Introduction
Economic growth and policies are important for a nation like China which is considered the second most powerful nation in the world. When such an economy faces slow growth despite potential investments, there is a concern amongst its policy makers. This report discusses how China’s economists are planning to increase their economic growth as well as in depth analysis of economic concepts discussed in the newspaper article that has been chosen.
Article’s Summary
World’s second – largest economy, China faces an export slowdown and the reason for this situation is said to be Europe’s debt crisis. Considering the export slowdown, Chinese President Hun Jintao, while speaking to Asia-Pacific Economic Cooperation CEP Summit, vowed to enhance domestic demand and encourage a balanced economic growth. For the first time in five months consumer prices has shown an increase, while the industrial production has gown down. The last month industrial production figures are the lowest in three years. This has affected the small and medium enterprises and exporters as well. While an increase in housing and food prices signals towards inflation. Another major concern for the country is the growing unemployment rate.
Economists believe that this situation poses a challenge for the policy makers of China and a new policy should be made to counter the new economic situation of the country. However, despite the slowdown, Chinese market is still an attractive business hub for foreign investors as figures of 7.5 percent growth rate shows potential and with the positive announcement by the Chinese government of spending US 157 Billion in the country’s infrastructure, future seems to be bright.
Chinese officials are hoping that the fourth quarter will yield improved results than the third quarter as government plans to take particular measures to stabilize foreign trade. Agreeing to the sentiments of the government, the business community welcomed these announcements and is hoping a better upcoming financial quarter for the nation.
Linkage between the Article and Economic Concepts
The main theme of the article is how to promote a balanced growth since increasing inflation and consumer prices along with unemployment is causing China to suffer from a slow economic growth; something which is not acceptable by its Government.
Inflation and its Effects
Inflation is described as a situation whereby there is a general and sustained increase in prices which is then measured in various indices. Like China, a number of nations have made it their priority to control inflation within economies (Grant, 2000). It has been deduced that increase in the money supply increases inflation that is:
Money supply rate of inflation
However, this will only happen if the rate of growth in the money supplies greater than the increase in the level of output in the economy of a country. The effects of increase in the money supply can be explained with the help of a graph:
The graph has the following features (Grant and Bamford, 2010):
- a vertical line for the supply curve of money since supply is determined by the Central Bank
- the demand curve of money is portraying the simple general factor which is associated with the demand curve of any commodity; people desire larger quantitative of money when they value falls since they need more money now to purchase the goods and services that they wanted to
- At the point X, the supply and demand of money is balanced at the price P and the value of money is indicated by the symbol V.
- Supply curve of money shifts from S1 to S2 when there is an increase in the supply of money. This leads to a new position in the graph at Y where the price stands at p/2 and the value of money is given by v/2. This shows that the price of money has doubled whereas the value of money has now decreased by half.
This particular effect of inflation on the economy is one of the major reasons why China wants to take corrective measures since not doing so will result in decrease in the purchasing power parity of its citizens which will in turn affect the exchange rate of its currency and the value of its exports.
It has been understood that the rate at which inflation rises determines the extent of problems that the economy will face. An inflation rate of 25 percent will cause more problems as compared to an inflation rate of 3 percent. Hyperinflation is the worst level that the inflation can rise up to since it causes political instability, loss of confidence in the money and using barter system rather than the currency itself. Another important point related to inflation is whether it can be anticipated or not. Anticipated inflation has a number of benefits since government, workers and consumers can correctly understand the level that inflation will rise of fall to and hence develop their goals accordingly.
Economic Growth
Economic growth is a phenomenon which takes place when a particular economy is able to increase its national income in excess of its rat of its population. Actual and potential economic growth rates have been a much debated topic by economists over the years. It has been said that actual economic growth rate since increase in the Gross Domestic Product (GDP) using unemployed resources while the potential economic growth is the ability of the country to produce certain levels of goods and services (Stimpson, 2002). In China, the economists had valued the country’s potential growth to be higher than its actual growth. Potential and actual growths can be depicted on a graph a follows:
The graph above shows that the actual output of an economy has grown towards its potential output. This is what China is trying to achieve through a change in its economic policies since it wants to enhance its economic growth as well as try to maintain a balanced growth in its fourth quarter of the year.
Unemployment
One of the major factors that the Chinese economy is facing is unemployment. The form of unemployment that exists within the economy is disequilibrium unemployment since within the labor market of China; the aggregate supply of labor is exceeding the demand of the labor itself due to the downturn in the economy (Grant, 2000). This can be shown with the help of a graph:
The graph clearly shows that due to an excess in supply but a decline in demand for labor like in the case of China, not only a proportion of population has to go through unemployment, but the wage rate of the current working force has also declined to W1 as shown in the graph above since there are more labor available within the economy to offer their services which has given a chance to the buyers of labor to pressurize the wage rate downwards (Grant, 2000).
Cost of unemployed people is great to the economy. These range from burden on those that are employed, purchasing power parity of the economy falling and the loss of status for those people who are unemployed (Grant, 2000). There are however a few benefits for those that are unemployed. These include having leisure time to pursue their dreams and goals, greater flexibility within the economy since there is a pool of qualified unemployed people available o join jobs whenever they find one and giving a chance to owners of factories and industries to pursue better production methods since the wage rates demanded have fallen (Stimpson, 2002).
The main cost to the society due to unemployed people is the loss of output that results. An economy might be able to produce Y number of goods and services, but due to the unemployed people in the economy, it is only producing X number of goods and services. If the unemployment prevails in the economy for a longer time, the gap between actual and potential output for an economy will increase (Grant and Bamford, 2010). The figure below shows this fall in output in a particular economy:
Aggregate Demand
Demand is described as the desire and willingness to pay for goods and services by consumers (Stimpson, 2002). Aggregate demand is therefore the total amount that is spent in a given period of time on goods and services. The aggregate demand comprises of four components which are: consumption, Government spending, investment and net exports which is represented by the equation C + I + G + (X-M) = AD (Keating and John, 1999). The figure of aggregate demand is as follows:
The curve slopes down from left to right since a lower price level will result in raising demand or the country’s exports, increase the purchasing power of individuals within that economy and increase consumption and investment since interest rates will be reduced (Grant and Bamford, 2010).
Aggregate Supply
Aggregate supply is the total output that is produced by the firms in the economy and their willingness and ability to supply their goods or services at certain price levels (Grant, 2000). Aggregate supply can be differentiated according to whether it is long run or short run in nature.
The short run aggregate supply reflects the output that will be supplied in a given period of time at different price levels assuming that various price factors remain constant (Grant and Bamford, 2010). The graph for short run aggregate supply is as follows:
This particular curve slopes from right to left unlike the aggregate demand curve because an increase in the price level will enable the firms to enjoy higher profits and cover their costs. Shift in the short run aggregate supply curve will occur if there is any change in the productivity or other factors of production (Grant, 2000). This can be shown as follows:
The long run aggregate supply curve on the other hand shows the total output that is produced by the firms in an economy over a period of time after price and other factors have been adjusted and the shift in demand curve has taken place (Keating and John, 1999). The graph for long run aggregate supply curve is shown below. It depicts that in the long run the economy can operate at any level and it is not necessary that full capacity is achieved. Furthermore, the output from 0 to Q shows that output can be increased at any price level but from Q to Q1 the firms start experiencing lack of resources and higher wages and at the point where Q2 is reached, maximum output has been achieved in these conditions (Grant and Bamford, 2010).
New classical economists however depict the long run aggregate supply curve as a vertical line since they believe that in the long run firms will operate at their full capacities (Grant, 2000). This depiction of new classical economists is as follows:
Relationship between Balance of Payments and Inflation
The Marshall-Lerner condition states that if exports and imports tend to be price elastic then a fall in exchange rate will improve the balance of payment over all. However, if this occurs along with a rise in inflation due to generation of extra demand of imported products and raw materials, the balance of payments will worsen (Grant and Bamford, 2010). This is represented by a J curve which shows that because some economies need to purchase raw materials from other economies, the imports ted to vary depending on the price that is offered and also on the exchange rate of the economy. Therefore imports are inelastic in nature. This can be shown using a diagram:
Monetary Policy, Fiscal Policy and Unemployment
If there is a risk of increasing unemployment in the economy, the Government can use monetary and fiscal policies together to make sure that these problems are eliminated. Through increased government spending, not only jobs will be created for people living within a country but also their purchasing power parity will also improve. This is known as a reflationary fiscal policy since the Government is reducing direct and indirect taxation on people, cutting taxes on the profits of the firm and increasing its spending which will add to the consumers’ purchasing power and disposable incomes (Grant, 2000).
The monetary policy in this case is reduction of interest rates which will result in increasing investments since cost of borrowing falls, consumers will tend to spend more as there is less incentive of saving money in bank due to low interest rates and the exchange rate will depreciate leading towards rise in exports for the economy (Stimpson, 2002).
These together will increase the aggregate demand of any economy. However, the extent to which these changes will take place will depend on the multiplier effect and the response from consumers and the confidence that exists in the economy regarding the Country’s currency (Grant and Bamford, 2010).
Conclusion
China has suggested adopting monetary and fiscal policies to correct the levels of unemployment that exists in is economy and grow its economy at a standard pace so that it can achieve sustainability. The country’s economists have shown support for these measures and since its consumers and foreign investors like Wal-Mart have confidence in its economy, the country will emerge better financially in the upcoming fiscal quarter. To better understand China’s condition, in-depth analysis of economic terms and theories like how unemployment affects the economy, how growing economy benefits countries and the relationship that exists between inflation and other factors have made it easier to reflect on the country’s economy.
References
- Grant, S. and Bamford, C., (2010). Economics, Cambridge, 2nd Ed., pp. 286-315
- Grant, S., (2000). Introductory Economics, Pearson Education Limited, 7th Ed., pp. 564-615
- Keating, W., and John V., (1999). The Dynamic Effects of Aggregate Demand and Supply Disturbances in the G7 Countries, Journal of Macroeconomics, 21, pp. 263–287
- Stimpson, P., (2002). Motivation in Theory and Practice, UK: Cambridge University Press, pp. 144-149
