China's Economists Grapple with Higher GDP - Assignment Example

Economic growth is the increase in the real GDP per capita over a period of time. It can be shown by an outward shift of the production possibility curve. The production possibility curve shows the combination of two goods that a country can produce using all of its resources in the most efficient way. Economic growth will increase the amount of goods and services that a country can potentially produce. To do this, the quantity or quality of factors of production must be increased. China has registered an unprecedented growth in the GDP. Over the last twenty five years, the country's economy grew at an average of 9.6%. However, the proportion of investment to GDP remains relatively unchanged, during the period of higher economic China's growth, real income and investment rate (1978-2000). . growth. The service sector in China is growing exponentially, which is not accounted for while calculating the GDP and the sector plays a crucial role in Chinese economy. Consistently high investment rate in China implies high rates of domestic saving which are exceptional not only by international standards, but more particularly for an economy at China's level of per capita GDP. Gross domestic product is the total value of new goods and services produced in a given year within the borders of a country, regardless of by whom. It is "gross" in the sense that it does not deduct depreciation of previously produced capital, in contrast to Net domestic product. There is two ways of calculating GDP, i.e., Income approach and expenditure approach. The income approach takes into account the income earned by the citizen. Sometime it is more important than GDP if a country has much foreign direct investment and many foreigners work in the country. Although about 70% of its population lives in the rural area, China's economic growth depends very much on the rapid expansion of manufacturing and service sector rather than on the agriculture, except for the earlier phase of the 1980s. The value added of industrial sector has accounted for 45% of China's GDP, while that of agriculture only about 10% and still declines. This gives rise to growing rural urban income disparity. The inequality within China has had mainly spatial dimensions, in terms of growing income and consumption inequality between rural and urban areas as well as across regions. Aggregate demand curve is the graph of quantity demanded as a function of price, normally downward sloping, straight or curved, and drawn with quantity on the horizontal axis and price on the vertical axis. In macro economy, aggregate demand curve indicates the various quantities of goods and services that purchasers are willing to buy at different price levels. The aggregate is negatively related to price. The inverse relationship between price and the amount demanded of a specific commodity, reflects the fact that consumers turn to substitutes when a price increase makes a good more expensive. The aggregate demand curve is downward sloping because of wealth effect on the consumption, interest rate effect on investment and the exchange rate effect on the net export. The aggregate supply curve reflects how the price is determined given the aggregate demand to aggregate capacity. The short-run aggregate supply curve indicates the various quantities of goods and services that firms will supply at different price levels during the period immediately following a change in the price level. The aggregate supply curve is upward sloping because with an increase in output the price or inflation rate will increase. Changes in aggregate demand cause the curve to shift outward (to the right) or inward (to the left). Changes in aggregate supply cause the curve to shift outward (down) or inward (up). Meanwhile increase in output also indicates the increase in employment and thus the decrease in unemployment rate. The unemployment is an important problem of micro economic theory which is calculated by the ratio of unemployment to the total labour force. There is a significant relation between economic growth and unemployment. Generally high rate of is associated with low employment. In China, despite a tremendous economic growth pattern, the unemployment is soaring and economic disparity is on the rise. The rate of increase in employment is precisely equal to the difference between the rate of GDP growth and the rate of growth in labor productivity. If and as labor productivity rises, generating a specified number of additional jobs requires a still higher rate of growth in GDP. Thus, while China's economy was growing at the highest annual growth rate, 7.8%, of any of the world's principal economies, its increase in employment was only 1% annually. Reduction in the income gap requires strengthening of macro-regulation, and increase in the investment in agriculture and rural areas to further relieve farmers' burden and increase of farmers' incomes. Poverty reduction need to be a driving force in economic restructuring and promoting the increase of farmers' incomes in poverty-stricken areas with the support of preferential policies such as subsidized loan and reduction and exemption of tax. There is an appreciation of Chinese yuan against US dollar by 2.1% last year, with speculation of further appreciation in the coming year. Appreciation or revaluation of currency is an increase in the value of one currency relative to another currency. Appreciation occurs when, because of a change in exchange rates, a unit of one currency buys more units of another currency or it has become more valuable with respect to another currency. For example if Chinese yuan appreciates it means that yuan has become more valuable in relation to dollar. Appreciation has given Chinese goods an unprecedented advantage in global market. To conclude persistent balance of payments surpluses build up appreciation pressure on a fixed exchange regime in a partially open economy like China. A deregulated market interest rate may work as an automatic stabilizer to release some of the appreciation pressures, but it cannot fully eliminate the appreciation pressure because of the zero interest rate floor. The Chinese government should consider improving the quality of domestic assets by reducing the non-performing loans of the banking sector, so that the substitutability of domestic and foreign assets will rise and the exchange rate will be stabilized. Secondly, more foreign currency loans may be issued through the state-owned banking sector to promote economic growth and increase income while at the same time reducing the level of foreign reserves. SOURCE Online Asia times "China's economists grapple with higher GDP" By Antoaneta Bezlova (http://www.atimes.com/atimes/China_Business/HA13Cb02.html) Read More