Gdp Growth and Inflation in China

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2.2 Inflation level

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As for measuring the inflation level of both countries, America has a more stable decreasing trend from 1978 to 2014, no matter judging from GDP deflator or inflation rate. However, in terms of inflation rate in China, it is rather more dynamic with greater changes in the number. Nevertheless, it is intriguing to find that the inflation rate and GDP growth has a rather corresponding result, fluctuating in nearly the same economic period. The peak and valley of both factors are closely related using time theories in both countries.

3. Analysis the relationship between the price index and economic growth

3.1 Several related theories that influence the price level and inflation

1. Neo-Keynesian theory

There are mainly three models responsible for the continuously growth of price level.

(1). Demand-pull inflation: it describes the scenario that occurs when price levels rise because of an imbalance in the aggregate supply and demand. When the aggregate demand in an economy strongly outweighs the aggregate supply, prices increase. Also, economists will often say that demand-pull inflation is a result of too many dollars chasing too few goods. This is attributed to the whole economy when individuals purchase the same goods and the price inevitably increases.

(2). Cost-push inflation: under this model, the driving force is the increase in costs, regarding to both labor cost and raw material cost. One case to explain the increased cost is the growth of imported goods like crude oil, copper and iron stone. If a country’s production is largely relying on imported essential production factors, it will be more easily to be influenced by the international price of commodities. Also, the developing price in labor cost, like wage, can also increase the cost of production, resulting in the average promotion in price level.

(3). Built-in inflation: this kind of inflation is the result of the previous factors. The condition of built-in inflation today is originated in the past under the continuous influence of a cost-push or a demand-pull inflation. It is evolved from the past and is going to influence the current economic conditions. In this case, people expect the price to rise, and the wage of people will be increased. De facto, the price level didn’t rise as they assumed, leaving the supply over passing demand in the market.

2. Aspects that has an impact on price level

(1). Output gap: The last term’s output gap would have a profound impact on the next season economic behavior.

(2) Short-Term Causes: This included wars, natural disasters, and decreases in natural commodities. When there is a war, people will have to repay the funds they borrowed from the bank and recover from the high expenses on war itself. It will also influence the stability of international trade and domestic production, eventually resulting in a rise in price. The same theory applies in natural disasters. The government must remedy the properties damaged in the progress. It is especially true in a small country with low production level and weak economy, that the damage is huge compared to the income of government per year. Also, when natural commodities decrease, it will create a short term gap between supply and demand, thus enabling the price level to be raised.

(3) Quantity of money: This situation occurs when inflation is caused by the over-heated money in the economy. This includes cash as well as financial instruments like investments and mortgages. It should be regarded as a normal phenomenon in the world market, but should be dealt with carefully and with consecutive monetary policies.

(4)Means of control: The role that government plays in controlling inflation should not be ignored, especially in terms of a country like China. Governments in many countries took different approaches to improve the environment. They would issue acts and statements according to what they believe to be the cause for economic changes and respond. Under the Keynesian approach, the government would likely to get involved in the economy by regulating commodities prices, manipulating wage prices of the workers, and breaking cartels between huge heads. A government that favors monetary theory will hold the situation according to the amount of currency in circulation. A government persuaded by cost-push or demand-pull inflation will mostly depend on the market itself to move back to normal. [pic 7]

3.2 Literary review on the connection between inflation rate and monetary growth

Actually, according to the report by many economists, the reaction of the inflation would be delayed by nearly five months, which was not indicated in this model. However, the slight inflation in China has a spillover effect on China’s economic growth. Judging from the economic cycle counted by year, it is more likely to find a corresponding relationship between the aspects with significant positive correlation.

In the essay written by Paul De Grauwe Magdalena Polan, he performed the analysis according to over 30 countries’ stata. When analyzing the full sample of countries they find a strong positive relation between the long run growth rate of money and inflation. However, this relation is not proportional. Their second finding is that this strong link between inflation and money growth is almost wholly due to the presence of high (hyper) inflation countries in the sample. The relation between inflation and money growth for low inflation countries (on average less than 10% per year over 30 years) is weak, if not non-existing.

3.3 The inflation cycle in China: (classified by peaks and troughs)

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In order to reach a more specified conclusion, we used a more simplified model. We calculated the relationship between the inflation rate and the percentage of economic growth. As is shown in the graph, after we ruled out some points-year 1988 due to the price reform, the result seems amazingly coincidental that these two factors are linear dependence. We also examined the R^2 in this case. The result answer is 0.8392, which is approximately near to the perfect case-1. The model is rough in that we only took the average growth per year into consideration instead of more detailed analysis of seasons and months.

In Li Jixuan’s essay on the topic of the