The World Economic Forum has warned that 2009 may see a ‘hard landing’ for China. In the context of China, this does not necessarily mean a recession, but the WEF report does identify a significant possible slowdown in Chinese growth. Given that high growth in China has led to a high level of demand for imports from other countries, especailly for raw materials and semi-finished goods, any slowdown in Chinese economic growth may have significant repercussions in the rest of the world. Any hopes that China and the emerging economies may help the rest of the world through their recessions have been dashed by data showing that even exports from China have been falling in October and November 2008 by 2.2% and 2.8% respectively. This has meant that aggregate demand in China is falling and may cause further problems, not only for China, but for the whole world economy.
China slowdown ‘big global risk’ BBC News Online (13/1/09)
China’s exports in record decline BBC News Online (13/1/09)
China’s exports slump in sharpest decline in decade Times Online (13/1/09)
World Economic Forum highlights Chinese slump as biggest risk to global economy Telegraph (14/1/09)
Chinese exports fall by the biggest margin in a decade Telegraph (14/1/09)
Questions
- Explain the significance of the fall in Chinese exports for the Chinese economy.
- Analyse the principal causes of the fall in the level of Chinese exports.
- Assess how the changes in China’s trade position will affect the exchange rate of the Chinese currency, the yuan.
- Discuss policies that the Chinese government can implement to try to minimise the impact of the fall in exports on economic growth.
Many commentators (and politicians) have suggested that the most painless route out of the recession is for us all to shop until we drop. If we can prevent consumer spending from falling too far then this may help maintain oonsumer confidence and therefore aggregate demand. So, is it our patriotic duty to shop? Should we all be out there helping in our own small way to prevent recession, or will more shopping just land us even further in debt and therefore make us worse off? The articles linked to below look at various aspects of the ‘shopping debate’ and consider whether retail therapy is also economic therapy.
Your country needs you … to buy some underpants Guardian (20/12/08)
Beyond retail therapy Guardian (8/1/09)
Shopping is no panacea for a broken economy Guardian (28/12/08)
High street counter-offensive Guardian (31/12/08)
Should shopping be a patriotic duty? BBC News Online (19/12/08)
Questions
- How could the need both to reduce debt and to maintain aggregate demand be reconciled?
- Discuss the extent to which an increase in consumer expenditure is (a) a necessary and (b) a sufficient condition for a recovery of the economy?
- To what extent will long-term aggregate supply depend on the maintenance of aggregate demand?
- If shopping is your patriotic duty, what types of shopping would be best for the country?
It is something of a media sport in these recessionary times to find ‘economic scapegoats’. One minute the recession is the fault of the banks and their poor lending practices; the next minute it is the fault of the media themselves, who are constantly reporting doom and gloom; the next minute it is the fault of the politicians, who have failed to react quickly enough to the economic uncertainties; the list goes on! However, the one group that is rarely blamed is ‘us’ – the consumers. Given that the state of the economy is the outcome of our collective decisions, it could be said that we have no real right to complain, as our collective lack of confidence could be what has caused much of the current situation. As James Meek puts it in the article below:
What makes the situation peculiar is that the crisis that threatens us also seems to be us; we are simultaneously menaced by the wave, and exist as elements of the wave. After all, that is what an economic crisis is: the sum of all the actions of billions of people around the world, deciding whether to lend or hoard, borrow or save, sell or buy, move or stay, hire or fire, study or look for work, be pessimistic or optimistic.
To live in remarkable times Guardian (5/1/09)
Questions
- Explain how changes in consumer confidence can affect the level of aggregate demand.
- Examine the importance of consumer confidence in determining the length and depth of a recession.
- Discuss policies that the government can implement to try to boost consumer confidence.
- Analyse the impact on an economy of a prolonged period of poor consumer confidence.
New figures from the Centre for Economics and Business Research show that the UK has slipped from the fifth to the sixth largest economy in the world as measured by GDP. This places the UK behind the USA, Japan, China, Germany and now France. Two years ago, the UK was fourth largest (ahead of China). However, is GDP the most appropriate measure of the success of an economy?
Zut! France leapfrogs UK in economic table Times Online (7/12/08)
UK drops below first France and then Italy in world GDP league table CEBR News Release (8/12/08)
Questions
- Explain the difference between GDP, GDP per capita and GDP measured on a purchasing-power-parity basis.
- Explain why “….. overvalued sterling has inflated the UK’s claims to be among the top five world economies.”
- Discuss whether GDP per capita is the most appropriate measure of economic success.
Paul Krugman won the Nobel Prize for Economics in 2008. He won the prize for his analysis of trade patterns and location of economic activity, but he is also well known in academic circles for his work on international finance. In the article below, he looks at the foundations of the current financial crisis. He explains the history of the crisis, the action that has been taken by governments around the world, the likely success of the policies and also the impact of the crisis on the real economy. This is perhaps the issue that is of most concern to us as economists. With recession having taken a grip on many countries, it is important for governments to understand the root causes of the crisis to ensure that their policies address these. The article is an edited extract from The Return of Depression Economics and The Crisis of 2008, by Paul Krugman.
We all go together when we go Guardian (6/12/08)
Questions
- Examine the role of the US housing market in the origins of the current financial crisis.
- What is meant by the ‘shadow banking system’? How does the regulatory approach to the shadow banking system differ from that of the mainstream banking system?
- “What’s really worrying is the loss of policy traction: the economy is stalling despite repeated efforts by policy-makers to get it going again.” What does Krugman mean by policy traction? Discuss the possible causes of this policy traction.
- Explain why Krugman believes that the financial rescue package will not be sufficient to turn the US economy around.
- Assess Krugman’s argument that the only way out of the crisis is a “good old Keynesian fiscal stimulus”..