Question

(PPP in China) The International Comparison Program (ICP) reported a price level index (PLI) for China of 42 in 2005 and 54 in 2011. Recall that, by construction, the PLI for the United States is always 100. 1. Find the percent change in the Yuan-dollar real exchange rate between 2005 and 2011. 2. In 2005 the size of the Chinese economy, at PPP exchange rates, was 43 percent that of the U.S. economy. Ignoring growth in physical output, find the size of the Chinese economy, at 2011 PPP exchange rates, relative to that of the U.S. economy. 3. Suppose instead that all of the observed real appreciation of the yuan was due to the imposition of import tariffs by China. Assume that in the U.S. and China the price level is given by P = Pγ XP1−γ M , where γ = 0.5, PX and PM denote export and import prices, respectively, and that absent tariffs the law of one price holds. Find the size of the import tariff.

Answer 1

Q.1 - Find the percent change in the Yuan-dollar real exchange rate between 2005 and 2011 ?

The yuan-dollar annual exchange rate for the period 1981-2011. The yuan-dollar exchange rate was CNY1.71 per dollar in 1981 and then steadily increased until 1994, when it reached CNY8.6397. Between 1994 and 2005, the yuan-dollar exchange rate remained above CNY8 per dollar. Beginning in 2005, the exchange rate declined, from CNY8.1936 in 2005 to CNY6.4630 in 2011.

Q.2 - In 2005 the size of the Chinese economy, at PPP exchange rates, was 43 percent that of the U.S. economy. Ignoring growth in physical output, find the size of the Chinese economy, at 2011 PPP exchange rates, relative to that of the U.S. economy ?

Since the introduction of economic reforms, China’s economy has grown substantially faster than during the pre-reform period, and, for the most part, has avoided major economic disruptions From 1979 to 2018, China’s annual real GDP averaged 9.5% (see Figure 3). This has meant thaton average China has been able to double the size of its economy in real terms every eight years.The global economic slowdown, which began in 2008, had a significant impact on the Chineseeconomy. China’s media reported in early 2009 that 20 million migrant workers had returned
home after losing their jobs because of the financial crisis and that real GDP growth in the fourth quarter of 2008 had fallen to 6.8% year-on-year. The Chinese government responded by implementing a $586 billion economic stimulus package, aimed largely at funding infrastructureand loosening monetary policies to increase bank lending.11 Such policies enabled China to counter the effects of the sharp global fall in demand for Chinese products. From 2008 to 2010, China’s real GDP growth averaged 9.7%. However, the rate of GDP growth declined slowed for the next six consecutive years, falling from 10.6% in 2010 to 6.7% in 2016. Real GDP ticked up to 6.8% in 2017, but slowed to 6.6% in 2018, (although it rose to 6.8% in 2017). The IMF’s April 2019 World Economic Outlook projects that China’s real GDP growth will slow each year over the next six years, falling to 5.5% in 2024 (Figure 4). 12 Many economists warn that China’s economic growth could slow further if the United States and China continue to impose punitive
economic measures against each other, such the tariff hikes that have resulted from U.S. action under Section 301 and Chinese retaliation. The Organization for Economic and Cooperation and Development (OECD) projects that increased tariffs on all trade between the United States and China could reduce China’s real GDP in 2021-2022 by 1.1% relative to the OECD’s baseline economic projections.