Tag Archives: GDP Compositions

China looking at sustainable and balanced growth

Historically China’s economic model was based on export-led growth, massive government injections into the economy and access to cheap money. This is not sustainable and although you can keep blowing up bridges and build cities that nobody lives in at some point it becomes unsustainable. Furthermore since the global financial crisis economies have increased protectionist policies to look after their own economy. Therefore the Chinese government need to refocus the growth of the economy on domestic consumption rather than building things – Gross Fixed Capital Formation. So much more C than I in the GDP Expenditure equation. EG:

GDP = C↑+ I↓+ G + (X-M)

The chart below from the BNZ shows that Consumption ( C ) accounts for just 35% of the Chinese economy which is significantly below what is apparent in the developed world. Domestic Consumption in the US economy is over 70% of GDP. It will take many years for China to get near this level of consumption.

Household Cons % GDP

Composition of US growth – Expenditure Approach C+I+G+(X-M)

Below is a chart from the National Australia Bank publication “AustralianMarkets Weekly”. It is interesting to see how each area contributes (or has a negative impact) to US growth. This is particularly useful when doing GDP Expenditure approach in Unit 5 of teh A2 course where you can breakdown the equation C+I+G+(X-M).

Some points to note:

* Consumption has started to increase from the negative status it had post GFC.
* Net exports after being positive in early 2009 have dropped into negative status with only small positive changes of late
* Business investment has started to creep into a positive contributor to GDP
* Government contributions to GDP have varied during the period with a negative impact in 2010 and 2011 before assisting GDP in Q3 2012.