Free «Macroeconomics» Essay Sample

One of the macroeconomics problems facing China is in the value of its currency, yuan (Barr, 2010). China's currency has in the recent past grown weak against other currencies especially those used in international trade. The value of yuan has grown weak especially against the US dollar (Barr, 2010). China is one of the major exports to U.S. Due to the weakening nature of its currency; it is currently facing problems with its export sector. The Chinese government is currently facing pressure from its export sector which employs millions and millions of people. It has been said that there are ongoing talks by world's economic sponsors to push the Chinese government to let the yuan appreciate against the dollar as a move to rescue its exports sector and relieve high unemployment in U.S. (Barr, 2010).

As China undergoes this problem, last year it was ranked the world biggest exporter and it held $2.4 trillion of foreign exchange reserves due to huge surpluses it had recorded (Barr, 2010). This came after a decade of almost extravagant U.S. spending in China through purchasing Chinese bonds as a means of funding China (Barr, 2010). However, these great trade strengths have been said to give China new economic susceptibilities. Due to the world economic depression which affected the globe in 2008, global demand for goods have since declined. This has dimmed prospects of exports growth in China and many of its debtors especially the U.S. have been threatening to take economic measures against China due to the value of yuan.



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One of the effects of this situation (low currency value) on other major macroeconomic factors is on inflation. It has been said that talks between U.S. and China have suggested that China's foreign currency be let to rise against the dollar. However, in the short run, the country will experience very high levels of inflation. With high levels of inflation, the purchasing power of the consumers is likely to go down thereby affecting consumption rate in the country. In fact, this has already started to be felt in China as last year; it recorded the lowest consumption rate in 25 years (Barr, 2010). In the medium run, if inflation level increases due to increase of yuan's value against the dollar, then the country's GDP is likely to decline. Decline in GDP for China would be as a result of low production due to high costs of labor. This would in turn mean that unemployment will increase thereby increasing poverty rate in the long run.

It has also been earlier mentioned that due to weakening of China's currency, the country is already facing problems in its export sector. This year, China's export sector has not been able to export like it used to last year. This is a short run impact of weak currency against foreign currencies. In the medium run, assuming that the value of its local currency continue to weaken against the dollar, then exports are likely to decline further due to low production which in turn will result into increased unemployment.    

China is also facing another macroeconomics problem. Inflation has been said to be increasing in China (Xinhau, 2009). The most probable reason for increasing inflation rate as earlier mentioned is due to the weakening value of yuan against the dollar. Short run effects of increased inflation include decline of consumers' purchasing power. Consumers' purchasing power is the ability of consumer to purchase goods and services at the varying market prices. Due to inflation brought about by efforts to increase local currency's value against foreign currencies, price of goods and services tend to rise. The more the inflation, the lesser the purchasing power of the customer. Therefore, customers are forced to buy less with more money. In the medium run, low purchasing power impacts on consumption. This is based on the assumption that the inflation rate remains high. Since consumers are purchasing less, it is assumed that they are consuming less. This results into low consumption level in the economy. For China, if the inflation rate continues to rise, then its consumption rate is likely to go down even further than what it recorded last year. In the long run, China is likely to experience low GDP if inflation rate don't go down in the near future.

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Finally, according to recent survey conducted by World Bank, China is facing problems in its housing sector (Xinhau, 2009). This is due to the high mortgage rates which are prevailing in the country. World Bank attributes this problem to the under developed housing finance system in China (Xinhau, 2009). The housing finance system in China is said to be in its infancy stage. Due to this reason, a lot of institutional and regulatory barriers are still hindering the development of the system (Xinhau, 2009). Apart from underdevelopment in the housing finance system, China also faces severe shortage of houses. For these two reasons, mortgage rates are very high in China.

As a short term consequence, many Chinese have been unable to afford affordable housing for their families. In China, it cannot be said that a large portion of its population live in modern houses. In fact, there is a large urban population but most of them live in poorly made houses. In the medium run, assuming that mortgage rates do not come down, urban development in China is likely to be affected. Most urban areas in China are likely to develop what is usually referred to as slums. With such a scenario, urban development will be hindered. It is important to note that high mortgage rates in China have been associated with the current problem of inflation in the country. Increase in inflation always tends to increase the lending rate from financial institutions. Mortgage services are sought from the financial institutions, and this is the reason as to why with increasing inflation, lending rate in China is also increasingly making it impossible for people to acquire mortgages.

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The major macroeconomics problems facing China include weak currency value against the dollar, high rate of inflation and increased mortgage rates. Weakening currency value has been seen to be the major contributor of the other two problems in China. Consequences of these problems have been decrease in purchasing power of consumers, possible increase in unemployment, low productivity and low GDP. These have been based on the assumptions that attempts are made to increase the value of yuan against the dollar, inflation rate continues to be high and the mortgage rates also continue at a high levels.


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