China's GDP Growth and Development - Coursework Example

[your teacher’s of the I. Introduction This paper aims to analyze China’s GDP structure and the causes for its robust economic growth over the years. As the government prompts a shift in the economic model by various market-oriented reforms, the effect of these reforms both on the aggregate demand and aggregate supply of the economy is explored in order to see their effect on the country’s output or GDP. By determining the individual components of aggregate demand and aggregate supply and the economic variables that the government aims to influence with these economic policies, the robust growth of China is better understood. II. Body A. China’s GDP structure before the productivity growth The unprecedented economic growth of China after its government has adopted a more lenient economic model after the fall of the Communist party in the country is influenced by many economic factors, triggered mostly by economic reforms. Prior to this, China’s GDP structure as a communist country is a centrally-planned economy where the output production is limited by the government. China’s GDP structure can be analyzed by probing at the aggregate demand and aggregate supply of the country. Before the productivity growth and market-oriented reforms within the country, the aggregate demand of China is centrally-planned, matching the aggregate supply in the economy which is also planned by the Chinese government. With this, the GDP, or national output as well as the price level are determined. Before China opens up its economy, the national output in the country as like any command economy, is restricted according to what the government plans it to be. B. Incentives for capital accumulation and investment, and China’s GDP An economy’s output is determined by the interaction of the aggregate demand and the aggregate supply in the country. On one hand, a country’s aggregate demand in a capitalist economy is comprised of four functions: consumption, investment, government spending and net export. Knowing these components of aggregate demand will help us analyze the causes for the robust economic growth of China over the years. According to Zuliu Hu and Mohsin S. Khan in their article in the International Monetary Fund’s Economic Issues, "The reforms raised economic efficiency by introducing profit incentives to rural collective enterprises (which are owned by local government but are guided by market principles), family farms, small private businesses, and foreign investors and traders. They also freed many enterprises from constant intervention by state authorities. As a result, between 1978 and 1992, the output of state-owned enterprises declined from 56 percent of national output to 40 percent, while the share of collective enterprises rose from 42 to 50 percent and that of private businesses and joint ventures rose from 2 to 10 percent. The profit incentives appear to have had a further positive effect in the private capital market, as factory owners and small producers eager to increase profits (they could keep more of them) devoted more and more of their firms own revenues to improving business performance (Hu & Khan, 1997, p.8)." As the government gives private enterprises incentives to accumulate capital by profit incentives, and then encouraging them to stimulate the local investments in rural areas, the aggregate demand is increased. When one of the functions of the aggregate demand, such as investment is increased in the economy, with the Chinese government adopting a capitalist model, the aggregate demand will be increased by a certain multiplier. In a capitalist model of an economy where consumption is no longer planned centrally by the government, increase in capital investments will push the aggregate demand not only linearly, but multiplied by that certain multiplier in the economy. As capital investments grow and more businesses are formed, more jobs are created in the market. Because small enterprises are given incentive to accumulate profits and reinvest them, local economies in the rural areas are also thriving. Thus, these incentives to accumulate and increase capital investments are one of the causes for the robust growth in the economy. This increase in capital investments, as it has an effect in the country’s technological infrastructure has also affected the aggregate supply. As better technology becomes available, the aggregate supply is pushed outward toward the economy’s potential output. C. Market-oriented reforms and China’s GDP When the Chinese government liberalized trade in the country, this is represented by certain reforms. Among these reforms include price deregulation in some industries, more deregulated human resource policies for businesses, and retention of portions of the firm’s earnings for reinvestment, as discussed by Hu and Khan: “Further, the post-1978 reforms granted greater autonomy to enterprise managers. They became more free to set their own production goals, sell some products in the private market at competitive prices, grant bonuses to good workers and fire bad ones, and retain some portion of the firm’s earnings for future investment. The reforms also gave greater room for private ownership of production, and these privately held businesses created jobs, developed much-wanted consumer products, earned important hard currency through foreign trade, paid state taxes, and gave the national economy a flexibility and resiliency that it did not have before (Hu & Khan 1997, 9).” These market-oriented reforms have impacted the functions both of investment and consumption within the economy. As more jobs are being created with these smaller enterprises, the purchasing power of the people become higher in more productive activities such as manufacturing than in agriculture. With the increase in businesses, more products that cater to the needs of the consumers are produced. This has an effect on the consumption function, which has then an effect on the aggregate demand. Reforms also include more lenient provisions for export. The growth in export has contributed to the increase in aggregate demand, thus has an effect in the increase in the GDP of the economy. But, like the other functions that comprise aggregate demand, increase in export does not increase the output linearly—the output within the economy is increased by the amount of export and the multiplier within China’s economic model. This is also one of the contributors to China’s economic growth over the years. “In addition, economic liberalization has boosted exports—which rose 19 percent a year during 1981–94. Strong export growth, in turn, appears to have fueled productivity growth in domestic industries (Hu & Khan 1997, 9).” D. Open-door policy/Foreign direct investment and China’s GDP As the government encourages private enterprises to accumulate and increase capital investments within the economy, the output within the economy increased. Apart from this, as the government has adopted an open-door policy that encourages foreign direct investment in the country, this substantial increase in the investment function further propels the growth of output in the economy. “By welcoming foreign investment, China’s open-door policy has added power to the economic transformation. Cumulative foreign direct investment, negligible before 1978, reached nearly US$100 billion in 1994; annual inflows increased from less than 1 percent of total fixed investment in 1979 to 18 percent in 1994. This foreign money has built factories, created jobs, linked China to international markets, and led to important transfers of technology (Hu & Khan 1997, 9).” The government’s policy to encourage foreign direct investment in China affects both the aggregate demand and the aggregate supply in the economy. The increase in investment function increases the aggregate demand, at the same time, the transfer of technology from entities that enter China along with their businesses increase the technological capability in the economy which has an impact on aggregate supply. III. Conclusion As China adopts a more lenient economic model, the interaction of the aggregate demand and aggregate supply now determines the level of output that is produced within the country. Understanding this interaction, as well as knowing the factors that influence them, provides insights as regards China’s economic growth over the years. The aggregate demand of China has experienced a rapid increase as more economic reforms have been enacted by the government over the years. These economic reforms have impacted the consumption, investment and net export functions of aggregate demand of the economy. Encouragement of foreign direct investments also propelled the country’s economic growth as more capital investments are poured in China’s economy. Apart from it, the transfer of technology brought by these entities has an effect on the technological capability within the economy which has an impact on the aggregate supply. The liberalization of trade also has an effect on costs due to price deregulations in some industry. China’s robust growth over the years is rooted from these economic reforms. By influencing the variables that stimulate the economy, the government has been able to promote an aggressive growth in the country’s economy over the course of the years. Works Cited Hu, Zuliu & Mohsin S. Khan. “Why Is China Growing So Fast?” IMF Economic Issues. June 1997. 10 February 2009. Other References Appleyard, Field, & Cobb. International Economics (5th ed.). McGraw-Hill Irwin: 2006. Brenner, Reuven. “The Causes of Economic Growth” CATO Policy Report. Vol. XX No. 3. May/June 1998. 10 February 2009. Morrison, Wane M. “China’s Economic Condition” CRS Issue Brief for Congress. 12 January 2006. 10 February 2009. < http://www.fas.org/sgp/crs/row/IB98014.pdf> Read More