by the Central Bank of China. It has decide to “pursue interest rate liberalization” (Chiang and Standing, 2013) in the latter half of 2013 with the aim of protecting and increasing consumption growth and supporting private investment. Causes of the problem The article considered for the study, highlights certain issues that have led to the fall in economic growth rate in China. At present the rate of infest in the economy is high, due to which investment activities are being suppressed. This has led to low income for the workers in the economy resulting in lower demand. On the other hand warm weather conditions have led to good agricultural produce and high supply of vegetables. Therefore price of vegetables has fallen by 13.8 % in May 2013 (Chiang and Standing, 2013). Figure1: Fall in Aggregate demand in China (Source: Author’s creation) Aggregate supply (of food items) has increased in the short run (owing to good harvest). But the consumers are left with less disposable income, therefore demand for the produce has fallen (as shown by the shift in aggregate demand curve form AD1 to AD2). Hence prices have fallen from P1 to P2. This has led to fall in the amount of contribution of the agricultural sector in the total GDP and overall GDP has declined. Another important reason behind the fall in GDP growth rate is the over dependence of China on its export sector. China has followed export ...Download file to see next pagesRead More
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