China Economic Essay

Economic Essay

Since the reform and opening-up policy released in 1978, great changes have taken place in China. China has been the second largest economy in the world, and is one of the permanent UNSC members. But many social problems have turned up, which makes us rethink if we keep pursuing high GDP growth whether we can provide a good environment for our next generation. This essay will explain the economic growth concept, the limitation of GDP and why Chinese growth has more costs and cannot be sustainable in the future.

The circular of flow of income is a model of three measurements of the economy, which are national output, national expenditure and national income. (Anderton, 2008, p.135) Firms provide goods and services to every household, and then the value of them is counted into national output. People pay money to firms for buying these, which is added to national expenditure. Meanwhile, national income is made up of rent, wages, interest and profit and so on when firms pay money to households in exchange for land, labor and capital. People save money in banks, and then they lend this money to firms as investment. The government also levies tax from households and spends it in public goods and merit goods. China exports goods and services to foreign countries and imports them from foreign countries. Savings, tax and imports compose the leakage, while lending, spending and exports mean the injection of expenditure. When the injection is bigger than leakage, the economy is growing, in other words, there is an economic growth.

China’s main contributor of economic growth is export. Because of our low value added products, cheap labor costs and cheap raw materials, products made in China are always cheaper than goods of the same quality from other countries. For example, products like clothes produced in the labor intensive areas in the east of China are sold at very low price.

Aggregate demand is defined as the total demands or expenditures on domestically-produced all goods and services in the economy. (Anderton, 2008, p.161) So the aggregate demand is equal to national income, national output and national expenditure. GDP measures the value of all goods and services produced in a country with a period. AD=C+G+I+X-M The increase in export will make the aggregate demand move outwards, so the price level decreases and national incomes increase.

Economic growth is the rate of increase of output, including potential growth and actual growth. (Anderton, 2008, p.185) Potential growth is the increase in what the economy can produce, while the actual growth is defined as the increase in what the economy is producing. There are four phases in the business cycle in the actual growth: peak, recession, depression and expansion. China’s potential growth is going upward and its averaging actual growth rate is around 10% at its peak.

Since the policy of reforms and opening-up in 1978, China has changed its command market to mixed economic systems. It means the government gives much freedom to firms with occasional intervention. The government gives newly developed businesses financial aids, so they invest more money into research and development. Great investment has been put in building transportation system, which makes it possible to deliver articles and travel around in a shorter time and improves the efficiency. With the development of Internet and mobile phone, people can make contact with each other in different places and find important information very soon. The government spends more money on education and makes nine-year compulsory education free of charge, which increases the literacy rate and more and more people are highly educated. Those who have received good education can do more technical jobs, which helps the development of technology. On the other hand, China encourages foreign companies to develop in China and takes their advanced advice positively. Also China introduces new and advanced technology and learn established business model from developed countries. Because of the widely use of high productive capital, the level of production has grown up fast and the efficiency has improved a lot.

It is certain that there are both benefits and costs of economic growth. As has been pointed out in the overview, the 10 percent a year of growth rate does lift more than 500 million people out of poverty. Absolute poverty which refers to people that cannot even pay their daily expenses will be provided benefits by the government, out of the terrible situation and their standard of living will also improved.

Also, people who cannot find jobs before can have more opportunities to set up a business or get benefits from the government spending.

The boom in economy will bring confidence to investors so that they will invest more money in research, development and better technology and buy new machines to be more competitive. People will be attracted by the products and buy them, and then the consumption will rise. The firms are more profitable so that they will consider expanding their assembly line and increasing their market share. The newly developed technology means more patents and intellectual property, and our economy will become more technology intensive. This means the costs are lower and the PPT curve moves inwards as the diagram d shows. As the diagram e indicates, AS curve moves outwards and GDP increases. Our brands will establish its position in the world and we don’t have to rely on foreign countries. Take hybrid rice for example, Yuan Longping created this new technology and address the problem of 13 billion Chinese people’s meals and makes us less rely on importing foreign food.

(d)

On the other hand, since people will get more incomes, the government can take more tax from people’s consumption and spends them in providing merit goods. These merit goods include infrastructure, education, environmental protection, defense, pension and so on. The environmental protection consists of air pollution, water pollution, the supervision of PM 2.5, so the government will grow more trees and build more public gardens. The infrastructure contains bus station, public bicycle, maintenance of railways, airports, etc. With well-organized transportation, it is more convenient for residents to go to anywhere else quickly. Defense refers to the military forces used to protect our country, given that some Asian countries have conflicts on land with China. Pension is paid to the old people who have retired or disabled, considering China has more and more aged people. Better education will let young adults have a good command of