Economic Analysis

 

Summary of the Article

Even though economic development in China has been on the increase in the recent past, this has changed as a result of low consumption rates by the Chinese. The country has for long enjoyed astronomical growth as it is considered the world’s exporting powerhouse. However, the trend is now on the Chinese consumers to drive future expansion of the country’s economy. Overreliance on external markets through massive exportation has decreased with decline on sales from Europe and US. Chinese are considered the stingiest consumers with their household consumption accounting for 35% of the overall economy while that of Americans is at 71% and 57% for the Europeans. Saving for Chinese is high at 38% compared to Americans’ rates of 3.9% and 2.8% for Japanese. Even though the young generation is beginning to buy more, take advantage of credit facilities, and save less, the old trend is only eroding very slowly (Richburg, 2012).

There are complex reasons as to why Chinese are likely to consume less and save more. The major reasons are the country’s tradition and government policies that discourage consumption. This is the reason Chinese aged over 50 years save over 60% of their income because of the economic hardship and political chaos they experienced. The government is now fighting for ways to expand domestic demand, which is a component of GDP. However, this requires that interest rates are freed to rise and the currency allowed to float freely, something that the China’s Communists Party has resisted for long. Since it is argued that China owns the greatest share of the GDP, it is advisable that the government encourages and allows the growth of the private sector. This is because consumers can be encouraged to consume more if they earn more. Household income in China accounts for only 50% of the country’s GDP when compared to 80% in US(Richburg, 2012).

 

Analysis and Own Opinions

Consumption is a component used in computation of GDP with high consumption rates leading to high GDP. It is therefore important to encourage citizens in a country to consume more in order to improve the economy of a country. In the case of China, consumption is low than savings as shown in the graph below:

 

 

 

 

 

 

 

 

 

From the graph above, it is evident that saving is below consumption in normal circumstances. Even though people are encouraged to save for future and unforeseen events, they should not save more than they consume. This is as shown in saving 1 curve, which is below the consumption curve. It is also notable that at disposable income equivalent to zero, a person will consume. At this point, consumption will be at A while savings will be at negative A, an equal negative amount. This is because consumption at this level will be based on debts that will be offset by future savings (Arnold, 2010).

In the normal circumstances, the saving curve, S1 will always be below the consumption curve, C, since consumers are encouraged to consume more and improve the economy of their country. This can be through increase in interest rates that will control the market and encourage people to consume by use credit facilities since the obtained funds have promising returns (Arnold, 2010). However, this is not the case for China in which saving is more (S2) than consumption (C). Even though the saving curve start at negative as it should, a time will come when savings will equal the consumption at X and later surpass the consumption curve to S2. In such circumstances, the consumers are saving more than they are saving and this has negative effect on the economy of the country. This is the reason the government in China calls for increased consumption to improve on the country’s GDP since the country has for long dependent on the currently decreasing external market. 

 

 

References

Arnold, R. A. (2010). Economics. Australia: South-Western Cengage Learning.

Richburg, K. B. (2012). Getting Chinese to stop saving and start spending is a hard sell. Washington Post.Retrieved from http://www.washingtonpost.com/world/asia_pacific/getting-chinese-to-stop-saving-and-start-spending-is-a-hard-sell/2012/07/04/gJQAc7P6OW_story.html.