Economic Growth Assignment-completed

STUDENT ID# 0872966/1 BUSINESS IN FOCUS

BUSINESS IN FOCUS

ECONOMIC GROWTH IN CHINA STUDENT ID #

0872966/1

WORD COUNT 

2965

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TABLE OF CONTENTS

PAGE WHAT IS ECONOMIC GROWT H?

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ECONOMY OF CHOICE AND WHY

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FACTORS INFLUENCING ECONOMIC GROWTH

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MEASURES CHINA¶S GOVERNMENT CAN USE TO INCREASE ECONOMIC GROWT H 

DEMAND

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SUPPLY

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OTHER POLICIES

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BENEFITS AND COSTS OF ECONOMIC GROWTH TO CHINA

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COMPARISON BETWEEN ECONOMIC GROWT H AND ECONOMIC DEVELOPMENT

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T HEORIES OF GROWT H

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ECONOMIC GROWTH IN A LESSER DEVELOPED COUNTRY

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CONCLUSION

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BIBLIOGRAPHY

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Economic growth is the increase in the amount of goods and services produced by an economy over time. It is important because ultimately it raises our standard of living. However, there are consequences associated with economic growth. Governments and individuals gene rally use different standards to measure economic growth, however there are two ways in which one can define economic growth. WHAT IS ECONOMIC GROWTH?

ECONOMY OF CHOICE AND WHY

The country chosen to talk about µEconomic Growth¶ is China. The reason for this choice is that the economy of the People¶s Republic of China has been the fastest growing nation¶s economy for the last 25 years with a GDP growth rate of above 10%. With a GDP of $7.8 trillion for 2008 it was the second largest in the world when measured on a purchasing power parity (equality) basis. For the last few decades it has drastically reduced poverty but as with rapid growth there are some negatives, as income inequalities has risen. Also, the country¶s per capita income is in the lower middle by world standards according to the International Monetary Fund (IMF). The per capita income is a monetary term of how much an individual of the country would receive of the yearly income generated by the country. Thus, although their growth has been extremely remarkable, there are still problems within the economy to be dealt with. FACTORS INFLUENCING ECONOMIC GROWTH

Few other countries have been able to match the pace of China's sustained economic growth. With gross domestic product (GDP) increasing, on average, more than 10% since 1978, China has become a major player in the global economy. Investment Drives Growth

China¶s growth has been largely investment driven, with investment consuming roughly 40% of gross domestic product. Much of China¶s growth reflects a combination of increased capital investment in machinery, equipment, roads, buildings, and other infrastructure and increased productivity from more efficient uses of labour and capital. Productivity can be increased by improving the quality of the basic factors of production (for example, increasing the skill or education of labour), or by adopting more advanced technology. Foreign Trade

China¶s opening to foreign trade has also been a key to growth since the 1980s. Tariffs have been slashed, import and export licensing requirements have been dropped for many products, and most government trading monopolies have been eliminated. The most notable impact of China¶s opening to trade is the growth of its export share in many global markets, which has given it the nickname ³the world¶s workshop.´ Rapid economic growth is a major factor contributing to China's increasing importance as an agricultural export market. A significant slowdown in t hat growth would reduce China's demand for U.S. agricultural products, including soybeans, cotton, wheat, and corn. Even so, China will likely continue to be a major destination for U.S. agricultural exports.

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Labour

China¶s abundant supply of labour keeps Chinese wages low, making China highly competitive in labour-intensive industries. Labour-supply growth was particularly rapid during the 1980s, when China¶s labour force grew by around 14 million workers per year, an average of 3 percent. This reflected high birth rates during the 1960s to early 1970s, when China pursued a pro-natal policy. Challenges Facing the Chinese Economy

China has potential for continued rapid growth in the foreseeable future. However, the Chinese economy faces potentially unsustainable pressures, including possible currency appreciation, rising rural-urban inequality, unemployment, banking reforms, and an unusual combination of inflationary and deflationary tendencies that could slow China¶s Growth. The factors that have propelled growth over the past 30 years are still in place. China¶s economy is still a long way from ³mature´ status where growth rates tail off. Its per capita income in 2003 was still less than 3 percent of that in the United States in constant 2000 dollars. When adjustments are made for the unusually low prices in China, per capita income at purchasing power parity (PPP) is about 12 percent of the U.S. average 16%. Growth in the 7% to 8% range per year over the next decade would still leave China with a per capita income of less than 5% in 2000 dollars and less than 20 percent in PPP dollars than that expected for the United States in 2013.Thus, China will still have very low labour costs compared with other major countries. As long as China maintains an open attitude toward foreign investment and invests heavily in infrastructure and other capital, it will continue to grow rapidly.

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MEASURES CHINA¶S GOVERNMENT CAN USE TO INCREASE ECONOMIC GROWTH

For governments to increase economic growth, they may want to promote demand and supply. Government has to try to increase aggregate demand in order to ensure increased productivity and expenditure and aggregate supply to increase potential output. DEMAND What is Aggregate Demand?

Aggregate demand is the total demand for final goods and services in the economy at a given time and price level. It is the amount of goods and services in the economy that will be purchased at all possible price levels. This is the demand for the gross domestic product of a country when inventory levels are stationary. It is often called effective demand or abb reviated as 'AD' Aggregate demand is usually described as a linear sum of four separable demand sources: AD = C + I + G + NX {X ± M} Where    

C -- Consumption by private households on consumer goods (durable and non-durable) and services (rent, medical etc). I -- Investment by businesses. Investments are defined a s spending now in order to increase output later. This also includes consumer's purchase of new housing. G -- Government spending on goods and services. It includes salaries of government employee, defense expenditure and any investments by government. NX -- Net Exports measured as the difference of Imports (M) from Exports (X). Therefore, NX = X-M.

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Monetary policy is the process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy. Monetary policy is referred to as either being an expansionary policy, or a contractionary policy. Expansionary policy increases the total supply of money in the economy and is traditionally used to combat unemployment in a recession by lowering interest rates. Contractionary policy decreases the total money supply and involves raising interest rates in order to combat inflation. Monetary policy is contrasted with fiscal policy, which refers to government borrowing, spending and taxation. China¶s monthly domestic loan increases jumped by 5.6 percentage points in March 2009 and increased a whopping 29.78 per cent over March 2008. Even though this rate is impressive and much higher than the 15 per cent threshold of the ³neutral stance´, in the short-term this will unlikely trigger any inflationary threat. On the contrary, high growth rates of credit are needed to revive the economy and save it from deflation. Monetary Policy

Fiscal policy is used by governments to influence the level of aggregate demand in the economy, in an effort to achieve economic objectives of price stability, full employment and economic growth. The two main instruments of fiscal policy are government spending and taxation. China began to pursue a proactive or an expansionary fiscal policy in 1998 in a bid to address the impact of the 1997 Asian financial crisis on the domestic economy. It meant increased government spending to stimulate economic growth. A prudent fiscal policy is designed to avoid dramatic government intervention in the economy. The central government slashed its treasury bond-funded investment in infrastructure projects to 60 billion yuan (7.5 billion US dollars) in 2006 from 150 billion yuan in 1998. Fiscal Policy

Fiscal policy was invented by John Maynard Keynes in the 1930s.

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SUPPLY

Aggregate supply is the total supply of goods and services produced by a national economy during a specific time period. It is the total amount of goods and services in the economy available at all possible price levels. Government of China can increase aggregate supply by increasing potential output through research, development and training. What is Aggregate Supply?

OTHER POLICIES Qualitative enhancement

Various measures have been adopted to enhance the quality of education and research activities in China¶s higher education since the 1990¶s, especially the issue of Project 211 has significantly affected qualitative enhancement of China¶s higher e ducation. The Project 211 is often literally explained as the attempt by Central government to establish 100 key universities in China by the 21st century. However, in fact it covers more specific objectives. The major points concerning qualitative enhancement in the Project include three key decisions. 1. First, to finance Peking University and Tsinghua University intensively with the purpose of enabling the two universities to reach or approach a higher level in the world and become world-class institutions. 2. Second, to enhance the quality of 25 other leading universities through provision of additional public revenue. 3. Third, to make efforts to improve the quality of over 300 key disciplines in different institutions. Quantitative Growth

To achieve mass higher education has been another recent big challenge for China¶s higher education. In 1999 there was a rapid increase in the enrolment in higher education. In 2003, the gross enrolment of the age-cohort (18±22 years) reached 17%, indicating that China has entered the stage of mass higher education. Compared with many developed nations, enrolment in China is still much lower, but what is worth mentioning is that the total number of students in Chinese higher education institutions has already reached approximately 19 million and China has become the country with the largest number of students in higher education institutions, even surpassing the number in the United States.

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BENEFITS AND COSTS OF ECONOMIC GROWTH TO CHINA

In this paper some of the economic and social advantages and disadvantages from expanding levels of production and consumption is considered. Focus will also be on the idea of sustainable growth. Economies tend to grow in cycles. The peaks and troughs of the trade cycle on average have been on average 5 years apart. The trade cycle may look something like this:

BENEFITS OF ECONOMIC GROWTH

A healthy economy leads to higher living standards and greater prosperity for individuals. It also helps businesses to be profitable which generates employment and income. These are some of the benefits of growth highlighted below. Improvements in living standards ± Growth is an important avenue through which better

living standards and lower rates of poverty can be achieved. This is particularly true for China, who regards growth as a key route for poverty reduction among their population. Rapid growth in China has reduced the number of people living on less than $1 a day to 22% of the population in 2002. That compared with 32% in 1990 shows considerable progress in the fight against poverty. There is now also an in increase in the availability of luxury goods example televisions, fridges/freezers etc. Rising Employment ± Growth stimulates higher employment. Sustained growth in China h as

helped to bring about a large rise in employment, the number of people with jobs has risen. Potential Environmental Benefits ± China have more resources available to invest in cleaner

technologies. As the nation move to later stages of development, energy intensity levels start to fall. Much depends on how many resources an economy is willing to devote to environmental improvement and protection. Over the last thirty years, the ratio of energy consumption per unit of GDP has fallen quite significantly. The reduction in energy intensity is a reflection of improvements in production technologies and also a gradual switch towards a low carbon economy. Certain organisations sponsor research into low carbon technologies and many environmental groups believe that greater investment should be made in alternative sources of energy.

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The ³fiscal dividend´ to the government - Government finances are cyclical in nature

because a growing economy boosts the tax revenues flowing into the Treasury and it also provides the government with more money to finance spending projects.

COSTS OF ECONOMIC GROWTH

Economic growth also comes with risks. Although China¶s material progress can be measured in part by the growth of national output, income and spending, if the economy grows too quickly, it can bring about short and long-term problems. Inflation risks - There is the danger of demand-pull and cost-push inflation if demand grows

faster than long run productive potential high and rising inflation can be destabilizing for China because it puts pressure on interest rates to rise and can cause a loss of competitiveness for domestic businesses in international markets The environment - Economic growth cannot be separated from its environmental impact. Fast

growth of production and consumption can create negative externalities such as increased noise and air pollution and road congestion. Environmental damage can have a negative effect on our quality of life and limits our sustainable rate of growth. Inequalities of income and wealth - Not all of the benefits of growth are evenly distributed. We

can see a rise in real GDP but also growing income and wealth inequality in China which is reflected in an increase in relative poverty. Regional disparities: Although average living standards may be rising, the gap between rich

and poor can widen leading to an increase in relative poverty and a widening of the gap between different regions. Sustainability of Economic Growth Many of the China¶s most valuable finite resources are being extracted at such a rapid rate that it questions the long-term sustainability of growth. Renewable resources are also being depleted because of over-consumption. Examples include the destruction of rain forests, the over-

exploitation of fish stocks and loss of natural habitat created through the construction of new roads, hotels, retail malls and industrial estates. Some of the main environmental threats include: 

  

The depletion of global resource base and the impact of global warming. The permanent loss of what should be renewable resources that result from over-extraction of some of our environmental resources. A huge expansion of waste and pollution of the environment. Over-population (particularly in urban areas) putting pressure on scarce land and other resources. Species extinction leading to a loss of bio-diversity.

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COMPARISON BETWEEN ECONOMIC GROWTH AND ECONOMIC DEVELOPMENT Economic Growth is an increase in a country's real level of national output which can be

caused by an increase in the quality of resources by education etc, increase in the quantity of resources & improvements in technology. Economic Growth can be measured by an increase in a country's GDP. However this does not necessarily mean that development has occurred. Economic develo pment is the development of economic wealth of countries or regions for the

well-being of their inhabitants. It is the process by which a nation improves the economic, political, and social well being of its people. From a policy perspective, economic development can be defined as efforts that seek to improve the economic well-being and quality of life for a community by creating and/or retaining jobs and supporting or growing incomes and the tax base.

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THEORIES OF GROWTH

The circular flow of income is a simple model of the economy showing flows of goods and services and factors of production between firms and households. In the absence of government and international trade this simple model shows that households provide the factors of production for firms who produce goods and services. In return the factors of production receive factor payments, such as wages, which in turn are spent on the output of firms. This basic flow is shown in the diagram below. Measuring the Circular Flow of Income

In reality the households do not spend all their current income. Some is saved. This represents a leakage from the circular flow. In addition to the consumer spending, firms also carry out investment spending. This is an injection to the circular flow of income, as it does not originate from consumers' current income.

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ECONOMIC GROWTH IN A LESSER DEVELOPED COUNTRY

Guyana, previously known as British Guiana, is a state on the northern coast of South America. It is the only state of the Commonwealth of Nations on mainland South America and it is considered to be a lesser developed country. Some constraints in Guyana¶s economy are:    

Poor governance ± the country and weak, corrupt and badly governed. Poor education system - Education is the most important value in a society. When you talk about the problems of a country reason is always education. Unemployment due to lack of available jobs because of a low economic growth as well as poor education. Low import and export rates.

In order for Guyana to become a more developed economy, their government has to better the above constraints.

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CONCLUSION

Although China occupies a unique niche in the world's political economy--its vast population and large physical size alone mark it as a powerful global presence--it is still possible to look at the Chinese experience and draw some general lessons for other developing countries. Most important, while capital investment is crucial to growth, it becomes even more potent when accompanied by market-oriented reforms that introduce prof it incentives to rural enterprises and small private businesses. That combination can unleash a productivity boom that will propel aggregate growth. For countries with a large segment of the population underemployed in agriculture, the Chinese example may be particularly instructive. Finally, China's open-door policy has spurred foreign direct investment in the country, creating still more jobs and linking the Chinese economy with international markets. 1

According to reports, China will outperform Japan to become East Asia's largest trading country by the year 2020.

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BIBLIOGRAPHY BOOKS REFERENCED:

Beardshaw, J., 1992, with contributions by Andy Ross. Economics- A Student¶s Guide. 3rd edition. Griffiths, A. & Wall, S., 2007. Applied Economics. 11th ed. Jewell, B.R., 1996. An Integrated Approach to Business Studies. 3rd ed.

INTERNET REFERENCES:

http://www.chinatradeinvestment.com/index.html [cited 12 April 2009] http://www.ukinvest.gov.uk [cited 12 April 2009] http://www.ingrimayne.com/econ/optional/ISLM/Aggregate.html [cited 14 April 2009] http://news.bbc.co.uk/1/hi/business/7935778.stm [cited 14 April 2009] http://www.telegraph.co.uk/finance/globalbusiness/5111032/ Chinas-growth-more-Occidentthan-design [cited 17 April 2009] http://tutor2u.net/economics/revision-notes/a2-macro-economic-growth-costs-benefits.html [cited 17 April 2009] http://www.economics4development.com/index.htm [cited 09 April 2009 http://www.bized.co.uk/index.html [cited 09 April 2009] http://www.essortment.com/all/economicschina_rjns.htm [cited 17 April 2009]

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Economic Growth Assignment-completed

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