Macroeconomic variable- comparisons between 2 countries Essay

Macroeconomic Variables Comparison between 2 Countries

 

I.                   Introduction

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Macroeconomic is the study of economy in its largest sense. It involves the study of a nation and all its determinants. This is a lot more complicated than the study of a single corporation as in microeconomics, due to its vast sense of correlation to various factors. The cause of an economy’s rise and fall could be from the geographical factor or from the cultural factor. The study of macroeconomics involves many other fields of social science.

Within this paper, I will make a comparison between two different economy having different important factors influencing their development. New Zealand is a modern country relying on trade to survive. It has very few natural resources and human resources. However, its economic growth is only a few points below the rest of the OECD countries. On the other hand, China is considered the fastest growing economy in the world. It has transformed itself from a closed economy into an open economy and managed to obtain the worlds recognition. It is three times the size of New Zealand and has a lot more resources too. However, it is characterized with significant fluctuation in its development

Within this paper, we will see how the characteristics of both economies are influenced by different factors as well. First, we will define the general indicators of growth for most country. Then we will use them to describe the two economies. Afterwards, we will elaborate the factors that influence each economy and shaped its characteristics.

 

II.                Determining Macroeconomic Development

The level of development experienced by an economy within a certain period can be described by assessing its Gross Domestic Products (GDP). Despite the existence of various other indicators, GDP is still perceived as the most valuable determinant in determining a nation’s economic development. However, few ever questioned the compatibility of the indicator compare to other instruments like government activities and market forces. Within this chapter we will present a comparison between these indicators and we will explain their strengths and weaknesses in assessing economic development (Roubini and Backus, 1998).

 

II.1      Government Policies

There are various subtle issues about non-market activities that could be measured to determine an economy’s level of development. Some of them are government spending, house work, pollution, etc. However, these variables are considered supplement to GDP, inflation and exports in measuring economic development. The most frequently mentioned non-market activities that ‘should be’ considered as an important indicator of growth are government policies.

Government policy is one of the most important factors that influence the growth of a nation. In some countries, this factor can even be either the number one supporter or the largest obstacle for economic growth. Take China for example, before the government initiate foreign policies that allows and invites Foreign Direct Investment into the country, government’s determination to maintain a ‘close economy’ is the largest problem that prevent the country from increasing its wealth. A few years after a new and open economy is promoted, the country became the largest recipient of the world’s FDI and one of the largest and most valuable markets in the world.

However, according to the new orthodoxy, macroeconomic policies have no long term effect on the real economy. As a result, analysis on macroeconomic policies and institutions has generally been reduced to studies on short-term effects and consequences for nominal variables like inflation. Therefore, within this study, we will use more measurable instruments, like the GDP, inflation, public debt, external debt and exports (‘Introduction’, n.d).

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II.2      GDP Methodology

In simple terms, GDP is the amount of goods and services produced within a country in a certain period. The GDP methodology consist of two types, both contain useful information to assess economic development. The first type of GDP is reported on a Purchasing Power Parity (PPP) basis and the second in on Official Exchange Rate (OER) basis.

 

II.2.1   GDP (Purchasing Power Parity)

The PPP basis is a valuation of GDP for all final goods and services produced in a given year. It provides the sum of goods and services valued at prevailing prices in the United States. Thus, the measure is rather difficult to compute, because it involves the assignment of all goods and services in US Dollar value, regardless whether the goods and services have a direct equivalent in the United States. This caused the PPP estimation of some countries to be based on small and sometimes different set of goods and services. Thus, the resulting GDP estimates for these countries may lack precision. This lack of precision problem generally occurred in developing countries due to their lack correlation to US economy. Therefore the difference between the OER and the PPP-denominated GDP values are generally much smaller in industrialized and developed countries (‘Notes and Definitions’, 2006).

 

II.2.2   GDP (Official Exchange Rate)

The OER concept of GDP involves the same measurement of a nation’s total goods and services produced within a given year. However, the measurement is based on the home-currency-denominated annual GDP figure divided by the bilateral average US exchange rate with that country in the given year. It is simpler to the PPP concept and provides a lot more accurate measurement of the value of output. Nevertheless, it is also an easier subject of manipulation and artificial measurements. There are also thoughts that the OER GDP is not appropriate to compare domestic GDP overtime. This is due to the fact that appreciation and depreciation from one year to the next will make the OER GDP value fluctuates even if the home-currency-denominated GDP stays constant (‘Notes and Definitions’, 2006).

With regards to both arguments, within this paper, we will use the Purchasing Power Parity method to measure economic development of a nation compared to another.

 

II.2.3   GDP and GNP

There is another concept that is very similar to the GDP. However, GDP is still considered the most popular one. According to the GNP concept, the GDP is not a fair measurement of a nation’s productivity because it involves goods and services produced by foreign citizens. For instance, if an American company is producing 100 billion yen worth of product and services, than the 100 billion yen should be excluded from Japan’s productivity measurement. On the other hand, good and services produced by a Japanese company outside of Japan should be included to Japan’s productivity measurement.

This view, however, is unpopular among economist that studied domestic economies. They prefer to the GDP concept because it is considered to be the more natural concept that measures total value added produced by firms operating within a given country. It seems that in economic studies, location of a business is more important than its nationality (Roubini and Backus, 1998).

 

III.             National Background

China and New Zealand are two countries which represents considerably different economy in many respects. It must be noted that China is still considered as the developing country, while New Zealand is a well-developed one. Geographically, China has more than 9 million square kilometer of mountains, high plateaus, deserts, plains, deltas and hills which gave birth to coal, iron ore, petroleum, natural gas, mercury, tin, and many other valuable minerals (‘China’, 2006). New Zealand on the other hand, has a total area of only 260,000 square kilometers of mountains and coastal plains, with much fewer natural resources (‘New Zealand’, 2006). Demographically, China has 3 times the size of New Zealand’s population with a lot more diverse culture and languages.

China has the more interesting economic history, with major economic reformation. In 1970’s, China’s economy changed from a centrally planned and closed economic system to a more market-oriented economy with rapidly growing private sector, domestic and international. Of course, the change was gradual and in a piecemeal fashion, however, economic development, especially in the private sector indicated a tremendous growth since the 1970’s (‘China’, 2006).

The country has a GDP per capita (purchasing power parity) about $6,200. To be specific, the GDP composition per sector is shown in the following figure:

 

Figure  1          GDP Composition per Sector (China)

 

Since most GDP come from service sector, it makes sense if the number of labor force also dominant in the sector. Following figures display the composition of labor force by occupation in China:

 

Figure  2          Labor Force by Occupation (China)

 

On the other hand, New Zealand has been an industry-oriented nation supported by the British market. However the people had truly experience a change in their way of living since 20 years ago, when the government transformed New Zealand from an agrarian economy to a more industrialized and globally competent free market economy. Technological capabilities enhanced the already rapid growth of the industrial economy within the last two decades. The developed country is now dependent heavily upon trade and exports (‘New Zealand’, 2006).

The country has a GDP per capita (purchasing power parity) about $24,100. To be specific, the GDP composition per sector is shown in the following figure:

 

Figure  3          GDP Composition per Sector (New Zealand)

Since most GDP come from service sector, it makes sense if the number of labor force also dominant in the sector. Following figures display the composition of labor force by occupation in New Zealand:

 

Figure  4          Labor Force by Occupation (New Zealand)

 

IV.             Development Indicators

Table I             Growth Indicators of China and New Zealand

 

China

Periods
2001
2002
2003
2004
2005
2006
Domestic debt to GDP
N/A
N/A
N/A
N/A
31.40%
28.80%
Inflation
0.40%
0.80%
0.80%
1.20%
4.10%
1.90%
Exports (billion US $)
232
262.1
325.6
436.1
583.1
752.2
External debt to GDP
3.60%
3.00%
2.62%
2.85%
3.21%
2.97%
GDP (billion US $)
4,500
5,560
5,700
6,449
7,262
8,158
New Zealand

Periods
2001
2002
2003
2004
2005
2006
Domestic debt to GDP
N/A
N/A
N/A
N/A
22.10%
21.40%
Inflation
2.40%
2.60%
2.70%
1.80%
2.40%
3%
Exports (billion US $)
14.6
14.2
15
15.86
19.85
22.21
External debt to GDP
45.56%
41.25%
41.88%
44.69%
51.17%
59.22%
GDP (billion US $)
67.6
75.4
78.8
85.26
92.51
97.39
Source: Available at http://www.cia.gov/cia/publications/factbook/search

 

Table 2                        Development of Growth Indicators

 

China

Growth during periods
2001-2002
2002-2003
2003-2004
2004-2005
2005-2006
Domestic debt to GDP
N/A
N/A
N/A
N/A
-2.60%
Inflation
0.40%
0.00%
0.40%
2.90%
-2.20%
Exports
12.97%
24.23%
33.94%
33.71%
29.00%
External debt to GDP
-0.60%
-0.38%
0.23%
0.36%
-0.25%
GDP
23.56%
2.52%
13.14%
12.61%
12.34%
New Zealand

Growth during periods
2001-2002
2002-2003
2003-2004
2004-2005
2005-2006
Domestic debt to GDP
N/A
N/A
N/A
N/A
-0.70%
Inflation
0.20%
0.10%
-0.90%
0.60%
0.60%
Exports
-2.74%
5.63%
5.73%
25.16%
11.89%
External debt to GDP
-4.32%
0.63%
2.81%
6.49%
8.04%
GDP (billion US $)
11.54%
4.51%
8.20%
8.50%
5.28%
Source: Available at http://www.cia.gov/cia/publications/factbook/search

 

As we can observe, the indicators displayed significant fluctuation between periods for both countries. However, the fluctuation does not originate from similar phenomena in both countries. Instead, they are results of complicated situation within the countries. First, we will elaborate on the growth tendencies in China, then we will elaborate on New Zealand, and in the final chapter, we will assess the differences between these countries.

 

V.                China

V.1       Economy of China

In CIA Factbook, China is said to successfully transform their economy from a sluggish Soviet-style centrally planned economy to a more market-oriented system. Such transformation brings positive impacts in which the country experiences a quadrupling of GDP since 1978. In 2000, with its 1.26 billion people China records a GDP of $3,600 per capita that put the country to be the second largest economy in the world after the US measured on a purchasing power parity basis.

To increase the national’s economy, the Chinese government has promoted several actions as follows: (a) collect revenues due from provinces, businesses, and individuals; (b) reduce corruption and other economic crimes; and (c) keep afloat the large state-owned enterprises.

From 80 to 120 million surplus rural workers are adrift between the villages and the cities, many subsisting through part-time low-paying jobs. Another long-term threat to continued rapid economic growth is the deterioration in the environment, notably air pollution, soil erosion, and the steady fall of the water table especially in the north.

In the fact book, we also encounter that China has major weakness in the global economy that could hamper growth in exports. Under such circumstances, Beijing will intensify efforts to stimulate growth through spending on infrastructure–such as water control and power grids–and poverty relief and through rural tax reform aimed at eliminating arbitrary local levies on farmers.

Furthermore, the country’s government realizes that a reform is a key factor behind the economy’s resilience to the regional crisis during the 90s. Growth in 2001 will depend on key international commodity prices, the extent of recovery in nearby Asian economies, and the strength of US and European markets. Below is economy figure of China.

 

V.2       Decentralization and Macroeconomic Performance

There are various factors that caused China’s economic behavior. A study by Andrew Feltenstein (2004) revealed that there is a connection between decentralization and macroeconomic performance in China. Decentralization has a positive effect on growth in real output. On the other hand, Fiscal decentralization has adverse implications for the rate of inflation because of inadequacy in the financial system. The positive connection between decentralization and China’s Macroeconomic performance can be justified by the absence of major structural break despite the existence of the decentralization shocks.

 

V.3       Fluctuation

The stop-and-go economy has been considered a trademark of China since the 1970’s. The economy has been experiencing significant slowdown sometime in the past, but was recorded to gain stronger structure in the last few years. There are several reasons of China’s frequent fluctuations. First, the frequent bank capitalization seemed to be the biggest threat to China’s fiscal solvency. China faces difficult trade off between maintaining fiscal stimulus in order to keep growth on track, and the promotion of financial market development using bank recapitalization and interest rate deregulation (Woo, 2004).

Second, manipulating aggregate demand via monetary and fiscal policies is important to maintain actual growth rate close to natural growth rate. China is aiming to mimic the best economic growth machine of all, which is a market economy with private enterprises focusing on the provision of public goods and social insurance. The switch to build the structure of this growth machine requires China to continue the privatization of non-defense related state enterprises that are not monopolies and finally result in the drastic reduction of legal discrimination against the public sector (Woo, 2004).

Third, the widespread of Yuan marks China’s comeback to international market. It shows the significant impact China has on the world’s economy. Furthermore, it indicates that China should be prepare to make major structural changes within its economy, because assuming its global position, there will be a high amount of disputes caused by cross-border spillovers from its policies (Woo, 2004).

 

V.4       Rapid Growth

After experiencing a considerable slowdown, China’s economy seemed to rise, which apparent in the year 2004. China maintains robust economic growth in 2004 due to strong export and investment demand. However, the government has taken steps to prepare for economic overheating due to the massive over-investment. Monetary policy was tightened in 2004 to cool down the investment boom. Nevertheless, the final quarter of the year displays softening investment, which leads to the assumption that growth is likely to be sustained for some time.  In the production point of view, the industrial enterprises grew rapidly in 2004, but revealed signs of slowdown as the country enters 2005 (‘Economic and Social Survey’, 2005).

 

VI.             New Zealand

VI.1     Determinants of Growth

New Zealand is often discussed because it never achieved its intended growth level, regarding the extensive and far reaching structural reforms. New Zealand always ends up a step behind the rest of the OECD country in terms of growth. Researchers stated that the lack of growth is largely connected to New Zealand’s isolated condition. Nevertheless, there are several other determinants that influence the country’s level of development. They are:

§  Inflation

In New Zealand, the correlation between inflation and growth is non linear. The specification of the growth equation will allow for the possibility of a nonlinear relationship between inflation and growth with threshold level of inflation set at 3 percent per year.

§  National Saving

For a certain level of investment, national saving provides information on New Zealand’s dependence of foreign capital. It is also important to note that the size of the government, which is accounted as the share of public consumption in GDP, is negatively associated with economic growth.

§  Degree of Openness

In New Zealand, this factor holds a certain significance due to the natural condition of the country

(‘New Zealand: Selected Issues’, 2004)

Bibliography

 

‘China’. 2006. The World Factbook. February 27, 2006. <http://www.cia.gov/cia/publications/factbook/Search>

‘Economic and Social Survey of Asia and the Pacific’. 2005. February 27, 2006.<www.unescap.org/pdd/publications/survey2005/3_Survey05_Ch-II_NEA.pdf>

Feltenstein, Andrew. 2004. ‘Decentralization and Macroeconomic Performance in China: Regional Autonomy has its Costs’ February 27, 2006. <www.ku.edu/~intecon/Research/feltenstein-iwata_jde05.pdf>

‘Introduction’. N.d. February 27, 2006. <www.people.fas.harvard.edu/~iversen/PDFfiles/website.PDF>

‘New Zealand: Selected Issues’. 2004. IMF Country Report. February 27, 2006. <www.fordham.edu/emp/country_studies/newzealand04.pdf >

‘New Zealand’. 2006. The World Factbook. February 27, 2006. <http://www.cia.gov/cia/publications/factbook/Search>

Roubini, Nouriel Roubini and Backus, David. 1998. ‘Chapter 1 Monitoring Macroeconomic Performance’. February 27, 2006. <http://pages.stern.nyu.edu/~nroubini/NOTES/CHAP1.HTM>

‘Notes and Definitions’. 2006. The World Factbook. February 27, 2006. <http://www.cia.gov/cia/publications/factbook/Search>

Woo, Wing Thye. 2004. ‘The Structural Obstacles to Macroeconomic Control in China’. February 27, 2006. <www.aeaweb.org/annual_mtg_papers/2005/0108_1015_1301.pdf>

“World Factbook 2001: China.” CIA.

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