Macroeconomic Analysis of China: GDP, Inflation, and Exchange Rates

This report provides a comprehensive macroeconomic analysis of China's economy. It begins by addressing the fundamental economic questions of what, how, and for whom China produces, highlighting the significance of its agricultural and industrial sectors, as well as its role in international trade. The report then delves into China's fiscal and monetary policies, examining the government's role in healthcare, education, and economic stimulus, and discusses the trend of government budget. The analysis extends to GDP trends, comparing China's growth with the United States and Japan, and exploring the business cycle phases. Additionally, the report examines inflation and exchange rate dynamics, providing a holistic view of China's macroeconomic landscape and performance. The report draws upon various sources to support its analysis.

Running head: MACROECONOMICS
Macroeconomics
Name of the Student
Name of the University
Author note

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Table of Contents
Introduction................................................................................................................. 2
What, how and for whom............................................................................................2
Self interest, Social interest or both.............................................................................4
Gross Domestic product and business cycle..............................................................7
Comparison of GDP growth.....................................................................................8
Price Level or Inflation in China.................................................................................11
Exchange rate and Currency analysis.......................................................................13
Conclusion................................................................................................................ 14
References................................................................................................................15

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Introduction
China is listed as one of the fastest growing Asian nations. In the last few
decades, the economy has recorded unprecedented growth rate and catch up with
many developed nations. The paper analyses macroeconomic perspective of China.
The three basic questions of economy – what to produce, how to produce and for
whom to produce are evaluated in context of this country. The next aspect
considered is the fiscal and monetary policy adapted by the government to stimulate
the economy. When discussing government policies, the status of government
budget is an important thing to be considered. In order to assess the economic
performance of nation, the historic trend of GDP is considered and compare with two
of its contemporary nations. Apart from GDP, inflation and exchange rate trends are
explored.
What, how and for whom
As far as agricultural product is concerned, China stands first in the
production of farm output. Despite having only 10 percent arable land the country
supplies 20 percent of food for world population. Agricultural industry is one of the
vital industries of China. The primary agricultural products are rice, potatoes, tea,
millet, cotton, wheat, sorghum, soybeans and oilseed. After agriculture the next vital
sector of the country is industry. Industrial output in China includes manufacturing,
mining, power and construction. China holds a leading position in manufacture of
fertilizer, steel and cement. Other industries include machinery, food processing,
petroleum, cement and automobile, transportation equipments, consumer products
such as toys, footwear and electronic and information technology.

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Foreign trade has significant contribution in China’s economic growth. It is
often called workshop of the world. A considerable portion of nation’s export is
manufacturing products and includes DVD players, toys, textile, shoes, sea food,
electronic equipment, body jewellery, food products, kitchen wares and others
(rgs.org, 2017). The export trend has now shifted to production or assembly of
cameras, television, refrigerators, air conditioners and washing machines. China is
one of largest producers of chemicals and primary products. Half of the world’s flat
grass and cements are produced in China and one third of the aluminium products
produced in China. China has made significant progress in car and truck
manufacturing and has left Japan behind.
China holds the status of a developing nation and a labour abundant
economy. The shortage of arable land makes agricultural production mainly labour
intensive. China primarily enjoys the advantages of a low cost labour supply.
However, agricultural productivity is enhanced with application of imported
technology. The labour productivity in China is highest in the world. The advantages
of labour cost raise China at the status of a middle income nation. However, China
has currently faced the problem of rising wage cost as the surplus labour exhausted
in rapidly expanding industries and migration of rural labours to the urban centres.
Therefore, China has recently made capital investment to raise capital output ratio
(imf.org, 2017). The capital investment has contributed to recent rapid growth of
China.
As like export, China imports various goods. The major imported goods in
China are electrical and machinery, medical and optical equipment, motor vehicles,
oil and metal fuels and metal ores. From nation in European Union China imports
goods and service worth about 200 billion euro. Transport and machinery equipment

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are most important in the group of imported goods, imported mainly from Germany.
Road vehicles mainly trucks and cars have significant share in imported transport
equipment group. The manufacturing sector in China is dependent on imported raw
materials and mineral fuels. The main exporter of, manufacturing raw material is
Netherland.
In the theory of trade a country has absolute advantage when it can produce
more goods and services than some other goods in absolute terms. The advantage
here is in absolute cost. Comparative advantage on the other hand is defined in
terms of lower opportunity cost. China enjoys a comparative advantage over most
other nations in terms of its cheap labour (Dai, Maitra& Yu, 2016). China can
produce a simple consumer good with a lower opportunity cost because of a low
wage. The cheap labour in China also provides it an absolute advantage in
production of labour intensive manufactured goods.
Self interest, Social interest or both
China is long since is considered as a socialist country where a pre
dominated role is played by government. Government here provides a range of
services. Private and public expenses together constitute total healthcare
expenditure in China. Expenditure on public health care makes up half of the medical
cost. Government in China has put forward significant effort in provide primary
healthcare services at an affordable price. Chinese government has undertaken a
program named ‘Healthy China 2020’ aiming at reducing cost of medical service and
providing insurance coverage of 70% cost in 2017. Government has taken some
major steps to provide an improvised health and education service to children. The
2014-2020 development plans is designed to achieve a development in the same

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level with 680 developed nations. The planning authority aims at reducing maternal
morality and infant mortality rate (Yu, 2015). Initiatives have been taken to diagnosis
the birth defect and prevent and offer facilities of pre-gestational test for free of cost.
Since 1998, in order to counter Asian financial crisis China had adapted
expansionary fiscal policy. The stimulatory fiscal policy aims at expanding domestic
demand and stimulates economic growth. From the second half of 2003, domestic
economy though recovered from economic downturn but shifted to a new round of
fiscal stimulus. A quick accumulation of fiscal risk was realized. The fiscal policy has
shifted from fiscal expansion to a neutral fiscal policy. It prevents inflation symptoms
while also counter deflationary pressure.It prevents excessive investment growth and
maintains a steady consumption growth at the same time. It restricts growth of
overheated sectors with extending support towards weak economic sector and
promotes social development. The current state of the nation demands replacement
of earlier proactive fiscal policy with a prudent one. The main objective of the fiscal
policy here is to check fiscal deficit, adjust budget structure, promotes necessary
reforms, cut unnecessary expenditure and increases revenue. To attain these
objectives taxes are imposed with strict enforcement of laws and government funds
are channelized with efficacy.
The monetary policy in China focuses on attaining a stable value of its
currency and fosters economic growth. The People’s Bank of China does not design
monetary policy in accordance to traditional monetarism with only objective of
controlling inflation and expands employment but it also makes intervention using
tool of interest to restrict or expand lending in certain sectors. China’s central bank
has recently adapted tight monetary policy with increasing the interest rate charged
in the open market operation and on funds transacted through Standing Lending

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Facility (Fernald, Spiegel & Swanson, 2014). The objective is to reduce upward
pressure on asset price and hence control inflation. Same as the fiscal policy the
central bank employs a prudent or neutral monetary policy and maintains a stead
liquidity flow in the economy.
Figure 1: Trend of government budget in China
(Source: tradingeconomics.com, 2017)
In 2016, China has accounted a deficit budget equal to 3.80 percent of nation’s
Gross Domestic Product. China records an average budget deficit of -2.03 percent of
GDP in between 1988 and 2016. The all time highest budget is observed in 2006
with budget being 0.58 percent of GDP. The lowest is recorded in 2016 where deficit
has reached to -3.80 percent of GDP. The expansionary policies undertaken by the
government to recover financial crisis and bring explosive growth ended up with a
high budget deficit. To address this issue government has now shifted its attention
from a proactive policy to a prudent or neutral policy.

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Gross Domestic product and business cycle
Gross domestic product of nation measures the monetary values of produced
goods and services within the nation in a particular year. The fluctuation in the trend
GDP is explained with phases of business cycle. The four phases of business cycle
are prosperity, recession, depression and recovery.
Figure 2: Gross Domestic Product in China
(Source: tradingeconomics.com, 2017)
The Gross Domestic Product in China has shown an upward trend in the last ten
years. In 2016, Gross Domestic product in China has worth of 11199.15 billion US
dollar. In the world economy, the GDP of China constitutes nearly 18.06 percent.
The Average GDP in China is accounted as 1790.50 billion USD between 1960 and
2016. An all-time highest GDP is recorded in 2016 Worthing11199.15 billion. The
lowest GDP is accounted in 1962 with GDP being 47.21 billion US dollar.
In order to make rapid expansion of production and achieve exponential grow rate
China has made significant investment in research and development. In today’s
world technological knowledge and its application has become increasingly

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important. Now, China has appeared as a powerhouse of science and technology.
Currently, it is the second largest performers in fields of research and development.
Industries in China are extensively using technological and scientific knowledge. In
the last thirty years, China has sustained a double-digit growth rate. The sharp
increase in the human capital investment has significant contribution in achieving a
stable growth rate. The human capital involve improvement in schooling, health
services to enhance skills of its labour force. 2.5% of China’s GDP has been spent
on schooling. In addition to human capital investment, China has also given focus on
investing in physical capital. For physical capital -investment China spends 30% of
the GDP. The steps taken for increases production possibilities of the nation
successfully bring improvement in the production structure and output and make
China competitive in the world market.
Comparison of GDP growth
China and United State
After the global financial crisis, majority of people in America believe that China has
grown to become worlds’ leading economy. The Gross domestic Product in US in
2009 was $15 trillion while that in China was $5 trillion, despite of having population
size four times larger than United State. The per capita income in US was $48,000
while that in China was even less than $4,000. The gaps narrowed from 2010. With
a rapid growth rate,China is quickly catching up with America.

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Figure 3: GDP growth rate comparison of China and United States
(Source:worldbank.org, 2017)
In 2016, the recorded GDP in China is 11199.15 billion US while in United States
GDP was recorded as 18569.1 billion USD. However, in absolute term GDP in US
though larger than that of China, in terms of growth China is far ahead of United
States.
China and Japan
There are numerous similarities between economies of China and GDP.
Recently China has overtaken Japan in terms of Gross Domestic Product and taken
the place of Japan to become the second largest economy in the world.

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Figure 4: GDP growth comparison between China and Japan
(Source: worldbank.org, 2017)
China and Japan are two largest economies of Asia. The growth trend shows china
has a relatively large growth rate as compared to Japan. In 2013, Japan’s economy
expands as an annual rate of 0.7 percent in contrast Chinese expansion at a rate of
7.7 percent. However, the growth picture is changed when viewed from perspective
of per capita GDP.
In reference to phases of business cycle, Chinese economy has hit a boom in
2011 and passes through the phase of recovery in 2012. After the collapse Lemon
Brothers in 2008, the economic growth in China has slowed down mainly because of
a rapid decline in export. To recover the economy from the initial crisis government
has considered monetary and fiscal expansion and achieved a rapid expansion with

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a double-digit growth rate of 11.1% (Guo, Liu & Zhao, 2015).This marks an recovery
of the economy.
Price Level or Inflation in China
The official currency of People’s Republic of China is renminbi. The basis unit
of Renminbi is yuan. In the international market Chinese currency is more commonly
known as Chinese yuan. The monetary authority and people bank of China issue
Renmibi. Until 2005, China’s currency was pegged as against US dollar. The
devaluation of Renminbi was encouraged since shift of the economy’s structure from
a centrally planned economy to a market oriented one. With increasing participation
in foreign trade, currency needs to be devaluated to promote export growth. The
official report shows a currency of China has undervalued by 37.5% against the
purchasing power parity (Zhang, 2013).
The rate of inflation describes a gradual upsurge in general price level for
common goods and services.