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UNITED STATES & CHINA COMPARISON IN LIGHT OF

SALIENT MACROECONOMIC FACTORS


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Table of Contents
Introduction 3
National income 4
GDP (Gross domestic product) 4
GDP Real growth rate 4
Per capita income 5
GDP - composition by sector: 5
Inflation 6
Discount rates 6
Prime rates 7
Liquidity 7
Unemployment 8
Labor force 8
Current account balance 10
Exports 10
Imports 11
Budget and its finances 12
Distribution of income 13
Conclusion 13
References 14

UNITED STATES & CHINA COMPARISON


IN LIGHT OF SALIENT MACROECONOMIC FACTORS
Introduction
US is largest and biggest economic power globally which currently contributes al
most 28% of the global economy (United States , 2010). It has led world in last
century towards capitalism where demand and supply forces guided manufacturing a
nd distribution of goods and services with minimal interference of government us
ing monetary and fiscal policy. US still have world’s largest economy. US dollar i
s international currency which is major sign of its rule on global economy.
Prior to 1979 China was a closed economy and it was a poor country. In that year
China introduced economic reforms and after that we can say it’s a unique success
story. Since then China’s GDP is growing on average 9.7% annually and size of eco
nomy has grown 11 folds (Bios, 2010). Trade running has grown from 27th to third
and some measures say that China has become the world’s second largest economy an
d it is expected to be the largest in a single decade (James & Rodgersb, 2009).
China, US economic relations and dependence has increased as China grew
in past 30 years. Trade between two countries has risen from $4.9 billion to $34
3 billion in 2006 (Zhang, 2009). Thus China is its second largest economic partn
er, its fourth largest export market and second largest source of imports. China
is providing cheap products which has increased purchasing power of the US cons
umer and has lead to substantial increase in the economic activity. US manufactu
rer is shifting its facilities to China to enjoy low cost labor and energy facil
ities. In this way China’s success is harming US and economic analysts are predict
ing China as a new economic power in the world. In recent years China has purcha
sed treasury securities and helped to keep interest rates in US market low, whic
h in turn increases outflows from US, market which shows that economies are clos
ely related and dependent on each other. Now we will present a close analysis of
these economies in light of major macro economic factors.
National income
National income tells us about a nation’s income within a given economic year. Thi
s measures what are whole nation’s earnings in a given year. For a brief view we w
ill look at it from different angels
GDP (Gross domestic product)
Ten years ago US economy was about six times larger than China but in these year
s US GDP has grown from 5.5 trillion to $14.26 trillion. In comparison China has
grown from1.15 to $8.789 trillion (China, 2010). These stats show that although
gap has become wider but the growth rate in both economies is very different an
d China has made its GDP almost 8 times as compared to US whose GDP is 2.5 times
higher (United States , 2010). Thus China currently has lower GDP but it is cat
ching fast and economists are predicting that China will cross US in next decade
. If we look at the growth rate China is maintaining a growth rate of average 9%
and in past few years US has shown negative growth. So currently China stands a
t third number after European Union and United States.
GDP Real growth rate
If we adjust GDP for inflation and judge incomes in commodity terms it is called
real GDP. In next section we shall have a detailed look on inflation but it wou
ld be good if we compare real GDP here. In US real GDP growth rate for year 2009
is –2.4% as compared to 8.7% in China if shows that US is walking backwards and i
ts real income is lower then last year (Bios, 2010).
Per capita income
GDP is an aggregate measure of national income if we want to be specific and bri
ng it to the individual level so that we can check what is the income of the ind
ividual consumer in a country we will use per capita income in a country. China
is the biggest country of the world in terms of population and it have 133 billi
on people so in presence of having such a huge GDP China‘s per capita income is $
6600 and United states is a country with a high per capita income which is about
$46000 (Fogel, 2010). Now when we compare both it has huge difference but per c
apita income in China is dramatically raising and it was $5700 two year back now
if we look at other side decreasing trend continues here and it was $48300 two
year back (James & Rodgersb, 2009). All it shows China is making progress in thi
s field but still it is far behind then its competitor. China is on 128th number
in the globally.
GDP - composition by sector:
GDP is normally has three sub sectors so now we will look in both countries what
is the distribution of income in these sectors and what are effects of these di
stributions. First in China here we can see that major source of income is servi
ces sector, which contributes 76.9% of income, manufacturing or industry brings
21.9% and finally agriculture just have 1.2% contributions in income (United Sta
tes , 2010). When we see the other side, picture is very different here dominant
sector is manufacturing sector, which consists 48.6%, services and agriculture
have 40.5%and 10.9% share respectively (China, 2010). On part of US huge depende
nce on services shows that it is consumption-based economy and services sector h
ave low multiplier effect on the economy but when we look at China its biggest s
ource of earning is manufacturing. This is due to low labor cost and energy cost
in China. US needs to decrease their dependence on services sector which has ma
de their population more of a consumer then saver. That is a reason because fore
ign investors are buying more and more US securities
Inflation
Inflation is a macroeconomic variable which can hit countries badly, due to this
price level in the country goes up and in result it decreases the purchasing po
wer of ordinary consumer. It also makes domestic products costly as compared to
the foreign products. In US current inflation rates are 1.91% and in China infla
tion rates are 3.25%, which are higher than expectation and it can harm China be
cause it will make goods costly and foreign consumer would be less interested in
buying goods from China (James & Rodgersb, 2009). Analysts are of the view that
China is going to increase the interest rates to decrease flow of currency and
finally to bring interest rates down. In US people are willing to borrow and thi
s trend has created scarcity of money which is keeping inflation rate lower and
US has low inflation as compared to China (Yong-ding, 2003).
Discount rates
In US government has increased discount rate from 0.5 to 0 75%, which is still v
ery low as compared to China where this rate is 2.75 exactly 200 basis points hi
gher then China and this shows a vital difference in the policies and economic s
ituation of both countries (Izurieta, 2005). China is looking strong and it is t
rying to reduce lending from central bank on the other hand US which is facing t
roubled banking industry is trying to support it by facilitating them with capit
al.
Prime rates
Impact of above two factors is visible on the prime rate which is a rate at whic
h commercial banks for running daily operations lend and borrow from other comme
rcial banks. In US banks have shortage of cash and here prime rate is 5.09% it i
s higher keeping in mind discount and inflation rate but shortage of money justi
fy this rate. In China prime rate is 5.31 and it shows banks are wiling to inves
t on just 2.06% profit or margin in real terms and it shows strength of banking
sector and economy in real terms (China, 2010) (United States , 2010).
Liquidity
Liquidity means the availability of the funds for the investors and government.
Investors utilize these funds to grab opportunities and governments fulfill thei
r deficits and also some times use them just to control different rates. After r
ecession and fall of big banks savers have lost their belief in banks and other
investments institutions that has made biggest problem for governments of develo
ped countries. US is worst effected and these days liquidity is a big problem fo
r it. Country introduced bailout plan just to resolve this issue and its current
discount rate and growth rates are showing that still lot need to be done (Mank
iw, 2009). In US people are consumers and they don’t save much and currently they
also don’t have lot to save as still they are losing jobs so liquidity is a big pr
oblem and it seems that situation is getting better but it will take time and ef
forts to be normal.
Now if we look at China its has not effected greatly its exports sector has disp
laced as their exports to US and western Europe have decreased but this has not
damaged greatly because funds from these parts also have transferred to China du
e to its good economic situation and investors are looking more satisfied by inv
esting their funds in China. (Mankiw, 2009) This impact is also evident by its r
eal growth rate and federal fund rate which is hundred basis points higher then
US.
Unemployment
Unemployment is another macroeconomic variable, which shows how many people don’t
have jobs. In real world unemployment can’t be eliminated completely but we can re
duce it to a certain level this level is called natural rate of unemployment. Th
is rate is used from 2% to 5%. US in previous year faced highest unemployment ra
te in its history and current rate of unemployment is 9.3% which still is very h
igh and people in United States are still losing jobs (Elmendorf, 2009).
When we look at China, its economic condition is good industries are gro
wing and new industries and businesses are opening so jobs are also increasing.
Unemployment rate is 4.3% which tells same story and it shows us that people are
able to find jobs. But situation is not so pretty as data from rural areas is n
ot available these figures are from urban areas where industrialization is takin
g place. Unemployment in China can rise to 9% if complete survey is done (China,
2010). US and China both are facing problems of unemployment but problem of US
is mush worse as its employed citizens have lost jobs in last few years where Ch
ina is a growing economy and it is expected that unemployment rate will come dow
n as urbanization and industrialization will increase.
Labor force
Labor force consists of people who are willing and able to work. Labor force of
a country is backbone of its economic operations. Level of skill also has an imp
act on their value. A highly skilled person is better then many unskilled ones.
So it is important to note that quantity of labor alone has no importance presen
ce of skills and resources to utilize them are equally important.
China has world’s largest labor resource. Currently China has 812.7 million worker
s this force includes both skilled and unskilled labor (Zhang, 2009). This popul
ation is divided in rural and urban areas and people in urban area are skilled a
nd they have high level of utility. These are the people who are playing major p
art in the success of Chinese economy. When we look at US it also has big labor
force and currently has 4th rank. US workforce consists of 154.1 million people.
Thing which make it different from others is its skills level (Elmendorf, 2009)
.
Chinese labor force can be divided in three sectors. Agriculture, industry and s
ervices 39.5% of workforce are associated to agriculture, which is fairly high a
s compared to their part in the GDP. This shows that labor in this sector is uns
killed. Other two sectors 27% and 33 % utilization of labor force (Bios, 2010).
Above data is showing that manufacturing is utilizing lowest number of people an
d producing highest number of revenues and unskilled people are burden to econom
y so country should arrange trainings to increase their skills level.
American labor force has more detailed description and just 0.7% of the populati
on is associated with farming, forestry, and fishing: manufacturing, extraction,
transportation, and crafts: 20.3%, managerial, professional, and technical: 37.
3%, sales and office: 24.2%, other services: 17.6% (United States , 2010). The s
tudy shows that majority of people are skilled and they are more associated to t
echnical jobs. In China skill level is very low so they need a lot to make them
comparable to highly technical labor force of US. Thus here Americans are clearl
y ahead.
Current account balance
Current account balance tells us about balance of payment. This is promi
nent feature of the payments of a country. In current account balance, positive
balance of payments and negative balance of payments shows the current account s
urplus or deficit. US current account balance is $296.2 billion (James & Rodgers
b, 2009). When we compare current account balance of China which is $-380.1 bill
ion. America has 1st number in the world in current account balance and China’s nu
mber is 190th.
Exports
When we talk about exports between these two countries we can say that these hav
e a lot of differences lets first talk about US exports here we have divided the
m in four different groups first agricultural products (soybeans, fruit, corn) 9
.2%, at second industrial supplies (organic chemicals) 26.8%, at third capital g
oods (transistors, aircraft, motor vehicle parts, computers, telecommunications
equipment) 49.0%, lastly consumer goods (automobiles, medicines) 15.0%. The tota
l worth of these exports is 994.78 billion and US is ranked 4th in all over the
world when we look them closely we can see that capital goods have highest share
. Still services sector dominates GDP. Canada is biggest importer of US products
and it imports 20.1% other major importers are %, Mexico 11.7%, China 5.5%, Jap
an 5.1%, Germany 4.2%, UK 4.1%. (United States , 2010).
Now let’s talk about China it has exports based economy, China is world’s leading ex
porter and its exports can also be divided into different categories which are e
lectrical and other machinery, including data processing equipment, apparel, tex
tiles, iron and steel, optical and medical equipment. China’s majority exports are
consumer products and products which require low level of technology but after
recession trend is changing and technological companies are moving their manufac
turing facilities to China which will have very positive effect on exports and i
mports it will increase exports and consequently will decrease imports. Now let
talk about export partners of China and their proportion in its exports these ar
e US 17.7%, Hong Kong 13.3%, Japan 8.1%, South Korea 5.2%, and Germany 4.1% (200
8). Honking is like a trading hub for China and products from here are exported
to other countries (China, 2010).
Imports
America and China are big countries and people have power to purchase. People wa
nt to fulfill their needs and wants, these needs and wants are fulfilled by loca
l and international products so let’s cover this important macroeconomic factor an
d look what these countries are purchasing. US are world’s second largest importer
after European Union. Like exports we have divided this too in different compon
ents, which are agricultural products 4.9%, industrial supplies 32.9% (crude oil
8.2%), capital goods 30.4% (computers, telecommunications equipment, motor vehi
cle parts, office machines, electric power machinery), consumer goods 31.8% (aut
omobiles, clothing, medicines, furniture, toys) (United States , 2010). In spite
of being most advance in producing technological product still 30% of import bi
ll consist these products.
Total US import bill is about $1.445 trillion. Other thing which is evident tha
t its 500 billion higher then US exports which is a huge burden on balance of pa
yments of country. Here China is biggest exporter and fulfills 16.4% of export n
eeds where US is just exporting 5.5% of its exports to China so Asian is highly
beneficial from this relationship. Now lets have a look on other importers of th
e products for the US these countries are Canada 15.7%, Mexico 10.1%, Japan 6.6%
, and Germany 4.6% (China, 2010).
China is a country with huge manufacturing facilities and it is exporting its pr
oducts throughout the globe and due to this they import different capital produc
t technological products, which are utilized in form of intermediate goods as co
mpared to US who mainly import consumer products. Other major imports are electr
ical and other machinery, oil and mineral fuels, optical and medical equipment,
metal ores, plastics, and organic chemicals (China, 2010). Their major import pa
rtners are Japan 13.3%, South Korea 9.9%, Taiwan 9.2%, US 7.2%, Germany 4.9% (Bi
os, 2010). This imports analysis shows that US is more dependent on China and we
althy America is in favor of China as it brings more business to this country.
Budget and its finances
Budgets tell us how well government is working and it lies down road map for the
m about how to allocate their resource. Budget deficit tells that country is una
ble to reduce its expenses according to resources or income available. Normally
budgets are deficit budgets and government finances them by public and private b
orrowing lets look at the budget of these countries. US budget portrait a very b
ad picture. Country’s income $1.914 trillion and its expenditures: are $3.615 tril
lion (United States , 2010). Budget deficit is 52.9% of total budget and governm
ent finances that by issuing treasury securities. But it is very difficult to fi
nance such huge deficit. In this case Chinese government took step and they boug
ht T bills at lower rate and didn’t let interest rate to rise which saved them. Ch
inese have almost met mark and their revenues were $972.3 billion and expenditur
es were $1.137 trillion (China, 2010). They financed 18.2% deficit from public d
ebt. China has very good economic policy and they are maintaining good income an
d expenditure relationship as compared to US.
Distribution of income
Distribution of income tells us on what income level majority is and how many pe
ople are living lower then the poverty line. First look at US where per capita i
ncome is 46000 and still 12% of total population lives below poverty line as com
pared to China where per capita income is 6600 and still just 2.8% people are li
ving below the poverty line (James & Rodgersb, 2009). Major difference is econom
ic structure in US which have large organizations and these are controlled by so
me individuals and these in return provide benefit to them on the other hand Chi
na’s economic system is based on small and medium size industries. So these small
industries distribute income in masses. By moving from small to large organizati
on we can achieve higher efficiency but at cost of unequal distribution of wealt
h.
Conclusion
After all this analysis we have come to the point that US is reality of today bu
t China is power of tomorrow. Almost all the factors show that US is lacking beh
ind and China is reducing deficit with an accelerated speed. Recession has also
favored China and it has triggered industrialization of this country. On the oth
er had US is worse effected by this event and US economy will take some time in
rehabilitating from this economic trauma. So this whole analysis tells us about
dominance of China in modern economic world and it also shows us how any country
or economy following this pattern can change itself from a closed economy to an
economy with highest number of exports. On the other hand it also tells what th
e loopholes are in US policies are and how they can be covered.
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