Introduction The World’s economy was hit by a devastating global recession in 2008. Most of the economies of the world are still recovering from its shocks. Unexpected events such as the earthquake in Japan and unrest in some of the leading oil producing countries in the Middle East also affected global growth in 2011. The leaders of the World’s economy are the United States of America, the People’s Republic of China followed by Japan. In 2010 China surpassed Japan and became the second largest economy of the world. It is classified as an emerging market.
China’s GDP was $5. 9 trillion where as Japan’s GDP was $5. 5 trillion, according to the World Bank statistics. Over the years China has shown steady growth. It’s most important sectors are agriculture and industry. China’s major exports include machinery, textiles, optical and medical equipment. It is world’s largest exporter of goods. The growth over the years comes from both private and public sectors. Rising Foreign trade is also a major contributing factor in its growth. Japan is the world’s third largest economy. It is classified as an advanced economy.
It focuses on technologically advanced products and is a world leader in motor vehicles and electronic equipment. On 11 March it was hit by one of the strongest earthquake ever recorded in its history accompanied by a tsunami (OECD, 2011). Besides resulting in a great loss of human life Japan also experienced massive economic damage. This had a short term negative impact on its economic output followed by an increase in spending on reconstruction. Supply chain disruptions were experienced by countries relying on Japanese parts and components in their industrial sectors.
Trends in the Economy
The trends in the economy can be studied by looking at macroeconomic variables. Indicators such a GDP, inflation, unemployment, balance of trade and the exchange rate can be used to determine the growth of an economy. 1. Gross Domestic Product China According to China daily’s article, China’s GDP growth in the year 2010 started with 11. 9 percent in the first quarter and ended with 9. 8 percent in the fourth quarter. The average growth rate of the year showed that China’s economy grew by 10. 4 percent in the year 2010. The World Bank statistics also show the same growth over the year.
In the first quarter of the year China’s exports increased as it expanded trade with emerging markets. These countries included Brazil, India and Russia. High property prices and low borrowing costs aided private investment especially in real estate. Increasing export performance, domestic demand and private consumption lead to an overall increase in growth. The article also shows that in the first quarter of 2011, China showed a GDP growth of 9. 7 percent and ended with 8. 9 percent in the fourth quarter showing that China’s economy grew by 9. 3 percent in the year 2011. The country’s nominal GDP reached $ 7.
3 trillion in 2011 from $ 5. 9 trillion in 2010, according to Word Bank statistics. China has high external and domestic demand which helps its economy even in difficult times. A rise in consumption was seen as a result of increase in employment and wages. On the other hand investment has improved as a result of expanding infrastructure and real estate construction. China’s exports of goods and services as a percentage of GNP increased from 29. 5 percent in 2010 to 31. 4 percent in 2011, according to the World Bank statistics. Net exports positively contributed to economic growth (IMF, 2011). Japan
Over a ten year period, Japan’s growth rate has been among the lowest in the list of advanced economies. The growth rate has been less than that of France, Germany, the US and many other economies (Treasury, 2011). In Japan, economic activity was interrupted in March 2011 by the earthquake and tsunami. Many countries which relied on Japanese components in their supply chain faced short term problems. IMF report suggests that about 30 percent of total cars manufactured in the world may have dropped after the earthquake (IMF, 2011). The growth in GDP fell from a rate of 3. 9 percent in 2010 to a negative 0.
7 percent in 2011 (IMF, 2011). According to the World Bank, Japan’s GDP was $5. 5 trillion in 2010 and $5. 9 trillion in 2011. Japan shows a changing pattern in its trade structure. Exports of sophisticated intermediate inputs have increased. And the exports of high technology final products have decreased (IMF, 2011). 2. Inflation China The expansion of global economy has shown signs of overheating in emerging and developing economies. These economies are still facing relatively high inflation pressures. The World Bank statistics show that China’s consumer price index rose from 115. 4 in 2010 to 121. 7 in 2011.
The year over year change in China’s consumer price inflation has seen a rise during the year 2010. It rose to around 4. 9 percent in January 2011 (IMF, 2011). And the 3 month moving average crossed 8 percent by January 2011 (IMF, 2011). A major portion of this yearly rise in inflation is due to food related items. Fresh food was first hit by the inflation. It than went beyond fresh food and transferred on to food related manufacturing and services (IMF, 2011). The policy measures taken have been effective. Monetary tightening and existing price controls were used in some cases. This increased the supply of food.
Energy and food prices have played a vital role in determining the pattern of inflation in these years. Japan Japan has been facing deflation since early 1990’s after the Bubble economy collapsed (IMF, 2011). Prices have been falling but so have the spending. Consumers are reluctant to spend because they expect the prices to fall even more. This has been a major problem. After the earthquake and tsunami in 2011, Japan overcame deflation. This was caused by the food and energy shortages after the earthquake. 3. Unemployment China An important goal of the government is to reduce unemployment in the country.
This ensures that the resources present are not being wasted. In the first half of 2010, China’s unemployment rate was 4. 2 percent (Treasury, 2011). During this time around 6. 4 million new jobs were created (Treasury, 2011). China had planned to create new jobs especially in the urban areas in order to keep urban unemployment rate below 4. 6 percent (Treasury, 2011). In 2011 China came face to face with two labor problems. Skill related and geographical labor issues (IMF, 2011). There is a growing skill gap in the country. Companies face a lack of skilled labor while on the other hand university graduates are unemployed.
Companies believe these graduates are ill equipped for the work place. The difference between the earnings of skilled and non-skilled labor is also widening. China saw a movement of labor from its coastal regions to the interior provinces in order to benefit from better paying jobs. Japan Japan has been facing many labor force issues which have been a major contributor to its slowing economic growth. The labor force shows that old age participation rates are higher for japan in comparison to other countries (IMF, 2012). The country has been facing accelerated population aging.
This is a reason for its shrinking labor force in japan. 4. Balance of Payments China A country’s balance of payments is a record of its entire international transactions. These are directly related to the country’s exchange rate. Exchange rate is the rate at which one country’s currency exchanges for another. Many emerging economies have experienced an appreciation of the exchange rate. But the real effective exchange rate has depreciated. This is the case with China as well. Chinese Yuan, in 2011, appreciated by 4. 7 percent against the dollar (WTO, 2012), but in real terms it only appreciated by 2.
7 percent (IMF, 2011). The reason behind this is that although the US dollar depreciated in 2011, it actually gained strength in real terms. Hence, the nominal exchange rate appreciation would give an overstated value of the currency. China entered World Trade Organization in 2001. Since then its exports of goods have grown drastically. By 2010 china became the leading exporter in the world. The total trade of the country was $362 billion in 2010 (WTO, 2011). Emerging markets, such as China, have done well in global trade as they reap the benefits of having low wage costs and undervalued currencies.
Japan According to the World Bank’s statistics the periodic averages of Japanese Yen exchange rate fell from 87. 8 in 2010 to 79. 8 in 2011. The Japanese Yen in real terms has been appreciating against the US dollar, the Euro and other major currencies in spite of the bank of Japan’s intervention to control the problem (UN, 2012). Japan’s exporters are being hurt due to the continuous appreciation of Yen as it makes Japan’s products more expensive as compared to their competitors’. It also results in Japan’s imports becoming expensive. Increase in imports and rising appreciation of Yen has caused Japan’s trade deficit to widen.
Comparison The nominal GDP’s and GDP growth rates of China and Japan show that China has been doing way better than Japan. Even though China’s GDP growth rate fell from 10. 4 percent in 2010 to 9. 3 percent in 2011, it is still showing healthier growth as compared to Japan. Japan’s GDP growth fell from 3. 9 percent in 2010 to a negative 0. 7 percent in 2011. The negative growth rate tells us that Japan is doing worse in 2011 than the previous year. Its economy has not grown in the past year. Japan has not been able to recover from the recession that hit the global economy in 2008.
Due to which it faces problems such as a lingering deflation, ageing population, a decline in the labor force and huge government debt. On top of all this, it was struck by an earthquake which has further shaken its economy. On the other hand China has been doing well. It took over Japan’s position as the world’s second largest economy in 2010. The main factors being robust export performance and rising domestic demand. This way China got to reap the benefits of both domestic and international demand. To deal with the losses from reduced demand in the developed countries, china expanded its trade to a few emerging markets.
Both developing and emerging economies have faced inflation pressures. These have been the result of rising oil and food prices. But the case with Japan has been worse. It has been experiencing deflation which has increased its trade deficit. Where labor is concerned we see there is a skill gap in China’s labor. But Japan is experiencing a decline in its labor force. It also faces a problem of ageing population. These two problems have slowed its overall GDP growth. China’s global trade improved significantly after it entered the World Trade Organization in 2001.
Its exports have been healthy and so have the balance of payments. Japan is suffering from a trade deficit due to continuous appreciation of the Yen. Conclusion The goal of every country is to achieve high sustainable growth, low unemployment rate, low inflation rate, a satisfactory balance of payments and stable exchange rate. Every aspect of the economy needs to work towards fulfilling these aims. The success of China over the years has been a combined effort of most of its macroeconomic variables contributing positively towards economic growth. The growth remained strong.
Expansion in trade was seen, especially with other emerging economies. Aside from expanding trade with the rest of the world, China also tapped into its domestic demand. China is facing rising unemployment. It should consider shifting towards the private sector to fuel job creation. Privatization would also help in opening up monopolies to competition. This would further enhance efficiency and productivity. Japan faces many challenges. It needs to improve its GDP growth rate and battle deflation. Measures need to be taken to control its currency’s continuing appreciation.
The debt to GDP ratio needs to be reduced. Deflation has discouraged domestic consumers from spending. Steps need to be taken to strengthen their confidence and increase domestic demand. Following the earthquake Japan has been concentrating on reconstruction. It needs to make sure the spending does not increase government borrowing in order to protect its debt problem from getting worse. There is a problem of declining and aging labor force. Japan needs to deal with these problems by tapping the underutilized sources of labor present in the country. References http://www. imf.
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