Introduction
The word economy can be defined as activities related to the production and distribution of goods and services in a particular geographic region. An economy can mean the economy of a city (local economy), a country (national economy) or the world as a whole (international economy), provided that it is involved in the production of goods and services. There are three main sectors of economic activity in an economy, they are as follows:
. The primary sector- This includes activities directly related to natural resources, e.g. farming, oil extraction etc.
2. The secondary sector- This includes the transformation of raw materials into goods e.g. manufacturing steel into cars, or textiles into clothing.
3. The tertiary sector- This includes all the public and private sector services e.g. Private sector- distribution, insurance, banking and finance and Public sector- health and defense.
Metaphorically speaking, let's assume that the economy is a giant cake, we all have a slice of the cake to eat, and may or may not be happy with the size of our slice. If the economy grows, we would be able to see the overall size of the cake increasing. Depending on if our individual slice grows, we would be able to share in the growing economy. Even if we are not benefiting directly, we should still be able to see some advantages to the growing economy. The reason for this is because the extra economic growth should produce higher tax revenues, which can in turn, be spent on public services that should benefit everyone.
Economic Growth
Economic growth is the increase in value of the goods and services produced by an economy. The principal causes of economic growth are
*?Increase in a country's productive capacity, as measured by comparing gross national product (GNP) in a year with the GNP in the previous year. ??????????????????
*?Increase in the capital stock advances in technology, and improvement in the quality and level of literacy.
In order for businesses to grow and prosper, economic growth is important. It relates to growth in the size and quality of the economy as a whole.
Economic growth occurs when an economy produces more products or services in a year than it did in the previous year. This simply means that output, which is measured by Gross Domestic Product (GDP), is increasing. Economic growth is an increase of the in the real level of output. It refers to an increase in a countries annual output of goods and services. The most common measure of this is G.D.P. Economic growth figures must be corrected for inflation. Nominal G.D.P. is not adjusted for inflation whereas real G.D.P. is.
Economic growth is also a long-term expansion of the productive potential of the economy. Sustained economic growth should lead to an increase in real living standards and rising employment. Economic growth can be caused by massive growth in consumer spending. This is because if the government lowered interest rates to try and make people buy more and spend less, people will go out and borrow money to buy houses and cars, which they would normally not be able to afford. This results in massive economic growth.
The main advantage of economic growth is that it improves living ...
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Economic growth is also a long-term expansion of the productive potential of the economy. Sustained economic growth should lead to an increase in real living standards and rising employment. Economic growth can be caused by massive growth in consumer spending. This is because if the government lowered interest rates to try and make people buy more and spend less, people will go out and borrow money to buy houses and cars, which they would normally not be able to afford. This results in massive economic growth.
The main advantage of economic growth is that it improves living standards. (As measured by real G.D.P. per capita) Then Growth also stimulates higher employment levels. Economic growth also has positive effects on government finances because of government benefits. The last significant advantage of economic growth is that it makes it easier to redistribute income to the poor.
The disadvantages of economic growth, however, are that the economy will grow too quickly and therefore, there might be a danger of inflation. Growing income and wealth inequalities in societies are also disadvantages. Negative externalities are also given off (pollution and congestion) which can damage social welfare and there will also be a depletion of non-renewable resources, which will eventually run out.
Economic Growth In China
The continuous high growth of China's economy has attracted a lot of attention. Indeed the world has never experienced such a country with such huge population, such quick change in such short period of time. This is a challenge both to China itself and the outside world.
In this essay, we will analyze the main sources of China's remarkable economic growth, the problems rising from this growth and what kind of fiscal and monetary policy China needs.
In December 1978 Deng Xiaoping became the undisputed leader of China, his rise to power coincided roughly with the elections of Reagan, Thatcher and Kohl in the west and while Deng was no free-marketer he took elements of the neo-classical economics which had been made public policy by these three western leaders and applied them to China. The neo-classical consensus rests on the following assumptions
. All distorting interventions in the pricing mechanisms should be abolished in order to achieve maximisation of growth and development.
2. Foreign trade should be liberalised to remove the incentives for inward-looking economic behaviour and to replace them with incentives for outward-looking and export-orientated economic activity.
3. The public sector should be reduced in size through privatisation of public undertakings and the relinquishment of as many economic tasks as possible to private companies.
Factors Influencing Economic Growth In China
Investment from abroad is one way for a country to grow. Even though some of the benefits from this investment flow back to the foreign owners, this investment does increase the economy's stock of capital, leading to higher productivity and higher wages. Moreover, investment from abroad is one way for poor countries to learn the state-of-the-art technologies developed and used in richer countries.
Also, foreign investment remains a strong element in China's rapid expansion in world trade and has been an important factor in the growth of urban jobs. Foreign-invested enterprises today produce about half of China's exports and China continues to attract large investment inflows. The Foreign Direct Investment (FDI) enterprises have played an important role in making the Chinese economy dynamic since they have not just contributed more than half of the exports, but also invested intensively in new industries, such as energy, communications and transportation, thus increasing the job opportunities.
Some economists have argued that human capital is particularly important for economic growth because human capital conveys positive externalities. An educated person, for instance, might generate new ideas about how best to produce goods and services. If these ideas enter society's pool of knowledge so everyone can use them, in some degree, improving the productivity, then the ideas are an external benefit of education.
Because of the advantage of education, an important governmental effort has been to eliminate illiteracy and popularize compulsory education over these recent years. At present, the national net enrollment rate in elementary schools is 98.58 percent, and the gross enrollment rate in junior high schools has reached 90 percent. This compares to 1949 when only 20 percent of school-age children were in school, and 80 percent of all adults were illiterate. This important government effort in turn supports the economic growth.
Problems rising from rapid economic growth
Environment
Another serious negative consequences of China's rapid industrial development since the 1980s has been increased pollution and degradation of natural resources. Problems such as soil erosion, desertification and the steady fall of the water table, especially in the north, have posed a threat to the sustainable development of the country. Although China has passed environmental legislation and has participated in some international anti-pollution conventions, pollution will be a serious problem in China for years to come.
Labor shortages and Urban-Rural Inequality
By 2005, there were signs of stronger demand for labor with workers being able to choose employment which offered higher wages and better working conditions, enabling some to move away from the restrictive dormitory life and boring factory work which have characterized export industries in provinces such as Guangdong and Fujian. Minimum wages began rising toward the equivalent of 100 U.S. dollars a month as companies scrambled for employees, with some paying as much as $150 a month on average. As more and more people move to southeast of China, some places are more and more wealthier, while others are becoming more and more poorer, leading Urban-Rural Inequality.
The ways to slow down the economy
The continuous high growth of China's economy has caused some problems, in particular the inflation rate. In order to cool down the economy, we can apply the fiscal policy and monetary policy.
Monetary policy
Monetary policy is the process by which the government, central bank, or monetary authority of a country controls the supply of money, in order to attain a set of objectives oriented towards the growth and stability of the economy.
Monetary policy is generally referred to as either being an expansionary policy, or a contractionary policy, where an expansionary policy increases the total supply of money in the economy, and a contractionary policy decreases the total money supply. Expansionary policy is traditionally used to combat unemployment in a recession by lowering interest rates, while contractionary policy has the goal of raising interest rates to combat inflation (or cool an otherwise overheated economy).
According to China's situation, China needs to stick to tight monetary policy, which means changes in monetary policy aimed at contracting aggregate demand can be decreasing the money supply or as raising the interest rate. To complete this target, the central bank can use its three tools (Open-market operations, reserve requirements and the discount rate) to decrease money supply.
(1) Open-market operation: the central bank can sells government bonds to the public in the nation's bond markets. The public pays for these bonds with its holding of currency and bank deposits, directly reducing the amount of money in circulation.
(2) Increase the reserves requirements. As a result, it raises the reserve ratio and decreases the money supply.
(3) Raise the discount rate. A higher discount rate discourages banks from borrowing reserves from the central bank. Thus, an increase in the discount rate reduces the quantity of reserves in the banking system, which in turn reduces the money supple.
The contraction in money supply can be achieved by indirectly raising the interest rate. The cost of borrowing and return to saving is greater now. Thus it encourages saving and discourages investment, which in turn affects the aggregate the demand. Because the quantity of investment will be less than before, so the aggregate demand will also be less
Fiscal policy, taking place within the scope of budgetary policy, refers to government policy that attempts to influence the direction of the economy through changes in government taxes, or through some spending.
In China now, the inflation rate is strong. The economy may need a slow down. In such a situation, Chinese government can use fiscal policy to increase taxes in order to suck money out of the economy. Fiscal policy could also dictate a decrease in government spending and thereby decrease the money in circulation.
As the increase in taxes and a decrease in government spending will shift the aggregate demand to the left. The end result is lower price level and lower quantity of output demanded.
Conclusion
China has achieved remarkable progress in economic development since the reform and open policy. We have witness a changing China, in particular in the area of economic power.Productivity boom has contributed a lot to the economic. And China's open-door policy has spurred foreign direct investment and external trade in the country, creating still more fobs and linking the Chinese economy with international markets. Education is one important factor enlarging the knowledge pool, which in turn supports the economic grow. This experience may be particularly instructive for countries with a large population.
Problems related with rapid economic also emerge. So what China requires is not an order for its own domination and control, but for its development in a peaceful and favorable environment. Thus, contractionary fiscal and monetary policy may be appropriate.
In all, China occupies a unique niche in the world's political economy--its vast populace and large physical size alone mark it as a powerful global presence, let's be optimistic about the economic future of China and hope it can continue to contribute more to the world's economy.
