Country Analysis - South Korea

Topics: Inflation, Unemployment, Macroeconomics Pages: 10 (3420 words) Published: July 14, 2013

STUDENT ID:2013225774

South Korea over the past four decades has demonstrated incredible growth and global integration to become a high-tech industrialized economy. In the 1960s, GDP per capita was comparable with levels in the poorer countries of Africa and Asia. In 2004, South Korea joined the trillion dollar club of world economies, and is currently the world's 12th largest economy. Initially, a system of close government and business ties, including directed credit and import restrictions, made this success possible. The government promoted the import of raw materials and technology at the expense of consumer goods, and encouraged savings and investment over consumption. The Asian financial crisis of 1997-98 exposed longstanding weaknesses in South Korea's development model including high debt/equity ratios and massive short-term foreign borrowing. GDP plunged by 6.9% in 1998, and then recovered by 9% in 1999-2000 Korea's export focused economy was hit hard by the 2008 global economic downturn, but quickly rebounded in subsequent years, reaching 6.3% growth in 2010. The US-South Korea Free Trade Agreement was ratified by both governments in 2011 and went into effect in March 2012. Throughout 2012 the economy experienced sluggish growth because of market slowdowns in the United States, China, and the Eurozone. The incoming administration in 2013, following the December 2012 presidential election, is likely to face the challenges of balancing heavy reliance on exports with developing domestic-oriented sectors, such as services. The South Korean economy's long term challenges include a rapidly aging population, inflexible labor market, and heavy reliance on exports - which comprise half of GDP. South Korea is an open economic system country. It is totally depending on their trading activities to support its economic growth as South Korea does not have any natural resources. Its main exports are semiconductors, wireless telecommunications equipment, motor vehicles, computers, steel, ships, petrochemicals and its main export partner are China 24.4%, US 10.1%, Japan 7.1%. Meanwhile, its main import are machinery, electronics and electronic equipment, oil, steel, transport equipment, organic chemicals, plastics and the import partner of South Korea are China 16.5%, Japan 13%, US 8.5%, Saudi Arabia 7.1%, Australia 5%  PRICE STABILITY.

Export (Billion $) Inflation Rate
Diagram 1 Diagram 2

Price stability is very important to a country as it determines the rate of money of the country. One crucial component that is significance to price stability is Consumer Price Index (CPI). Usually, inflation rate is based on CPI. The South Korean CPI shows the change in prices of a standard package of goods and services which South Korean households purchase for consumption. In order to measure inflation, an assessment is made of how much the CPI has risen in percentage terms over a given period compared to the CPI in a preceding period. The price stability also is achieved when there is a low rate of inflation. According to Parkin and Bade, inflation is an upward movement in the average level of prices. Its opposite is deflation, a downward movement in the average level of prices. The boundary between inflation and deflation is price stability. Therefore, it’s very important for a country to control their inflation rate from 2% to 3% only in order to have good price stability. However throughout the 5 years period starting from 2007 until 2011, Korea’s average inflation rate is 3.4% which is quite high as the inflation rate should be only 2% to 3% only. This is due to the deepening recession that occurs during late 2008 and 2009 in United States and in the world generally which causes the economic activity become slower. In United States,...
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