National Income Accounting : A Case Study Of CHINA

Group 7
Kota Saranya Pinki Mandal Shilpa M Shivraj D Sneha Mehta Tapan Udaykumar Desai

Economy of China
CHINA ranks 2nd in terms of GDP calculated by purchasing power parity method with GDP of $ 9.412 trillion succeeding U. S. It ranks 4th in terms of GDP calculated by nominal method with gdp of $ 2.22 trillion succeeding U.S. , JAPAN, GERMANY.

Contd..
Its gdp per capita in nominal terms is $1703 and in ppp terms is $6200.

Its GDP growth rate is 9.9 %.

Male Female Ratio

120

100

80

60

FEMALE MALE

40

20

0 2000 2001 2002 2003 2004

Population Growth YOY % Basis

% CHANGE YOY BAISIS
0.9
0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2000 2001 2002 2003 2004 % CHANGE YOY BAISIS

120

100

80

60

RURAL (MILLION) URBAN (MILLION)

40

20

0 2000 2001 2002 2003 2004

CHINA brought economic reforms in the year 1981 and from then it is moving from command economy to market economy .

Gross Domestic Product

The sum of market value of all final goods and services produced in a country during a specified period of time, generally one year. GDP at factor cost (GDPFC) is the sum of all factor payments (wages, interest, rent, profits and depreciation).

GDPFC= GDPMP Net indirect taxes

Year

Real GDP GDP annual Rmb Index in GDP per growth billion real head rate at terms Rmb (%) current prices 100.0 115.6 120.5 128.6 147.9 155.5 67.9 82.4 85.9 91.0 102.8 106.8 119 142 144 150 165 168 15.6 4.2 6.8 15.0 5.1

1953 Hyperinflation conquered; civil war and land reform ended: GDP up 15.6% in real terms.

1952 1953 1954 1955 1956 1957

1958
1959 1960 1961 1962

188.6
205.2 204.6 148.7 140.4

130.7
143.9 145.7 122.0 114.9

200
216 218 185 173

21.3
8.8 -0.3 -27.3 -5.6

1958-59 So-called "Great Leap Forward" devastated agriculture: result was falling GDP in 1960-62.

Year 1963 1964

1965 1966 1967 1968 1969 1970 1971 1972 1973 1974

154.7 183.0
214.2 237.1 223.6 214.4 250.6 299.3 320.2 332.4 358.6 366.9

123.3 145.4
171.6 186.8 177.4 172.3 193.8 225.3 242.6 251.8 272.1 279.0

181 208
240 254 235 222 243 275 288 292 309 310

10.2 18.3
17.0 10.7 -5.7 -4.1 16.9 19.4 7.0 3.8 7.9 2.3

1963-66 Partial restoration of market economy in the countryside promoted faster growth of agriculture. 1967-68 Production undermined by the so-called "Great Proletarian Cultural Revolution", that was initiated by Mao in mid-1966 and effectively ended by People's Liberation Army intervention in 1968.

1969-70 High growth rates followed the restoration of order after the "cultural revolution".
1976 Widespread earthquakes, hit industrial centres, while agricultural output was hit by drought; policy paralysis resulted from the anti-Deng campaign, followed by Mao's death and the arrest of the Gang of Four. GDP fell.

1975 1976

398.8 392.4

299.7 294.4

327 316

8.7 -1.6

1977

422.2

320.2

339

1978
1979 1980 1981 1982

471.6
507.5 547.1 575.5 629.0

362.4
403.8 451.8 486.2 529.5

379
417 460 489 525

1983-85 Double-digit real GDP growth 7.6 accompanied the first wave of foreign investment into China, and non-state 11.7 enterprises started to develop.
7.6 7.8 5.2 9.1 1989-91 Growth slowed which resulted

1983
1984 1985 1986

698.9
805.8 912.1

593.5
717.1 896.4

580
692 853 956 1,104 1,355 1,512 1,634 1,879 2,287

10.9
15.2 13.5 8.8 11.6 11.3 4.1 3.8 9.2 14.2

989.7 1,020.2

1987 1,103.5 1,196.3 1988 1,228.2 1,492.8 1989 1,279.8 1,690.9 1990 1,333.5 1,854.8 1991 1,454.9 2,161.8 1992 1,660.0 2663.8

in panic buying and runaway inflation. Price stability was achieved by cancelling large fixed investment projects, slowing domestic demand. Foreign investment fell off after the Beijing Massacre of June 1989.1992 massively boosted foreign direct investment inflows .

1993 1994 1995 1996

1,877.5 2,114.0 2,304.3 2,530.1

3,463.4 4,675.9 5,847.8 6,788.5

2,939 3,923 4,854 5,576

13.5 12.6 10.5 9.6

1997 1998 1999 2000

2001 2002 2003 2004 2005 2006 2007

2,745.2 2,959.3 3,169.4 3,422.9

7,446.3 7,834.5 8,206.8 8,946.8

10,965.5 12,033.3 13,582.3 15,987.8 18,386.8 21,087.1 24,661.9

6,054 6,038 7,159 7,858

8,622 9,398 10,542 12,336 14,040 16,084

8.8 7.8 7.1 8.0

8.3 9.1 10.0 10.1 9.9 11.1 11.4

1993 Growth rates subsided gradually in subsequent years, producing a so-called "soft landing". Living standards continued to rise, as evidenced by the proliferation of consumer durables, especially among the urban population. However, at the end of 2005 GDP has recently been grossly underestimated as a result of a failure to take into account the rapid growth of the services sector. As a result, growth rates for 2003-2005 are now recorded at around 10% per year in real terms. Despite efforts to cool the overheating economy, the officially recorded GDP growth rate was 11.4% in 2007.

2008

31,404.5

9.6

2009

34,506.9

8.7

2010

40,201.2

10.4

2011 1st 3 qtrs

32,069.2

9.4

In 2008 the global economic crisis began to reduce China's growth rate. In the face of forecasts that this might drop below the rate at which school leavers can be absorbed by the growing economy (7%-8%) the government decided to pump Rmb 4 trillion into the economy in the form of an economic stimulus package consisting largely of investment in fixed infrastucture and human capital. The stimulus succeeded in preventing a dramatic fall in GDP growth in 2009 and in providing a sustained recovery in 2010, when the real annual GDP growth rate rose to 10.4%. With stagnation in China's major markets in 2011, GDP growth is expected to subside to around 9.2% by the end of the year. As global conditions continue to deteriorate in late 2011, it seems likely that economic growth will fall to around 8% in 2012. The government does not have the option of returning to stimulus on the massive scale of 2008-2009 and has to be careful not to stoke inflation.

Measurement of National Income

Three approaches of measuring NI:
Product Approach

Factor Income Approach

Expenditure Approach

Year
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

GNI
3.501 3.658 4.003 4.597 5.208 5.921 6.534

Growth rate
3.50072387 3.3145175 11.0135604 16.5290153 12.1597606 20.0397003 9.43122966 10.6448107 10.8950979 8.61739875 5.86839404 5.66575628 8.04036873 7.35690141 9.90645957 8.15317641

7.252 8.004
8.639 9.185 9.8 1.062 1.135 1.25 1.384

2000
2001 2002 2003 2004

Contd..
2005 1.545 11.9920245 2006 1.732 10.9254534 2007 1.970 12.1444096

2008

2.109
3.55641231

2009

2.401
18.502939

Inflation Rates in China

Artificially lower prices resulting from state subsidies for every basic product
Before Reform

Low inflation rate of 0.7% since prices were controlled by state

Initial Period of Reforms

Second phase of opening up in 1992

Boosted FDI inflows into coastal areas Started a wave of government investment in Shanghai Resulted in surge in trade , GDP growth and Inflation followed

How Inflation Measured In CHINA?

Inflation is measured using four price indices

GDP deflator from 1978

Consumer Price index (CPI) from 1985

Retail price Index (RPI) from 1978

Producer Price Index (PPI) from 1979

Consumer Price Index, Inflation Rate and GDP deflator for China
Years 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
General CPI (1985 = Inflation Rate (%) @ (Year-on- GDP Deflator # (1990 100) Year change in CPI) = 100) 100.00 -70.5 106.5 6.50% 73.8 114.3 7.32% 77.6 135.8 18.81% 87 160.2 17.97% 94.6 165.2 3.12% 100 170.8 3.39% 106.7 181.7 6.38% 115.2 208.4 14.69% 131.9 258.6 24.09% 158.2 302.8 17.09% 179 327.9 8.29% 189.6 337.1 2.81% 191.2 334.4 -0.80% 186.5 329.7 -1.41% 182.4

Inflation Rate (%) @ (Year-on-Year change in CPI)

0.3
0.25

0.2

0.15

Inflation Rate fluctuated overtime and became negative (deflation) in 1998 and 1999

0.1

0.05

-0.05
Inflation Rate (%) @ (Year-on-Year change in CPI)

Interest Rates
As inflation rose, real interest rates on loans fell into negative area. So to control inflation, China raised interest rates on bank loans and deposits. Even after the interest rate hike, when inflation was taken into account, real interest rates stood at roughly 3%.

Contd..
When interest rates are disintermediation effect. low, there will be a

Unregulated financial transactions effectiveness of monetary policy.

reduces

the

During the period between 1990 and 2004, the bank rate and annual inflation rate moved together.

Chart: Inflation rate and Bank rate in China

40 35

30

25

20

Annual Inflation Rate Bank Rate(% per annum)

15

10

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

EXCHANGE RATES
The price of one country's currency expressed in another country's currency. The exchange rate of yuan is pegged against the US Dollar by the Government of China. The economy got overheated in 1992 and 1993 due to reforms and liberalization.

GDP real growth was at 14%.

contd.
Inflation increased from 5% to 24% in 1994. The current account balance shifted from surplus $1.3 billion in 1991 to a deficit of $11.9 billion in 1993. This led to depreciation of yuan. In china , 1994 yuan was devalued.

Effective Exchange Rate of Yuan

Years 1990 1991 1992 1993 1994 1995 1996 Real Effective Exchange Rate 98.94 87.75 78.90 69.81 75.90 84.57 92.76 Nominal Rate 148.84 137.77 119.27 95.75 86.68 85.63 89.25 Effective Exchange

1997 1998
1999 2000 2001 2002 2003

98.84 100.00
97.51 100.00 104.32 102.64 96.68

95.11 99.45
97.31 100.00 104.49 103.59 96.48

EFFECTIVE EXCHANGE RATE OF YUAN

Despite an average annual growth rate of nearly 10% since its reforms, per capita GDP in china is still lower than that of US. The yuan /dollar rate of 1.68 in 1978 dropped to around 8.2. The continued fall in value of yuan was attributed to the policy by the Chinese government to maintain an artificially low exchange rate to boost exports. Lowering the nominal exchange rate would lead to a rise in inflation. China was under heavy international pressure to discard its currencys de facto peg to US dollar.

On July 21st 2005 , managed floating exchange rate was introduced.