China's Macro and Microeconomic Policies - Research Paper Example

China’s Macro and Microeconomic Policies China’s Macro and Microeconomic Policies Microeconomics is the process by which the decisions regarding the resource allocation and product price are made by the people or businesses in a give setup. It involves the taxes and regulations put in place by the government. Microeconomics concentrates on demand and supply. On the other hand, macroeconomics focuses on the characteristics of the economy as a whole and not individual person or sector as in the microeconomics (Salvatore,1991). This research paper explores the indicators of economy and the necessary policies put or to be put in place in order to keep the economy of the Democratic Republic of China growing. There are many economic indicators that can be used to show the growth of a given economy. In this research paper, only three are discussed. Gross Domestic product(GDP), inflation and the unemployment rate are the major indicators of the economic change in the country. Gross Domestic Product of china Chart showing GDP development trends of China and India (1950-2002). The state council of China established a system of national accounting in 1985 to measure the gross domestic product of the people’s republic of China. In comparison, the Gross Domestic Product report produced by Fengbo Zhang in his measurements in 1980 and that of 1998, the difference in the economic levels is negligible. This is the period when the weighting factors underwent tremendous changes. The prices were amended year after another. Despite the great changes in technology in china, the Gross Domestic Product has shown negligible deviation since 1980. The chart below shows the changes in the Chinas GDP as compared to other economic growths in the first and second world countries. Proportion of world (countries with data) nominal GDP for the countries with the top 10 highest nominal GDP in 2010, from 1980 to 2010 with IMF projections until 2016. Grey lines show actual US dollar values China’s mean annual growth in Gross Domestic Growth was 9.90 % from 1980 to 2010. The highest it ever went in the history is 15% while the lowest was 3.7%. in 1984 and 1990 respectively. According to the research of 2013, Chinas nominal GDP by Expenditure approach is 9.2 trillion Dollars of the USA. Factors affecting the GDP in china and other developed countries vary. The first is growth phase and sector shares. Economic development in China and other developed countries have experienced changes, which affected the progress of growth through labor force, participation rate and economic sector relative sizes. Transition from agricultural activities to manufacturing saw the manufacturing industries increase the output, flooding the market. This lowered the prices of goods leading to the reduced employment as compared to the other sectors in the economy. This lowered the Gross Domestic Product. Demographic changes affect the ratio of the employed people to the ratio of the whole population in the country. China has the largest population in the world with 20% of world’s population. Due to this phenomenon, china has employment problem. Most of the members of the china’s population are jobless and some earn too meager to sustain them. The unemployed population puts a lot of strain on the government resources lowering the Gross Domestic Product. Population structures also affect the economic growth in a manner that some countries for example, China have many dependants as compared to the working class. Most of the income realized by a productive population is transferred to the dependants who are the old and the young population. This hinders economic development. Chinese also like engineering courses which take many years. This means that people take many years studying, only to become productive after many years of study. This delays economic development. Economic growth is concerned with the long-run trend in production due to structural causes such as technological growth and factor accumulation. The business cycle moves up and down, creating fluctuations around the long-run trend in economic growth (Marin, 2013). Technological advancement has also led to the rapid growth in population. This population growth also calls for the care and nursing which consumes the little resources realized by a small productive population Inequality has been blamed for slowed economic development. Demand is high among the members of the society where the economic resources are inadequate. For a country to be productive it has to have the raw materials. It is for this reason that the countries which import the raw materials spend a lot on production cost, hence increasing the price of the finished goods. These goods eventually loose international market, thus affecting the economy adversely. Unemployment is also an issue that attracts a lot of concern as far as economic development is concerned. Unemployed population are perceived as wasting the human resource potentiol. It also looses hope and starts creating conflicts among people. Some theories have been put forward to explain how some things have contributed to the low gross domestic product. For instance the energy from fossils has caused gradual harm to the economy because the fuel mined from the fossils gets depleted with time reducing the productivity at a diminishing rate. The inflation of china remained tepid early 2014. The economic analysts have, however, reiterated that there is no room for the improvement due to the current debts confronting the country. This has slowed down the economic growth of the country. The country’s price index, however, has been anticipated to rise by 2.5% yearly. This is according to the National Bureau of Statistics (Salvatore,1991). A vendor holding chickens at a market in Jiaxing, Zhejiang province on Jan. 9, 2014. Chinas inflation rate held steady in January. Reuters Low inflation has an advantage to consumers, although the demand is not as strong as it used to be indicating a low economic growth rate. This is because of the over capacity in the production industries leading to low prices and unfair competition. Inflation has had an adverse impact on the economy of China. The prices have gone high, forcing the country to pay very high for the imported goods as compared to their counterpart countries. The exports of china earn the country low as compared to other countries. This week, information collected on housing states that new concerns about property have emerged in some of the towns and cities. In the report, the house holds are too high to be afforded by the ordinary Chinese inhabitants. The control of inflation has become one of the dominant objectives of government economic policy in many countries. Control measures of inflation depend of the causes of the same. Monetary policy is a major control tool for inflation. The government has to increase the interest rates on loan and contract the supply of money in the country. This will help reduce the demand in the country and reduce unfair competition. Fiscal policy helps to increase the leakages and reduce injections from and into the circular flow of income respectively. This reduces inflation caused by increased demand. Fiscal policy can be implemented by the china government by; higher direct taxes, which cause a fall in disposable income, lower government spending and reduction in the amount that the government sectors borrow each year. Another economic policy is the direct wage controls where the cost inflation is reduced by restricting the increment in the wages of the citizens. This is done by imposing pay limits to public servants while restricting wage growth in the private sectors. Wage inflation causes unemployment and therefore must be discouraged by all means. The government can launch moral suasions to agree with the government to reduce the salaries paid to their workers. Reforms in the Labor market also help to weaken the powers of trade unions, the growth of part-time and casual laborers along with the expansion of flexible working hours are all developments that have increased efficiency in the labor market. This enables firms to control their labor costs and may reduce cost push inflation. Reforms on Supply may see greater output, produced at a reduced cost per unit product, then the economy can realize sustainable economic development with low inflation. An increase in aggregate supply is usually the fundamental focus of the Government economic policy. In the diagram below the benefits of an outward shift in the long run aggregate supply curve. The equilibrium level of real national income increases and the average price level remains relatively constant increasing the productivity of the economy in the long term. Producers can then sale their output at low prices. Effects of Unemployment on the Economy. Transfer payment. when you are unemployed, the government provides monetary assistance through transfer payment. A high rate of unemployment forces the government to distribute out funds from the national budget to cater for the needs of a large number of jobless people, creating a heavy burden on the economy. This government wealth is released from the economy for unproductive reasons, slowing down the economic growth as there are fewer funds for other development projects. Another point is; flow of income is the lifeline of a flourishing economy. Unemployment slows down this flow when there are inadequate funds for inflow and outflow into and out of the economy. The economic growth will eventually slow down. An economy may show signs of jobless recovery with a continual increase in the rate of unemployment. Such a growth may lead to a slow recovery from the recession in the future. The unemployed are naturally trying to stretch their financial assets for a longer duration due to the uncertainty of the end of unemployment. This leads to reduction in consumer expenditure due to financial limitations and greatly affects the retail sector. Decrease in the volume of sales translates to a reduction in output and subsequently profits for companies, prompting them to tone down their budgets, often by firing employees. In fact, unemployment benefits exceeding $2,400 are taxable on federal return in later years once employment has been secured. This creates a liability in the future for the tax-payer, although the state reaps the returns on investment. Under-utilization of resources has imposed a great burden to the economy where high unemployment rate implies wastage of labor resource. It leads to lack of personnel to operate machinery and raw materials available to produce output supplied to match the reduction in demand for products. Unemployment reduces revenue to the government. This decrease in public funds for the government to invest in public spending, together with the transfer payment, has a cumulative effect on the size of the fiscal budget available for social welfare. The government consequently raises tax rates (Organisation, . E. C.-D. 2009). Lesser capital flow in the economy encourages debts and borrowings that have to be paid along with interest. Since people are unemployed or earning lesser income, it becomes harder to repay debts. This increases mortgages on housing, which are elements of bankruptcy and deflation. Higher deficit in the current account is another outcome of high unemployment in the economy. Lack of spending due to inadequate financial resources and devaluation of the currency propels decrease in return on investment scaring away investors. Moreover, investors may even begin pulling out money from the economy to invest in promising industries belonging to other prosperous economies that are not struggling with high levels of unemployment. The overall effect of the above is the drop in the growth of the Gross Domestic Product of the economy and sometimes, even a negative growth may be observed. Such retardation in economic growth influences people to start their own ventures, creating new job opportunities. This creates balance in the economy. It is important to maintain the optimum level of unemployment to maintain equilibrium between demand and supply of goods. An acceptable level of unemployment in the country is a good indicator of an economy. It helps the government shape monetary and fiscal policies. However, it must be noted that even in the beginning of healing from recession, unemployment in an economy may continue to show steady growth due to organization apprehensions towards the economic future (Organisation, . E. C.-D. 2009). Macroeconomic policies should be enacted and implemented in order to remedy the economies of the world. These are discussed below: Population control; this is very important because it will reduce the strain on resources of the country’s economy. People in the countries should be educated on the family planning methods and importance in order for them to appreciate its significance. Free family planning should be given to the citizens. The government should also offer incentives to the parents who bear only a certain number of children. The government, has to reduce the interest on loans in order to encourage investments in the country. This will lead to employment opportunity creation. There is a need to create peace in the country so as to encourage investment. This also provides a suitable working environment. The government has to offer better deals and good negotiation terms to the stock market. The protection of people’s shares in stock should be guaranteed. Public and private sectors must ensure employing skilled personnel to carry out the management of the resources in order to avoid negligent losses (KPMG China 2011). In China, Dengs first reforms begun in the agricultural sector, which had been overlooked for many years until 1978, food supplies and production had become so deficient that government officials were warning that China was yet to go back to the disaster of 1958 where the famine claimed lives of millions of people during the great leap. Deng responded by restructuring agriculture and emphasizing the system responsibility of the households, which divided the land of the people into private plots. Farmers were able to keep the lands output after paying a share to the state. This move increased agricultural production, increased the living standards of hundreds of millions of farmers and stimulated rural industry. This move also created employment to millions of the Chinese. The agricultural and manufacturing firms remained of great benefit to the country as a whole. It led to economic growth in a manner that people could now work and save the little they acquired since they had food security (Organisation, . E. C.-D. 2009). Deng Xiaopings policies continued beyond the initial reforms. Controls on private businesses and government intervention continued to decrease, and there was small-scale privatization of state enterprises which had was no longer viable. A notable development was the freed of state control, leaving the local provincial leaders to experiment with ways to increase economic growth and privatize the state sector. Firms were owned by the provincial governments, but fully private, which began to gain market share at the expense of the public sector. Chen Yun, in his conservative opposition, prevented many reforms that would damage the interests of special interest groups in the government. Corruption and increased inflation increased discontent, contributing to the 1989 protest, which eventually back lashed after that event which killed reformers and threatened to reverse many of Dengs reforms. However, Deng stood by his reforms; he affirmed the need to continue with reforms. He also reopened the Shanghai stock exchange which had been closed many years ago. In conclusion , microeconomics is the process by which the decisions regarding the resource allocation and product price are made by the people or businesses in a give setup. Factors affecting the GDP in china and other developed countries vary. The first is growth phase and sector shares. Demographic changes affect the ratio of the employed people to the ratio of the whole population in the country. China has the largest population in the world with 20% of world’s population. Macroeconomic policies should be enacted and implemented in order to remedy the economies of the world References Marin, A., (2013). Macroeconomic Policy. UK: Routledge publishers. Langdana, F., (2009). Macroeconomic Policy: Demystifying Monetary and `Fiscal Policy. New `````````York City: Springer publishers. http://online.wsj.com/news/articles/SB10001424127887323932604579052973988936230  http://www.reuters.com/article/2013/10/24/us-china-economy-idUSBRE99N07P20131024 Chinas 12th Five-Year Plan: KPMG Insights series – KPMG China (June, 2011) Sector Insights on the 12th Five-Year Plan – KPMG China Connect(June, 2011) Changes in Five-Year Plans Economic Focus – China Internet Information Center (November 9, 2005) Report on the Outline of the Tenth Five-Year Plan for National Economical and SocialDevelopment ` (2001) Gov.cn (Chinese Governments Official Web Portal) THE OUTLINE OF THE ELEVENTH FIVE-YEAR PLAN FOR NATIONAL ECONOMIC & SOCIAL DEVELOPMENT ` OF THE PEOPLES REPUBLIC OF CHINA – National Development and Reform Commission (NDRC) ` Peoples Republic of China China Mapping out the 11th Five-Year Guideline – China Internet Information Center A Country Studyina – Library of Congress Country Studies KPMG China (June, 2011) Sector Insights on the 12th Five-Year Plan – KPMG China Connect(June, 2011) Changes in Five-Year Plans Economic Focus – China Internet Information Center (November 9, 2005) Report on the Outline of the Tenth Five-Year Plan for National Economical and Social Development (2001) Gov.cn (Chinese Governments Official Web Portal) DEVELOPMENT OF THE PEOPLES REPUBLIC OF CHINA – National Development and Reform Commission (NDRC) Peoples Republic of China China Mapping out the 11th Five-Year Guideline – China Internet Information Center A Country Studyina – Library of Congress Country Studies Tisdell, C. A., & Hartley, K. (2008). Microeconomic policy: A new perspective. Cheltenham, UK: Edward Elgar. Organisation, . E. C.-D. (2009). Globalisation and Emerging Economies: Brazil, Russia, India, Indonesia, China and South Africa. Paris: Organisation for Economic Co-operation and Development. Sullivan, L. R. (1995). China since Tiananmen: Political, economic, and social conflicts. Armonk, NY [u.a.: Sharpe Salvatore, D. (1991). National economic policies. New York: Greenwood Press. Read More