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China's Economy and its development

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Introduction

China's Economy and its development Development is a key point raised in the article and how this may burn out. The indicator that is commonly used throughout the article to assess the growth of China is GDP (Gross domestic product, which is the value of everything produced in the economy in a year including expenditure taxes). Growth usually increases a countries development. This is one of many ways of measuring economic development in a country. The figures show us that the economy of China has increased as China's GDP 'grew by 9% in the year (2003) to the third quarter.' This is showing a growth in the Chinese economy as the GDP has increased. Although there limitations of using the GDP as the sole indicator of development. The GDP does not take into account who the money is generated by and who it is distributed to as you may have the extreme rich and the extreme poor. ...read more.

Middle

Investment levels may also give an indication of the development of a country. High levels in investment are likely to result in development of an economy. The article says that investment in China is running at a 'scorching 32% higher than a year ago, accounting for 2/3rd's of GDP growth in the 3rd quarter. This is a large amount of investment and is mainly being made by foreign firms who believe that China's economy will flourish and produce abnormal returns. This idea follows with the economic theory of Harrod and Domar who were economists in the 1930's. This theory stated that investment, savings and technological change were key variables in growth. This is what has happened in China as investment has been made to bring about technological change, i.e. from manufacturing by hand to by machine. The increase investment, according to Howard and Domar's theory, shifts out the production possibility frontier (PPF), as seen below. ...read more.

Conclusion

The increase in investment (40% of GDP in 2002) will increase the aggregate demand in the Chinese economy and sets off the multiplier effect. This is an injection into the economy and the circular flow of income. The article also says that there are 'growing signs of overinvestment in sectors such as cars, construction and coastal properties.' Overcapacity may push down profits and profits are taxed which will reduce the tax revenue available to the government and may slow down the development of China due to the lack of funds to spend on education, healthcare etc... which are a large part of development. The article refers to this as overheating which usually implies excess demand. This excess demand (according to the theory of supply and demand) leads to shortages and higher inflation. Economists believe that the economy will keep steaming for the moment but one day the investment boom may turn to bust. Article reference: (15th November 2003), China's economy. Steaming, The Economist, p93/94. Word count: 747 words IB economics Portfolio (unit 3), 05/05/2007 Louis Redman - 1 - ...read more.

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