Question

CHINA TARGETING 8% GROWTH IN 2010
At the beginning of 2010 the Chinese government announced that it was targeting 8% growth for the economy
again, despite the global recession. The target had been 8% for a number of years and the government had
always met it.
About 9% growth is expected in 2010 thanks to huge government fiscal and monetary stimulus measures. The
Chinese economy is the third largest in the world. Forecasts for economic growth made by the International
Monetary Fund for 2010 included China 9.2%, UK 0.9%, Japan 1.7%, US 1.5% and India 6.4%. However,
government officials in China recognized that growth was not guaranteed. China relies heavily on exports and
so is vulnerable to economic change elsewhere in the world.
Adapted: Gillespie, A (2013), Business Economics, Oxford University Press
QUESTION 1 (25)
1.1 Discuss what is meant by economic growth and why is economic growth often important to governments.
(10)
1.2 8% is relatively fast economic growth by international standards for China. Critically evaluate the sources of
economic growth for China and why the country set such as high target?

Answer 1

Ans: Economic growth basically occurs when the level of production of goods and services in an economy rises that is when the capacity of the economy to produce more goods and services expand which implies that Production possibility frontier (PPF) of the economy is shifted rightwards. We measure the economic growth as percentage increase in the real gross domestic product (GDP) which is adjusted for inflation,

It basically occurs when the factors of production that is capital, labor or technology improves only then the production of goods increases and the national income is increased. Only when the income which is available to per head of the country increases i.e. per capita income increases then the economic growth sets in. Economic growth effectively implies that the production of goods as well as services increses which turns into the increase in total expenditure which again turns into high levels of consumption and further into high income; this cycle continues and the production increases again and the economic growth sets in.

Economic growth is important to governments because of the following objectives are achieved by economy:

• Improves the living standards: By improvement in the income level and the production levels of the economy the consumption levels is increased and then it translates into high employment levels as the demand is increased and then the cycle of growth sets in which means that as the living standards of people increase growth occurs.
• Improved Tax revenue: High growth leads to improvement in tax revenues as the growth occurs more production converts into high levels of total expenditure and thus more income in tax deductible so the tax revenues with the government increase which can reduce the budget deficit and more income can be spent on the public activities that is on roads, infrastructure etc.
• Fall in unemployment levels: As the production increases, the level of unemployment falls and the number of people employed rise which can help to create the vituous cycle of production and economic growth; more productive capacity of the workers occurs and the thus total factor productivity (TFP) occurs due to economic growth.
• Rise in the levels of investment: More the economic growth, more the consumption levels and more the demand then the investment levels in the economy will rise because more foreign firms will come into country to meet this excess demand as it has happened with huge FDI inflows into China as well as private sector investment rises which again turns into high levels of revenue for the government and the people.
• High Confidence to invest: Due to this the confidence among the investors boosts up and their level of confidence to invest in the economy rises as the levels of return rises due to excess demand.

1.2 Sources of econmic growth in China:

• High growth in manufacturing : Over the last 40 years since the chinese economy opened up it has remained more focused on its labor intensive industry and has a high comparative advantage in terms of huge labor growth. Because of the growth in population there is plenty of cheap labor in China which gives firms huge profit due to reduced production cost.Thus level of manufacturing and the spur of this industry is one of the sources of growth.
• Structural Change in export value chain: Due to upgradation of technology and the changes in export structure of China from low labor intensive manufacturing to high value technological products basically electronic industry ths has been a huge source of high economic growth in China as it has become a manufacturing hub of electronic products.
• Huge inflow of FDIs: Due to high levels of FDI inflows and high capital investment the economic growth levels are tremendously high and this is the backbone of Chinese economy; due to again cheap labor cost and excess demand more foreign companies are setting their industries in Chinaand it has become an integral part of global supply chain.
• High export levels: Due to cheap products the foreign demand of chinese products basically in every field like textiles, electronics, pharamceuticals and among other areas the export levels have risen in China and it has led to huge FDI inflows.
• Huge FDI flows linked with high public spending : Due to huge spending levels domestically as well as FDI inflows have been high which can resulted in huge spending and investment by the government and the public facilities like education, health as well as infrastructure levels have expanded and thus the FDI inflows have been at a high stake.

Not only the above factors but there are other sources of economic growth are also there which have led to high economic growth which include institutional reforms, structural changes in government policies, stricter enforcability of the reforms and laws, higher tax revenues etc are all the sources.

China has set such a high target because historically it has attained higher target levels of economic growth in its rapid development process and not only that the Chinese economy has the capacity to grow at a high rate inspite of Global recession because of its comparative advantages as well as low cheap cost labor and not only that due to high fiscal stimulus the demand among the people will expand and by lowering the interest rates the monetary authorities will be able to tackle the lowered expectations of the people and the confidence among the investors can be boosted up and the investment can be increased. The capacity of the economy together with the institutiinal reforms and the greater enforcability Chinese economy coupled with the benefits of providing cheap labor it can grow to such target as result of its past performance and the strategic comparative advantage.