Innovation and economics- China economy growth Essay

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CHINESE ECONOMIC GROWTH
Ejiroghene Ajari (01017696)
Faisal Alshalan (01011564)
Jianjie Zhao (00994068)
Sonal Chopra (01014144)
Xuezhou Wang (00969291)
Yiannakis Charalambous (00980154)

Economics and Strategy for Innovation
Professor J. Haskel
22/10/2014

1

CHINESE ECONOMIC GROWT H

Question 1
T able1. Cumulative Average Growth Rate (CAGRs)(1952-2008)
Year
1952-1978
1978-2008

Year
1952
1978
2007

Y
5.1%
9.6%

L
2.1%
1.7%

h = H/L
1.6%
1.2%

K
8.7%
9.7%

T able 2. Economy Factors of China (1952 - 2008)
Output
Input
Y
L h=H/L K
162,655,626,000
282,000,000
1.10
147,292,230,037
587,000,040,000
484,000,000
1.65
1,301,869,215,998
8,444,953,000,000
781,000,000
2.33
18,957,094,811,042

T he steps to get the cumulative average growth rates:

T hen:




T hus, for the year 1952 – 1978, the CAGRs of Y is 5.1 percent. After applying the formula above to all factors, we would get the CAGRs for L, h and K, which are 2.1%, 1.6% and 8.7%. While for the year
1978 – 2007, the CAGRs of Y is 9.6 percent. At the same time, the CAGRs for L, h, K are 1.7%, 1.2%,
9.7%.

Question 2
Year
1952-1978
1978-2007

T able 3. Cumulative Average Growth Rate (Including ∆lnTFP)
Y
L h=H/L K
5.1%
2.1%
1.6%
8.7%
9.6%
1.7%
1.2%
9.7%

∆lnT FP
-1.1%
3.4%

By inputting the CAGRs of Y, L, h and K into the formula, we get the numbers for ∆lnT FP (T able 3).

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2

CHINESE ECONOMIC GROWT H

Between 1952 and 1978, the Labor quantity L rose by 2.1% per year, the average labor quality of workforce h rose by 1.65% per year, and Capital K rose by 8.7% per year. T hough the economy was growing with an average rate of 5.1%, the ∆lnT FP is only -1.1%, meaning the T otal Factor Productivity
(T FP) was decreasing annually. In this time period, the main driver for Chinese economy is the Chinese policy of industrialization, and more specifically, the capital accumulation. As Zhu (2012) mentioned,
China’s government mobilized the resources for investment by limiting household consumption and setting low prices for agricultural goods so that forced savings and surpluses extracted from the agricultural sector could be used for investment in other industries.

In contrast, from 1978 to 2007, the graph below shows the economy had a greater increase in T FP, from 1.1% to 3.4% per year. Compared to the factors in the first time period, t hough the economy of China was achieving a growth rate of 9.6%, the growth rates of the input in human, labor and capital saw a slight change. Between 1978 and 2007, T FP has played an important role contributing to the rapid growth of
China. T he rise in T FP was two fold. First, the productivity growth reduced employment in the agricultural sector and relocated them in other sectors. Secondly, the structural transformation to allow the development in the private sector enhanced competition between private companies and stated owned enterprises that may have stimulated the innovation in technology (Zhu 2012).

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3

CHINESE ECONOMIC GROWT H

Question 3
ΔlnT FP refers to the change in “T otal Factor P roductivity” (T FP) and is defined as the portion of output that is not explained by the amount of inputs (capital and labo ur) used in production Comin (2006). T here are four major contributors to growth, including: human capital, gro wth in labour participation rate, gro wth in capital/output ratio and growth in total factor productivity. It is widely believed that the level of
T FP is the most important element to a country’s economic growth and is dictated by the deployment of inputs utilized in production in relation to its efficiency and intensity.

Zhu (2012) establishes that China’s growth performance differs significantly before and after 1978.
Between 1952-1978, the annual growth rate was 5.1% per year. As the data suggests, the growth was mainly due to increases in both physical and human capital. Ho wever, gro wth in china was stagnated by inefficiencies in T FP and innovation. T he calculations denote a decline in the T FP by 1.1% per…