Chinese Economic Expansion and Business Cycle

This assignment examines China's recent economic expansion and its positioning within the business cycle. It analyzes key macroeconomic indicators such as GDP growth, unemployment rate, inflation, and interest rates. The analysis highlights the factors driving this expansion, including increased consumption and investment, while considering the impact of global trade and government debt.

Running head: ECONOMICS ASSIGNMENT
ECONOMICS ASSIGNMENT
Name of Student:
Name of University:
Author Note:

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TABLE OF CONTENT
PART-1: MICROECONOMICS.....................................................................................................2
PART-B: MACROECONOMICS...................................................................................................9
REFERENCE................................................................................................................................13

2ECONOMICS ASSIGNMENT
PART-1: MICROECONOMICS
1.a)
.
(Source: Author)
PRICE OF TV($) QUANTITY
DEMANDED/MONTH
QUANTITY
SUPPLIED/MONTH
200 1000 2500
180 1200 2200
160 1400 1900
140 1600 1600
120 1800 1300
100 2000 1000

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From the given information about the price level of TVs and quantity demanded and supplied per
month at each price level the demand and supply curve are derived after plotting the information.
It can be seen that the equilibrium price is at $140 and equilibrium quantity is at 1600 unit in the
market for television.
Figure 1: TV Market (Source: Author)

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b)
(Source: Author)
Television is normal good, which implies that for increase in income the quantity demanded
would increase and fall for decrease in income. Since income has increased and as a result at
each price level, 500 units of TVs are being sold in addition to the previous quantity. This
indicates as rightward shift in the demand curve. Increase in income is considered one factor of
demand that leads to shift in the curve. After plotting the new shifted demand, we find that the
equilibrium price is at $160 and equilibrium quantity is at 1900 unit. From the analysis, it can be
said that for increase in demand with supply remaining at previous level, the suppliers face more
demand. This encourages more production and as result equilibrium quantity increases. Since
PRICE OF
TV($)
QUANTITY
DEMANDED/MONTH
NEW QUANTITY
DEMANDED/MONTH
QUANTITY
SUPPLIED/MONTH
200 1000 1500 2500
180 1200 1700 2200
160 1400 1900 1900
140 1600 2100 1600
120 1800 2300 1300
100 2000 2500 1000

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demand increases more than the provision of increased supply the market equilibrium price
increases. The reason behind such is that consumers face competition, those who have higher
willingness to pay achieve the goods, and this let the suppliers charge higher price.
Figure 2: TV Market (Source: Author)

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D
D1
S
S1
E
E1
P
Q
2.
Banana is a normal good. If price of it goes up then demand falls and if price falls then demand
increases. From the supply side, as price rises, more sellers would be interested to supply due to
the higher price and reduce the supply if price falls (Sherman 2014). Income of the consumers is
assumed to be constant here. Now if income goes up the consumers derives ability of purchasing
more units at same price level. This creates a shift in market demand. More sellers enter the
market, which implies more bananas are now available. We can see three possible cases now
with regards to equilibrium quantity and price in the market for banana.
CASE-1:
Figure 3: Market for Banana (Source:Author)

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D
D1
S
S1
E
E1
P
Q
The demand curve in the banana market is downward sloping and supply curve is upward
sloping. The equilibrium is attained at point E. Now in the market supply increases due to more
sellers enter the market for banana. This shifts the supply curve rightward. The demand is not at
previous level but also increases due to increase in their income. Now what happens to the
equilibrium price and quantity depend upon the quantum of the shift in demand and supply. If
both demand and supply increases by same amount as in this case, then equilibrium price would
remain same but quantity would rise.
CASE-2:
Figure 4 Market for Banana (Source:Author)

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D
D1
S
S1
E E1
P
Q
Demand for banana rises due to increase in income. Supply rises due to the presence of more
sellers of banana. If supply rises less than the increase in demand then the equilibrium quantity
will rise substantially and the equilibrium price would rise too in this case. The reason behind
this is again availability of more demand made by the consumer compared to the supply in the
market. This leads to charging higher price amidst the competitive consumer demand
Case-3:
It might happen that supply increases more than demand in the market. In presence of more
banana and less demand made by the consumers, there is the possibility that bananas remain
unsold. This would lead to charge lower price by the sellers. Even though the equilibrium
quantity would rise in the market, the equilibrium price would fall. The sellers would want clear
the stock by charging lower price so that consumers buy more of it at that low price.
Figure 5: Market for Banana (Source:Author)

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PART-B: MACROECONOMICS
a)
From the above sources overview of macroeconomic indicators like unemployment rate,
inflation rate, export and business confidence are portrayed based on the macroeconomic data.
Other essential indicators of Chinese economy are growth rate of GDP, interest rate, balance of
trade, exchange rate and so on. Following the graph based on 2005-06 data, t can be seen that the
unemployment rate remains constant and stable at 4.2% from January, 2005 till July 2006
(Gabisch and Lorenz 2013) At this point the unemployment rate declined continuously and
reached 4.1%. Though the amount of fall is not that great in extent but it definitely depicts a
recovery from the halted rate of unemployment for over a year. After stagnation the fall in the
unemployment rate implies to recovery stage of the nation in terms of business cycle.
The export data of China shows an upward trend in the export from January 2005 to January,
2007. Though there are fluctuations but the overall trend shows smooth upward trend. Between
Jan-06 to Jul-06 there can be seen presence of structural break in the export of the nation
(Gabisch and Lorenz 2013). This might stem form the collapse of US capital market due to
closing down of Lehman brothers that affected entire global economy with direct and higher
impact on the nations directly linked with US (Bodie 2013). China is one of the largest exporter
to US market and recession of US hit China’s economy very hard that is evident in the fall of the
export demand. Less exports implies less income received. This impacts the overall GDP of the
nation too.

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Analyzing the data on inflation rate, it can be said enough fluctuation existed between
tJan-05 to Jan-07. Initially it rises then steeply falls until the end of the year 2005. From the
beginning of the 2006, the inflation rate captures upward trend and follows s cyclical pattern till
the end of the period in graph (Fidrmuc, Korhonen and Bátorová 2012). This indicates a
recession followed by recovery in the economic activity as reflected in the price in terms of
business cycle analysis.
From the data business confidence graph of China has been drawn which clearly depicts
the negative sign of the economic situation of the country. The confidence fell till last quarter of
2005 but captured drastic upward trend from the advent of 2006. This also reinstates the fact that
China has been facing a recovery stage of business cycle in 2006.
b)
Components of aggregate demand of a nation consist of consumption, investment, expenditure of
government and net export. From the sources provided clearly the unemployment rate falls,
inflation rate shows a fluctuation, export rises and business confidence rises after facing a
downfall. Interpreting all of these would imply that GDP of the nation was rising as falling
employment means more employment or creation of job that further reflects into more GDP
backed by increased consumption and expenditure (Harvi and Van Hoa 2016). Falling inflation
rate imp-lies contarctionary monetary policy, which can further reinstate that government
incurring less expenditures and keeping interest high to control money supply in the market. In
contrast to that, increase in inflation rate implies expansionary monetary policy channelized
through less interest rate. This situation also faces positive business confidence in China. The
more is the business confidence the greater is the investment expenditure incurred by the external

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financial institutions as well as national government. Increase in export also implies increase in
GDP stemming from increased local as well as international demand for Chinese goods and
services. These facts coupled with the condition of the economic recovery paves path for the
expansion of the economy in 2006. The Chinese economy can be expected to see rise in GDP
and overall aggregate demand that would lead to expanded growth.
c) As per the economic theory, business cycle has four evident phases. Expansion, Boom,
Recession and Recovery. The Chinese economy being second largest in terms of nominal GDP
faced much of the difficulties since the Asian Financial crisis and Greta Financial Crisis
(Kollmann 2013). The country is largely linked to the world market through huge amount of
trade. The recent figures of major macroeconomic indicators are discussed below:
The GDP growth rate of the nation is recorded to be at 1.7% compared to 1.3% previously. This
implies increase in the economic activity (Kose, Otrok and Prasad 2012) . Unemployment rate
has fallen to 3.95% from 3.975. It shows very less fall, which indicates limitation of the
expansion of the economy in recent year. Inflation rate has risen to 1.8% from 1,4% from
previous year. This also clearly indicates expansion of the economy in recent years that is
reflected in the higher price level of the country. Rate of interest has managed to remain same at
4.35%. The balance of trade has fallen to 420 USD HML from 467 USD HML (Galí 2015). This
implies increase in import demand over export supply of the nation which has fallen recently.
Moreover debt of the Chinese government has increased from 42.6% to 46.2% of the GDP. The
currency rate of Yuan is also stable at previous level. These facts gives a combined picture of the
Chinese economy which is lying on the expansion stage of the business cycle. This can be
concluded from the fact that there has been growth in GDP through growing exports, imports,
consumption. The business confidence increases to 51.7% from 51.4% reflecting slightest yet

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significant increase that allows more investment in the country. Growing GDP, price level,
falling unemployment, increasing consumption, investment are the sign of expansionary stage of
the economy in the business cycle hence China is rightly in this stage recently.
REFERENCE
Bodie, Z., 2013. Investments. McGraw-Hill.
Fidrmuc, J., Korhonen, I. and Bátorová, I., 2012. China in the world economy: Dynamic
correlation analysis of business cycles. CESifo Economic Studies, 59(2), pp.392-411.
Gabisch, G. and Lorenz, H.W., 2013. Business cycle theory: a survey of methods and concepts.
Springer Science & Business Media.
Galí, J., 2015. Monetary policy, inflation, and the business cycle: an introduction to the new
Keynesian framework and its applications. Princeton University Press.
Harvie, C. and Van Hoa, T., 2016. The causes and impact of the Asian financial crisis. Springer.
Kollmann, R., 2013. Global banks, financial shocks, and international business cycles: Evidence
from an estimated model. Journal of Money, Credit and Banking, 45(s2), pp.159-195.
Kose, M.A., Otrok, C. and Prasad, E., 2012. Global business cycles: convergence or
decoupling?. International Economic Review, 53(2), pp.511-538.
Sherman, H.J., 2014. The business cycle: growth and crisis under capitalism. Princeton
University Press.