China And USA: Bound By Their Economies

 

For decades China has tried to take over the Global economy, having already contributed a huge chunk in the global GDP. US has been the dominating economy so far but it has slowed down after the global economic meltdown of 2007. This bodes well for the Chinese economy that has tried to surpass the other world leaders. This is good but up to a point, and that saturation point will eventually be the trouble for the Chinese economy.

 

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This article looks into all this and shares some light on this issue.

 

Decoding Their Economies:

 

CHINA:

The Chinese have, for so long, been an export driven economy. This means that most of the products produced in China are being shipped off to other counties.

For exporting you have to have people to make those products. The intriguing question is till when will the Chinese worker choose to be in the lower income band? Eventually, he will ask for a raise in his salary. If we look at it keeping in view the whole country then if the wages are increased, it might lead to wage driven inflation.

The farmers who work on their fields are moving to the cities and are trying to find jobs there. This will surely bring down the wage as he might just work for less pay than the other but he too will eventually see an increase in his wage. So china will soon move in to the middle income country band. The bargaining power of the workers is rising and this will push the cost of the products higher and will push up inflation. The GDP growth rate of 8-9 % will not keep up if these trends continue.

 

USA:

The US is trying to get out of the crisis that it suffered in 2007. Getting out of the crisis will take time and getting back to the long term steady state will not only take time but will also require a lot of effort from the current government. US has lost its consumer share on the global level because of Chinese products. But because of increasing worker bargaining power this trend is likely to be reversed with increased demand of the US goods and decreased demand for Chinese goods with increase in the Chinese products price.

This is all related to the purchasing power parity theory with which we can find the trends between two or more countries.

 

Demographics:

China has the largest population on earth and its working population is amongst the age group of 18-45 years of age. US has a similar kind of trend. But Chinese demographic dividend is changing and the working age population interval is moving to the right. This does not bode well for China.

On the other hand the US economy working age has stayed the same and if it continues then US will see a resurgence in the global economy. The logic is simple, more the number of young workers in an economy, more will be the efficiency and thus, more will be the total output in an economy.

According to latest census data and surveys, the percentage of working people is higher in US than in Asia.

 

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This is just a small look into the two economies and they both, as we know, are superpowers and will surely help shape the world. One is in the west and the other in the east, so it rests on the future trends of the two economies and we shall find out who comes ahead of whom.

 

By Yash Jain

 

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