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

2000 2001 2002 2003 20040

20

40

60

80

100

120

FEMALE

MALE

Population Growth YOY % Basis

2000 2001 2002 2003 20040

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

% CHANGE YOY BAISIS

% CHANGE YOY BAISIS

2000 2001 2002 2003 20040

20

40

60

80

100

120

RURAL (MILLION)

URBAN (MILLION)

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

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

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

Year

GDP Index in real terms

  

GDP Rmb billion at current prices 

GDP per head Rmb

Real annual growth

rate (%)

1952 100.0 67.9 119

1953 115.6 82.4 142 15.6

1954 120.5 85.9 144 4.2

1955 128.6 91.0 150 6.8

1956 147.9 102.8 165 15.0

1957 155.5 106.8 168 5.1

1958 188.6 130.7 200 21.3

1959 205.2 143.9 216 8.8

1960 204.6 145.7 218 -0.3

1961 148.7 122.0 185 -27.3

1962 140.4 114.9 173 -5.6

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.

Year

1963 154.7 123.3 181 10.2

1964 183.0 145.4 208 18.3

1965 214.2 171.6 240 17.0

1966 237.1 186.8 254 10.7

1967 223.6 177.4 235 -5.7

1968 214.4 172.3 222 -4.1

1969 250.6 193.8 243 16.9

1970 299.3 225.3 275 19.4

1971 320.2 242.6 288 7.0

1972 332.4 251.8 292 3.8

1973 358.6 272.1 309 7.9

1974 366.9 279.0 310 2.3

1975 398.8 299.7 327 8.7

1976 392.4 294.4 316 -1.6

1983-85 Double-digit real GDP growth accompanied the first wave of foreign investment into China, and non-state enterprises started to develop.

1989-91 Growth slowed which resulted 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 .

1977 422.2 320.2 339 7.6

1978 471.6 362.4 379 11.7

1979 507.5 403.8 417 7.6

1980 547.1 451.8 460 7.8

1981 575.5 486.2 489 5.2

1982 629.0 529.5 525 9.1

1983 698.9 593.5 580 10.9

1984 805.8 717.1 692 15.2

1985 912.1 896.4 853 13.5

1986 989.7 1,020.2 956 8.8

1987 1,103.5 1,196.3 1,104 11.6

1988 1,228.2 1,492.8 1,355 11.3

1989 1,279.8 1,690.9 1,512 4.1

1990 1,333.5 1,854.8 1,634 3.8

1991 1,454.9 2,161.8 1,879 9.2

1992 1,660.0 2663.8 2,287 14.2

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.

1993 1,877.5 3,463.4 2,939 13.5

1994 2,114.0 4,675.9 3,923 12.6

1995 2,304.3 5,847.8 4,854 10.5

1996 2,530.1 6,788.5 5,576 9.6

1997 2,745.2 7,446.3 6,054 8.8

1998 2,959.3 7,834.5 6,038 7.8

1999 3,169.4 8,206.8 7,159 7.1

2000 3,422.9 8,946.8 7,858 8.0

2001 10,965.5 8,622 8.3

2002 12,033.3 9,398 9.1

2003 13,582.3 10,542 10.0

2004 15,987.8 12,336 10.1

2005 18,386.8 14,040 9.9

2006 21,087.1 16,084 11.1

2007 24,661.9 11.4

• 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.

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

Measurement of National Income

• Three approaches of measuring NI:• Product Approach

• Factor Income Approach

• Expenditure Approach

Year GNI Growth rate

1989 3.501 3.500723871990 3.658 3.3145175

1991 4.003 11.0135604

1992 4.597 16.5290153

1993 5.208 12.1597606

1994 5.921 20.03970031995 6.534 9.43122966

1996 7.252 10.6448107

1997 8.004 10.8950979

1998 8.639 8.617398751999 9.185 5.868394042000 9.8 5.66575628

2001 1.062 8.040368732002 1.135 7.35690141

2003 1.25 9.906459572004 1.384 8.15317641

Contd..

2005 1.545

11.99202452006 1.732

10.92545342007 1.970

12.14440962008 2.109

3.556412312009 2.401

18.502939

Inflation Rates in China

Before Reform

•Artificially lower prices resulting from state subsidies for every basic product

Initial Period

of Refor

ms

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

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?

GDP deflator

from 1978

Consumer Price index (CPI) from

1985

Retail price Index (RPI) from 1978

Producer Price Index (PPI) from

1979

Inflation is measured using four price indices

Consumer Price Index, Inflation Rate and GDP deflator for China

YearsGeneral CPI (1985 =

100)Inflation Rate (%) @ (Year-on-

Year change in CPI)GDP Deflator # (1990

= 100)1985 100.00 -- 70.51986 106.5 6.50% 73.81987 114.3 7.32% 77.61988 135.8 18.81% 871989 160.2 17.97% 94.61990 165.2 3.12% 1001991 170.8 3.39% 106.71992 181.7 6.38% 115.21993 208.4 14.69% 131.91994 258.6 24.09% 158.21995 302.8 17.09% 1791996 327.9 8.29% 189.61997 337.1 2.81% 191.21998 334.4 -0.80% 186.51999 329.7 -1.41% 182.4

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

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

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

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

1999

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 low, there will be a disintermediation effect.

• Unregulated financial transactions reduces the effectiveness of monetary policy.

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

Chart: Inflation rate and Bank rate in China

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 20040

5

10

15

20

25

30

35

40

Annual Inflation Rate

Bank Rate(% per annum)

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 YuanYears Real Effective Exchange Rate Nominal Effective Exchange Rate

1990 98.94 148.84

1991 87.75 137.77

1992 78.90 119.27

1993 69.81 95.75

1994 75.90 86.68

1995 84.57 85.63

1996 92.76 89.25

1997 98.84 95.11

1998 100.00 99.45

1999 97.51 97.31

2000 100.00 100.00

2001 104.32 104.49

2002 102.64 103.59

2003 96.68 96.48

2004 94.98 92.04

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 currency’s de facto peg to US dollar.

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