According to GDP figures released on 15 August, China overtook Japan in the second quarter of 2010 to become the world’s second largest economy. This raises two questions: just what do the GDP figures mean and why has this happened?
The GDP figures are total figures measured in US dollars at current exchange rates. According to these nominal figures, Japan’s GDP was $1.286 trillion in the second quarter of 2010; China’s was $1.335 trillion. This follows several years when Chinese growth rates have massively exceeded Japanese ones.
As far as explanations are concerned, economists look to a number of different factors, including investment policies, relative exchange rates, confidence, deflation in Japan and the scope for catching up in China.
The following podcasts and webcasts look at these questions, as do the articles.
Podcasts and webcasts
China eyes Japan’s slowing GDP growth BBC News, Roland Buerk (16/8/10)
Japan’s economic strategy ‘not happening’ BBC Today Programme Interview with Dr Seijiro Takeshita of Mizuho International banks (16/8/10)
China’s growth rate slows to 10.3% as lending tightens BBC News, Chris Hogg (15/7/10)
China exports jump in May BBC News, Chris Hogg (10/6/10)
China Overtakes Japan in 2Q As No. 2 Economy Associated Press on YouTube (16/8/10)
China’s economy takes over Japan’s AsianCorrespondent on YouTube (16/8/10)
Articles
China overtakes Japan to become world’s second-biggest economy Telegraph, Roland Gribben (17/8/10)
Chinese economy eclipses Japan’s Financial Times, Lindsay Whipp and Jamil Anderlini (16/8/10)
Decoding China’s modesty Financial Times blogs, Jamil Anderlini (17/8/10)
China ‘overtakes Japan in economic prowess’ asiaone news (17/8/10)
China overtakes Japan to become second largest economy in world Irish Times, Clifford Coonan (17/8/10)
China Passes Japan As Second-Largest Economy Huffington Post, Joe McDonald (16/8/10)
Data
World Economic Outlook July 2010 Update IMF (7/7/10)
China Economic Statistics and Indicators EconomyWatch
Japan Economic Statistics and Indicators EconomyWatch
Questions
- Why may simple GDP figures be a poor indicator of the relative size of the Chinese and Japanese economies?
- If purchasing-power parity figures were used, how would this affect the relative sizes of the two economies? Explain why purchasing-power parity exchange rates are so different from nominal exchange rates in the two countries.
- What impact have the relative exchange rates of the two countries had on economic growth?
- Why are simple GDP figures a poor indicator of living standards?
- What factors will determine whether income inequality is likely to widen or narrow in China over the coming years?
- What factors explain Japan’s low rate of economic growth since the early 1990s? How likely is it that these factors will apply in China in the future?
One of the key issues tackled during Labour’s term was poverty. In 1997, the UK had one of the worst child poverty rates in Europe (20% of the population) and so Labour made a concerted effort to move more people out of poverty than ever before. Low income was defined as income below 60 per cent of median income. As Chapter 1 from the first “Data and reports” link below states:
Over the period 1994/95 to 2008/09, the percentage of the population below 60 per cent and 70 per cent thresholds of contemporary median income showed slight falls on both Before Housing Costs and After Housing Costs bases. …The proportion and number of the population below low-income thresholds … fell substantially over the same period – with proportions falling by around one half.
Over the period 1994/95 to 2008/09, there was a marked fall in the proportion of children below low income thresholds held constant in real terms. 2008/09 has shown a fall compared to 2007/08.
Despite these improvements, there is a high concentration of people just above the 60% of median income level. And, although poverty rates have fallen since 1997, income inequality remains stubbornly high, with a post-tax-and-benefit Gini co-efficient hovering around 0.38 since 1992, compared with around 0.30 in the late 1970s/early 1980s.
As recession set in, there were concerns about the effect it would have on poverty figures. However, according to the Department for Work and Pensions (DWP), throughout 2008 and 2009 both children and pensioners saw their position improve, as hundreds of thousands were lifted out of poverty. According to the DWP’s annual Households Below Average Income report, mean take-home incomes grew for the seventh consecutive year – by 1% in 2008/9.
Whilst the most vulnerable seem to have survived the first test, the next will come with the substantial budget cuts the UK will see, as the government attempts to reduce the budget deficit. Poverty campaigners have warned that attempts to reduce the deficit must not be detrimental to poverty figures, by taking benefits away from those who need them. As Michelle Mitchell, the charity director at Age UK said: “Clearly there are huge challenges ahead for the new government, but now is the time to renew the fight against pensioner poverty and commit to eradicating it once and for all.”
Articles
Campaigners warn Coalition not to jeopardise falling poverty rates Guardian, Katie Allen (20/5/10)
Child poverty ‘historically high’ The Press Association (20/5/10)
Labour kept poverty in check, says IFS Financial Times, Nicholas Timmins (22/5/10)
Child poverty in Scotland increases by 10,000 in year Scotsman, Gareth Rose (21/5/10)
What the poverty figures show Guardian (20/5/10)
The untold story of poverty in working households Guardian, Peter Kenway (21/5/10)
UK pledges to reduce poverty Financial Times, Daniel Pimlott (21/5/10)
Don’t scrap child benefits, charities warn Guardian (20/5/10)
Data and reports
Households Below Average Income (HBAI) 1994/95-2008/09 Department for Work and Pensions (19/5/10)
Households Below Average Income (pdf file) National Statistics, First Release (20/5/10)
Effects of taxes and benefits on household income Office for National Statistics (see also, especially Tables 26 and 27)
Poverty and inequality in the UK: 2010 Institute for Fiscal Studies
A range of poverty data The Poverty Site
Previous blog
See also The poverty of poverty reduction policies
Questions
- What are the main causes of a) poverty and b) inequality?
- What is the difference between poverty and inequality? Can you think of any policies that might improve one of these objectives, but worsen the other?
- Explain how and why the recessions of the early 1980s, the early 1990s and between 2008 and 2009 could have led to poverty being reduced.
- The Financial Times article talks about different levels of poverty across the country. What can explain these regional disparities?
- The Coalition government has pledged to lift the income tax threshold to £10,000. What effect could this have on unemployment and poverty? How might this effect the poverty trap?
- The Guardian article ‘What the poverty figures show’ says that high levels of child poverty will cost the country at least £25bn a year. Why is this?
Whenever a sporting event comes around, there is mad frenzy from countries across the world to enter a bid – this was entirely evident with the 2018 World Cup bids! And it’s not really surprising with the attention that the World Cup and the Olympics receive. Hundreds of thousands of spectators, billions of pounds worth of investment in infrastructure, thousands of jobs created and television deals in every country of the world.
However, why is it that every sporting event of this magnitude fails to come in on budget? The costs are always underestimated. The Athens Olympics was supposed to cost £1.5 billion, but ended up costing over 10 times as much. It is also suggested that it may have played a part in the current Greek financial crisis. The 2002 Japanese World Cup had little effect on the struggling Japanese economy. The London 2012 Olympics was estimated to cost £2.35 billion, but suggestions say it will now cost taxpayers some £20 billion, although budget cuts are inevitable. What about South Africa? Costs of $300 million were estimated for stadiums and infrastructure, with a boost to GDP of $2.9 billion. However, $300 million was not even sufficient to renovate Soccer City (where the first and final game will be held). Add on to this over $1 billion to rebuild the rest of the stadiums and then take into account rising inflation, which has caused inevitable cost over-runs.
On top of this, every country says ‘look at the benefits’ when they enter their bid. However, economists have suggested that there are actually minimal employment benefits in the long term. Obviously there is substantial investment in infrastructure leading up to the World Cup, which will benefit locals, but the overall boost to GDP is not expected to be significant. A similar thing can be seen with the London Olympics. In the study by PriceWaterhouseCoopers in 2005, there were estimates of a direct gain to London’s GDP of £5900 million between 2005 and 2016. However, UK GDP would only rise by £1936 million. Some of the costly stadiums that were built for the Portuguese European Championships were simply knocked down after the event.
So, what can we expect from South Africa? There have been many criticisms of poor ticket sales and that this World Cup is only for the rich. Street sellers have been booted out of their normal selling ground, as they do not have the necessary permits to sell and cannot afford to buy the permits anyway. Whilst transport has been improved, there are still concerns about the distance that has to be travelled between stadiums and this has put off many potential spectators. However, the Super 14 Southern Hemisphere Rugby tournament was staged in South Africa, with the final at the end of May and the event was successful. Transport worked perfectly, spectators arrived by the thousand and it is hoped that this is a positive omen for the fast approaching World Cup!
Articles
Saved by the Ball Times Online (5/6/10)
South Africa World Cup just for the rich BBC News (10/5/10)
Footing South Africa’s World Cup bill BBC News (4/6/10)
Will South Africa reap rewards from hosting the tournament? Peace FM Online (5/6/10)
Did 2004 Olympics spark Greek financial crisis The Associated Press (4/6/10)
Cost of 2012 Olympic pool triples BBC News (8/4/08)
Watchdog attcks ‘astonishing’ £5bn rise in cost of 2012 games Times Online (22/4/08)
South Africa World Cup costs above budget Reuters (13/8/08)
Reports and papers
Olympic game impact Study PriceWaterhouseCoopers December 2005
A Cost-Benefit Analysis of an Olympic Games Queen’s Economics Department Working Paper No. 1097, Darren McHugh, Queen’s University (Canada) (August 2006)
Questions
- Why do costs tend to be under-estimated and benefits over-estimated?
- What technique could be used to determine whether a sporting event, such as the World Cup, should go ahead? Can you apply this to the London 2012 Olympics?
- How is the multiplier effect relevant to a sporting event, such as the World Cup or the 2012 Olympics?
- To what extent do you think the Athens Olympics contributed to the Greek Financial Crisis? Could the same thing happen with London?
- What might happen to the South African exchange rate during the South African World cup and the sterling exchange rate during the London 2012 Olympics?
- How has inflation affected the budget of South Africa?
Throughout 2009/10, a new millionaire was created in Brazil every 10 minutes – not bad for a developing country! Despite the global recession, Brazil has managed growth of almost 5% and is set to overtake both the UK and France to become the world’s 5th largest economy. Brazil will hold the next World Cup and the Olympic games after London, bringing it further recognition as a global power. It has the third largest aircraft manufacturing industry in the world and is even doing its bit to tackle climate change, with 50% of its cars running on bio-fuels. It exports more meat than any other country and is looking to become an energy power. With falling unemployment, a buoyant economy, growing confidence, fantastic beaches and 6 millionaires created every hour, Brazil looks like the perfect place to live.
However, that is just one side of the story. Brazil is still a country with deep poverty – approximately 60 million people. The slums, or favelas, are home to 1 million people in Rio alone, where unemployment is high and drug wars common. There has been a concerted effort to reduce the drug trafficking business, but this has only created more unemployment. There is little sanitation, poor electricity and minimal chance of escape. Neighbourhoods need rebuilding, and despite high growth and arguably the most popular president in the world (Lula da Silva), there are calls for political, social, taxation and labour market reforms. This cycle of poverty and the equality gap needs addressing before the Brazilian economy can really be considered a global power.
Webcasts and podcasts
Will Brazil’s economy keep growing? BBC News, Matt Frei (27/5/10)
Brazil’s bid to be ‘world’s breadbasket’ BBC World News America, Paulo Cabral (26/5/10)
Tackling Brazil’s poverty BBC World News America, Gary Duffy (28/5/10)
Brazil’s development spurs economic quality hopes BBC World News America, Matt Frei (27/5/10)
Brazil’s air industry takes off BBC World News America, Paolo Cabral (24/5/10)
‘Our growth quality is better than China’ BBC World News America, Marcelo Neri (25/5/10)
Brazilian economy poised to overtake UK’s BBC News Today, Matt Frei (27/5/10)
Data
Economic data Banco Central do Brasil
Brazil Economy EconomyWatch
Brazil CIA World Factbook
Brazil Geognos
Brazil data World Bank
Questions
- What are the main causes of (a) inequality and (b) poverty in an economy? What is the difference between these concepts?
- How does the government subsidised housing programme aim to help low income households. Use a diagram to illustrate the effect.
- What policies can be used to reduce the equality gap?
- Are those living in the favelas in absolute poverty? How do we distinguish between absolute and relative poverty? Is it the same across the world?
- What are the adverse effects of fast growth in Brazil?
Labour’s Chancellor, Alistair Darling, delivered his last budget on the 24th March 2010. However, with the new Coalition government planning to make more substantial cuts and with George Osborne and other ministers claiming to find ‘black holes’ in the budgets left by Labour, an emergency budget will take place on the 22nd June 2010. The Coalition government has agreed to make £6 billion of spending cuts in the current year in a bid to reduce the UK’s substantial budget deficit, which stands at nearly 12% of GDP. Vince Cable told the Times:
I fear that a lot of bad news about the public finances has been hidden and stored up for the new government. The skeletons are starting to fall out of the cupboard.
There are plans to reform capital gains tax, possibly increase VAT to 20% and remove tax credits from some middle-income families. In Alistair Darling’s budget, it was middle-income families who were among the ‘losers’, with tax rises of around £19 billion, and it looks as though middle-income families may be hit again. Throughout the election all parties pledged to continue to help the poorest families, but there appears to be a lot of uncertainty ahead for middle-income families. They are likely to face reduced benefits and higher taxes as the Coalition government tackles the £163 billion deficit.
Despite critics of spending cuts arguing that it could cause a double-dip recession, the government is confident that cutting spending now is the right thing to do. As Osborne told GMTV:
I am pretty clear that the advice from the Governor of the Bank of England was that [cutting spending now] was a sensible thing to do, and if there is waste in Government that people at home are paying for with their taxes, let’s start tackling that now.
Chancellor launches audit of government spending Independent, Andrew Woodcock (17/5/10)
Osborne to give details of £6bn spending cuts next week (including video) BBC News (17/5/10)
Savings cuts to ‘hit middle class families’ BBC News (15/5/10)
Osborne to deliver emergency budget on June 22nd Times Online, Susan Thompson (17/5/10)
David Cameron declares war on public sector pay Telegraph, Rosa Prince (16/5/10)
All eyes on the emergency Budget Financial Times, Matthew Vincent (14/5/10)
Tax rises likely under Coaliation government, says Institute of Fiscal Studies Telegraph, Edmund Conway (13/5/10)
Questions
- What will be the likely impact on middle-income families if proposed spending cuts go ahead? How might this affect the recovery?
- What are the arguments for a) cutting spending now and b) cutting spending later?
- In the future, the Coalition government plans to limit bonus payments. How might this policy affect jobs and recruitment?
- What is the likely impact of the future increase in personal tax allowance? Who will it benefit the most?
- How are the proposals for corporation tax and capital gains tax likely to affect the economic recovery?
- Is a rise in VAT a good policy? Who will it affect the most? Will it reduce consumption and hence aggregate demand or is it likely simply to raise tax revenue? (Hint: Think about the type of tax that VAT is.)