Economic Essay Example | Topics and Well Written Essays - 1000 words - 2

Economic - Essay Example When the government relaxed its price control and promoted foreign investment, the United States started to invest in PRC beginning 1979 after both countries establish diplomatic relations. With Japan as their fund provider since 1978 through soft loans, PRC is now the fastest growing major economy in the world. Its success has been attributed to a formula of cheap labor, ease government policy, overall infrastructure, high productivity, and some say, an underrated exchange rate. In spite of a growing trade surplus, PRC is consciously making effort to lower its inflation rate and/or manage inflation expectations by raising bank reserve ratio of deposits through a directive from PRC’s Central Bank. This brings as to the first question as to how will this affect the balance sheets of both the banks and the PRC’s Central Bank. As regard to the banks, their assets, particularly deposits will decrease and the same amount will increase the reserve in the â€Å"Liabilitiesâ⠂¬  portion in their Balance Sheet. Expectedly, the assets of the Central Bank either in receivables or deposits will increase as well as their reserves. Normally, banks hold two bank reserves, one is use for cashing checks or satisfying client’s withdrawals while the other is called â€Å"legal reserves† or sometimes called â€Å"federal reserves† or central bank reserves. ... Asian Development Bank (ADB) said in its 2011 Asian Development Outlook that â€Å"there is very little risk of hard landing because growth momentum remains robust for the medium term†. As compared to last year the Gross Domestic Product (GDP) growth will slow to 9.3% in 2011, a dip from 10.3% annual growth in 2010 (Global Times), mainly due to stubborn inflation this year. One determinant factor of inflation is the Consumer Price Index (CPI), as the CPI rise so is the inflation. Consumer consumption is one of the major components in arriving at the total GDP, the others are government expenditures, gross investment and the net of exports versus imports. Consumer consumption may not be a factor at this time because wages will not outpace production. Government expenditures were already programmed to pay maturing foreign loans, hence will be constant, while investment will decrease minimally due to expected increase in interest rates. The one that will affect most in computing the GDP is the net difference between exports and imports. As I analyze it, imports will continue to outpace exports due primarily to higher demands for fuel consumption, which are outsourced externally. The World Bank said â€Å"strong domestic demand and relative price changes has reduced the importance of external trade for China† (Reuters.com) There might be an oversupply of products which will considerably affect prices and therefore have an effect on equilibrium. As regard the aggregate expenses, again this will tend to be low as the net effect of imports versus exports is high. PRC’s Central Bank raising of RRR will certainly have an effect on the money multiplier since it will