Economics论文模板 – CHINA’S ECONOMIC GROWTH: Evaluate the View that the Effects of Lower Economic Growth ar e Always Negative

Evaluate the View that the Effects of Lower Economic Growth Are Always Negative

Economic growth is “the most fundamental indicator of an economy’s health – the rate at which national income is growing” (Bolton and Khaw, 2006, para.1). It goes through self-adjusting cycles of peaks and troughs (Bolton and Khaw, 2006). In the initial phases, firms usually increase the amount of goods produced until it peaks at capacity.

The peak phase of the production cycle leads to: increasing production, increasing employment, and higher wages (Bolton and Khaw, 2006). As result there is increased spending in purchase of goods and cycles continues until the economy reaches its peak capacity. Economic growth is measured by indicators such as GNP and GDP.

Gross Domestic Product (GDP) is the most commonly used measure of aggregate economic output. GDP “is the market value of all final goods and services produced in a country during the course of the year” (Mishkin, 2010, p.21). It excludes the purchase of goods produced in the past (prior to the current financial year) and intermediate goods.

The value of intermediate goods is included in the final output computation. GDP is measured from a nominal or real perspective. Nominal GDP is derived from the computation of final goods and services using current prices/exchange rates while real GDP is computed from fixed/constant prices with an arbitrary base year (Mishkin, 2010).

GDP is also measured using Purchasing Power Parity (PPP) which theorises “that shifts in exchange rates will occur to offset different rates of inflation in pairs of countries” (Rugman and Collinson, 2012, p.208). Gross National Product (GNP) measures the output of a country’s citizens irrespective of where they are working or residing (Bolton and Khaw, 2006).

Economic growth from a low base usually translates into higher output in all indicators. Production of goods and services is higher, employment grows which reduces the unemployment level, incomes also rise with increased demand for labour which results in higher spending an in return feeds into the growing boom and the trends continues until peak capacity.

However, as the economy nears its peak capacity, there is the need to increase investment in production capabilities and ease price pressures (Bolton and Khaw, 2006). If the rate of investment is not commensurate to price pressures, inflation increases which in turn results in dipping demand for goods and services (Bolton and Khaw, 2006).

The impact of inflationary pressures on prices and demand downturn affects production scale as firms cut back. Decreased production leads to job losses as firms scale down which feeds into the economic cycle in lower or even negative growth. Economic growth has varying impacts on the environment with deterioration during the initial phase (Grossman and Krueger, 1995).

Higher economic growth usually impacts negatively on the environment as the country seeks to increase factors of production (Grossman and Krueger, 1995; Economist, 2013; Lopez, 1994). The environment is critical in achieving economic growth considering that it is one of the most important determinants of national competitive advantage (Porter, 1990).

 According to Hill (2013), factor endowments include basic factors such as climate, location, and natural resources. Grossman and Krueger (1995) noted that environmental degradation was evident during the initial growth phases but there was a positive turnaround when the average per Capita income reached $8,000.

Kuznets (1955) analysed the relationship between economic growth and income inequality using an inverted U-shape. He noted that when economy begins to grow in the early phases, inequality rises fast but it tends to decline as economic growth tapers. In effect, a slowdown in economic growth allows for rebalancing of the economy with positive impact on inequality.

The slowdown in Chinese economic growth has to some extent been influenced by rising wages. It is no longer the cheapest location for production which is shifting production to neighbouring countries with lower wages. In fact, wages rise in tandem with higher economic growth and also continue to rise albeit at a slower pace when the economic growth slows down.

Rising wages are usually visible in the lower wage cadres which help to bridge income inequality. However, Barro (2000) noted that there is little relationship between investment and growth rates and income inequality. High inequality usually leads to retarded development in poorer countries but has inverse effect in richer countries.

It concurs with Kuznets curve of economic growth and inequality with the difficulty in the relationship being explained by variations of inequality in different countries over time (Barro, 2000). Generally, strong economic growth is beneficial for the poor as it does not vary systematically with average income growth rates (Dollar and Kraay, 2002).

Their conviction in the in the measurement of the poorest quintile based on a sampling of 92 nations over a span of four decades indicated there were no income changes with average growth rates. Economic growth impact on poverty reduction could only be achieved by stronger growth rates since policy measures and average growth had minimal impact.

A slowdown in economic growth translates in higher impact on the poorest quintile but has modest negative impact on the richest quintile. The level of impact is disproportionate considering that economic slowdown is prompted by varying factors including high inflation, lower foreign investment/foreign exchange rates, and high interest rates.

In a study by Helliwell (1994) based on 125 countries over a period of 25 years, they noted the strong linkages between economic growth and democracy. He noted that having democratic did not explicitly lead to positive impact on economic growth. Some planned economies such as in China have maintained strong growth mainly due to factor endowments.

However, there are trends towards democracy as a result of economic growth since with reduction in poverty levels and increase in literacy levels; there is greater awareness of individual rights. There is less tolerance of mismanagement especially during the troughs of the economic cycle and this increases openness within the society.

Increased agitation of openness and reduction of bureaucracy usually increases during periods of slowing economic growth. As Barro (1991) found out that based the measurement of human capital using constant enrolment rates in primary and secondary schools, economic output in poorer countries were generally faster.

He noted that countries that had high human capital inevitably had lower fertility rates but with higher investments relative to the GDP (Barro, 1991). In addition, there was a strong relationship between growth rates and positive impact on political stability (Barro, 1991). Economic growth is driven by policies such securing of property rights and protection of intellectual property.

When a country begins to grow, it begins on a low real GDP relative to human capital in the forms health and educational attainment (Barro and Lee and Lee, 1993). Economic growth positively impacts on the development of human capital and as such a reduction from a slowdown has negative effects especially on health.

Sustained higher economic growth usually leads to improved life expectancy and reduced fertility rates with more family planning. As a result the proportion of the ageing population increases while the younger demographic begins to taper in growth and as result slowing economic growth does not compensate for future social security.

The challenge with GDP as a measurement of economic growth is that it provides a historical perspective of performance but does not indicate future performance. Slowdown in economic growth can be influenced by monetary and fiscal policies and exogenous factors. Current borrowing and investments might not lead to future output.

It is especially significant with retail borrowing which boosts demand in economies but is based on future earnings. Heskett (2009) noted that economic growth is derived from confidence and that a slowdown in growth was not necessarily bad or good. He noted that the growth generated by financial engineering up to 2008/09 financial crisis did not contribute to individual value.

There was strong top-line performance by institutions which increased aggregate demand as measured by GDP but there was marginal economic value. The positive impact of slowing economic growth is that it reduces income inequality as the economic model is reviewed with more taxation on the wealthy and flexibility for the rest (Heskett, 2009).

The challenge with economic slowdown is that it leads to: job insecurity, reduced employment, and increased inability of government to manage their finances. In conclusion, the general effects of slower economic growth are usually negative in the sense of potential higher unemployment as firms restructure operations and social challenges for the government.

However, they also have a positive effect on the incomes with a reduction on income inequality. During such periods, governments employ a number of fiscal and monetary policies to stimulate growth that favour low income earners and target high income earners. It leads to a better income balance in the economy but with the most of the consequences being negative.

References

Barro, R. J. 1991. Economic Growth in a Cross Section of Countries. The Quarterly Journal of Economics, 106 (425), 407 – 443.

Barro, R. J., and Lee, J-W. 1993. Losers and Winners in Economic Growth. World Bank Economic Review, 7 (1), 267 – 298.

Barro, R. J. 2000. Inequality and Growth in a Panel of Countries. Journal of Economic Growth, 5 (1), 5 – 32.

Bolton, S., and Khaw, S. 2006. Economic Growth [Online] Available at: http://www.theguardian.com/business/2006/jul/10/ukeconomy.globalrecession [Accessed: 27 February 2016].

Dollar, D., and Kraay, A. 2002. Growth is good for the Poor. Journal of Economic Growth, 7 (3), 195 – 225.

Economist. 2013. The Long View Contrary to Popular Belief, Economic Growth May be good for Biodiversity [Online] Available at: http://www.economist.com/news/special-report/21585100-contrary-popular-belief-economic-growth-may-be-good-biodiversity-long-view [Accessed: 28 February 2016].

Grossman, G. M., and Krueger, A. B. 1995. Economic Growth and the Environment. The Quarterly Journal of Economics, 110 (2), 353 – 377.

Helliwell, J. F. 1994. Empirical Linkages between Democracy and Economic Growth. British Journal of Political Science, 24 (2), 225 – 248.

Heskett, J. 2009. What Does Slower Economic Growth Really Mean? [Online] Available at: http://hbswk.hbs.edu/item/what-does-slower-economic-growth-really-mean [Accessed: 28 February 2016].

Hill, C. W. L. 2013. International Business: Competing in the Global Marketplace, 9th edn. New York: McGraw-Hill/Irwin.

Kuznets, S. 1955. Economic Growth and Inequality. The American Economic Review, 45 (1), 1 – 28.

Lopez, R. 1994. The Environment as a Factor of Production: The Effects of Economic Growth and Trade Liberalization. Journal of Environmental Economics and Management, 27 (2), 163 – 184.

Mishkin, F. S. 2010. The Economics of Money, Banking, & Financial Markets, 9th edn. Boston: Pearson Education, Inc.

Porter, M. E. 1990. Competitive Advantage of Nations. New York: Free Press/Simon & Schuster.

Rugman, A. M., and Collinson, S. 2012. International Business, 4th edn. Harlow: Pearson Education Limited.

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