Chinese Miracle

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Economics
Presentation at the end of the course (5 minutes of speech + 5 min of discussion), no slides or papers (shit). Task: make and idea of the china growth in the next 10 years, and the rest of the world economy. Read china daily.

Introduction
How do trade opening and globalization affect the economic growth? Macroeconomists think of Trade-Imbalance as a difference between Savings and Investments, and find answers to their questions by making assumptions. Why should a country run a trade surplus according to this theory? Running a TB surplus today means a less consumption today in order to consume more tomorrow. Why should a country run a TB surplus? Consumption smoothing is a determinant assumption. If you expect to produce different levels of output over time, period 1 less than period 2, so if u expect economy to grow fast, and if your preference consumption smoothing, when you try to maximize welfare (over time not just today) you have to consider that your marginal utility of income is going to decrease. Now, that you are poor, you give more importance to the same sum of money rather than in the future. Thus, expecting to be richer in the future, you consume more today (consuming too little today and too much tomorrow reduces the marginal utility). The theoretical approach to study imbalances is useless in order to find the answers. There are different explanations to current imbalances.

The questions we will try to answer are related to globalization and economic performance: how can globalization affect the economic performances and the economic growth of a country? We will analyze the Chinese experience of the past years to base our model, since China has been embraced by the effects of globalization and by a stellar growth rate. Main questions will regard: 1) why like china most countries in the world are open to international trade, instead of opting for autarchy (self sufficiently like north Korea)? What is the link between openness and trade? 2) Like China, most countries are open, but as well they are protectionist. The fact that most countries are open to trade suggest they to increase their welfare with international trade, but at the same time countries try to reduce it, since a low TB seems to be a benefit. What is the reason of this behavior? 3) Why and how trade openness affects economic growth?

Lecture 106/11/2012
In 1978 China started a process of trade liberalization moving from planned to market economy. China’s nominal GDP in 1978 was $150 billion. This amount is less than the actual trade surplus with the US. Nowadays, the Chinese GDP of $ 7.3 trillion makes this country the second largest economic power after the US ($15 trillion).

It is important to bear in mind that it does not make sense to compare these values, since they are in nominal terms and do not consider fundamental factors as economic growth. Thus, China’s economy is not 50 times bigger than in 1978 but we should rather consider the effect of inflation and look at real GDP in order to compare GDP growth over time properly. We know that the Average Chinese Real GDP growth is equal to 9.9%, and that in order to compute the size of any economy at the end of a period we have to apply this formula: (1+g)t. Therefore, if China will maintain this level of real growth, in 30 years the size of its economy will be 17.5 times bigger [(1+0.10)30=17.5]. For a given growth rate, how much does it take to double income? t log(1+g)=2 t=log(2)/log(1+g)

Moreover, the problem of computing the China and US GDP $ is that you are assuming that the purchasing power of acquiring US dollars is the same across China and US. The purchasing power of manufacturing goods in China or US is not different, but what makes a big difference is the purchasing power of services (restaurant, haircut, massage), which in US are a lot more expansive; indeed, the effect of different purchasing power and the presence of non-traded...
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