China. Bretton Woods system

Introduction

In the late 1970’s China was an insignificant participant and contributor to the world economy in the trade of goods, services and capital but since then china has achieved a lot in economic performance and the contribution to the world economy by China has increased. China recorded a GDP(gross domestic product) of $7.318 trillion in 2011(The World Bank,2013).This GDP made China the single biggest contributor to the world economy(China Daily,2013).

China has the largest population of over 1.3 billion(The World Bank,2013).It is the world’s second largest economy after it overtook Japan in 2010 and China shows a lot of potential to get to the number one spot to become the world’s largest economy by beating The United States Of America.

China is a member of the BRIC countries which consists of the world’s fastest growing economies and is forecast to be four of the world’s dominant economies by 2050. Justin You Lin the chief economist, World Bank stated in November 24th 2011 that “The world desperately needs engines of growth right now, and fortunately with continued strong and pragmatic economic policy making China can provide that impetus (The World Bank, 2013).

He also stated that China has the world’s largest foreign reserve which exceeds $3 trillion. China in the present world economy acts as a very important trading hub as many firms around the world have relocated to China and it is from China that these goods get exported to the world economy.

China’s Development The four main macroeconomic objectives which are Economic growth, Inflation rate, Unemployment and Balance of payment has been handled effectively by china since its development process which enabled it to become a very successful economy in the present world. In the present, the world economy has become dependent on China for its exports and imports to the world economy. If China would reduce their trade with other economies by imposing quotas or embargoes, this will severely affect the other dependent countries.

Many western firms were lured into China because of China’s resources such as cheap labour, availability of land, less legislations and formalities for setting up businesses etc. Examples of western brands which are very popular and successful in today’s world economy that has relocated to China are: KFC, Intel, Microsoft, Nike, Audi, General Motors, etc.

A well educated workforce was another reason for china’s development (A.Anderton, 2009). The change of the market structure from a planned economy to a more free market type of economy led to many Chinese individuals setting up their own businesses which increased exports and linked China to the world economy, finally investment began to flow into the Chinese economy.(A.Anderton,2009).

A planned economy is where there is high government intervention and social welfare is given the most priority whereas in the free market economy there is less government intervention, profit motivated and high competition in the market and the factors of production are owned by the private sector. The four main macroeconomic objectives of China will be discussed below:

Economic Growth Economic growth can be defined as the increase in the production capacity of a country which enables it to produce more output than it was able in the previous years. This is when the gross domestic product (GDP) increases. GDP is the national income excluding income from foreign investments. Between the years 2001 to 2006 China’s average annual national income was recorded as 9.7%,the highest by any economy between 2001 to 2006(A.Anderton,2009).

In 2010 China recorded a total economic output of 3.7 trillion(Economy Watch,2012).China has helped other developing economies to achieve economic growth by providing funds and expertise knowledge to them. For example China provided funds for Sri Lanka to continue with their development projects such as the southern express highway project.

Inflation Rate The inflation rate measures the rate of the change in the general price levels, when the change is increasing it is called inflation and when the price levels decrease it is called deflation. High rates of inflation is bad for an economy because it can lead to a depressed economy which leads to negative economic growth, however a very low inflation rate is bad as well because this will lead to a fall in the money value.

One major problem of falling money value is that imports become expensive as more money has to be paid to the sellers. Therefore to have the best results, an economy has to balance the inflation rate. Economists suggest that an inflation rate between 1% to 5% is good for an economy(A.Anderton,2009).China had managed its inflation rates very effectively with a 4.23% average inflation rate between the years 1994 to 2012(Trading Economics,2012).

In December 2012 the inflation rate of china was recorded as 2.50% which many economists believe is a healthy rate for a country with more than 1.3 billion people(Trading Economics,2012).Due to low inflation rates the Chinese have provided the global economy with goods and services that are relatively cheap against other economies, this has increased the choice for consumers around the world.

Unemployment Unemployment occurs when there is insufficient demand for workers who are willing to seek employment. “Unemployment is a major problem in society because it represents a waste of scarce resources” (A.Anderton, 2009).The unemployment rate of China at present is 4.1% which is a very low rate compared with other countries and ranks in the fourth place of top economies when unemployment is considered. Below is a graph that shows the unemployment rates of China from January 2011 to October 2012. (Trading Economics, 2012)[Online]

This graph shows that china has utilized their resources very effectively with less wastage and hence resulting in China’s continuous development. China’s low unemployment rate has not only benefited Chinese workers but also foreign workers. China has provided employment opportunities to the whole world because the demand for employment in China is very high since there are many businesses in China.

Balance of Payment The balance of payments contains the financial accounts of an economy which are: Current account Capital account/Financial account The current account is involved with the balances of trading goods and services, the goods account is named as visible balance and the service account is the invisible balance. China’s current account balance is still a surplus because its exports exceed the imports (The Economist, 2013).China helps the world economy by exporting many goods that other countries would not be able to produce by their own and it generates income to other countries by importing goods needed in production.

In December 2012 China’s imports increased to $1676.11 hundred million from $1597.47 hundred million in November of 2012(Trading economics, 2012).China’s exports increased to $1992.30 hundred million in December 2012 from $1793.81 hundred million of November 2012(Trading economics, 2012).China recorded a trade surplus of $316.18 hundred million in December 2012(Trading economics, 2012).Below is a graph that shows China’s trade balance between the years January 2011 to January 2013:

(Trading Economics, 2012) Conclusion China to the present world economy is very important when the above factors that I have wrote about are concerned such as China being the largest economy, the single biggest contributor to the world GDP, the largest exporter and importer etc. One of the most important factors that I have considered would be that many countries still depend on China’s performance.

Finally I would conclude with a statement made by Tommy Koh the professor and chairman of the centre for international law, National university of Singapore and ambassador at large for the government of Singapore “The bottom line is that economically, China needs the world and the world needs China (East Asia Forum, 2010)

References A.Anderton, 2009 A/levels economics East Asia Forum 2010 [online] www.eastasiaforum.com Economy Watch, 2012 [online] www.economywatch.com The Trading Economics, 2012 [online] www.tradingeconomics.com The Economist, 2013 [online] www.economist.com The World Bank, 2013 [online] www.worldbank.com