Economic Comparison of China and the United States
There are large differences in the economies and governing systems that are in place in China and the United States. Both have a direct influence on the other; however, government does have more of a role in economics than economics in government. The purpose here is to briefly compare, contrast, comment and think about the reasons for the differences between the United States and China on these subjects:
1. GDP per capita
2. Unemployment
3. Inflation
4. Interest Rates
5. Economic Freedoms
6. Why does the US have an economic output 1.5 larger than China, even though China has 1.3 billion people and the US has only 310,000,000?
GDP per capita is a measure taking the entire GDP of the country, or in other words the whole of a nations consumption, investments, government services and net exports, and dividing it by the total number of people in the country. In 2010 the GDP of the United States was $14.66 trillion dollars; while in China, the world’s second largest economy, it was $5.878 trillion. China’s GDP is 40% the size of the United States GDP. China for a very long time has had the largest population in the world, but only recently in 2010 did it overtake the second largest economy in the world, which was Japan with a GDP of $5.459 trillion and a population of 126,475,000. So why is there such a large difference in the GDP of the United States, Japan and China? Even though put together the United States and Japan still have less than half the people of China both economies were much larger than China’s and still are per capita. The reason is that strong government intervention and restrictions were not in place in the United States as they were in China. China, under the Communist Party leadership was a restricted economy until 1978 when China reformed and opened its economy. This sort of policy had been in place in the United States since the ratification of the constitution. These open policies, which said people were freer to work as they pleased, opened the way for new growth through the important aspect of the economic health of a country, the entrepreneur. Opening the door to the self-starting individual in China spurred growth and has caused the economy to expand by an average of 9.3% annually since 1978. The reason the United States GDP is so much higher is because they adopted the Laissez-faire policies, and largely stuck to them, since the signing of the Constitution in 1787.
This open market policy allows people the right to start their own business and progress as far as they are able. A restricted economy, such as the one previously held in China, does not allow people the freedoms of the entrepreneur. Instead they restrict the opportunities of people and slow economic progress. “Over-regulation lames entrepreneurship more than taxation or recession.”(1) The GDP per capita of the United States in 2010 was $47,200, and in China it was $7,600. Being that it is the second largest economy in the world you would assume that it would be much higher than $7,600 and closer to the U.S. numbers, but because of the size of the population the Chinese economy still has very far to go until it reaches the size per capita of the U.S. It would have to have a GDP of $61.3 trillion dollars. Which China is not expected to hit for many decades to come. When, or if, they ever hit that number they will be the largest economy in the world, with an average level of income matching what we currently enjoy in the United States. This only seems possible though if the United States stops progressing its economic output for the next few decades until China can catch up, which is unlikely. Also, China must have a stale and not a growing population. So it may take much longer than that to match the size of the U.S. economy. It is interesting to note that in the United States only .7%, or 10.7 million, of the workforce is involved in farming, forestry and agriculture combined, while in China 38.1%, or 310.6 million people, are employed in agriculture. And only in the 1980’s after economic reform, did the country become self-sufficient in grain production. The same scenario occurred in Communist Russia, where 30% of the workforce was employed in agriculture and there still was not enough food to feed everyone. (2) This is because the GDP per capita, or the GDP in general, was restricted by government rule. When the government de-regulated the agriculture industry the average real income for the farmers went up tremendously (ibid).
The inflation rate of the United States in 2010 was 1.6%, which was down .3% from 2009. In China, however, the inflation rate was higher at 3.2%, but still down .7%. We are not sure why the inflation rate went down in 2010 other than the idea that government spending went down a smidgen from 2009 to 2010. In 2010 Government Spending went down $42 billion from what it was in 2009. As the economists say “inflation is taxation without legislation.” It is in the best interest of the government that inflation occurs because they will receive more in taxes as the prices of things go up. The more inflation there is the more people get paid to compensate for the inflation; and when they get paid more they are moved into a higher tax bracket. Therefore, inflation causes excess taxes on the population when no laws were passed to raise taxes; the government just had to spend more to effect this change. They don’t seem to realize, however, that too much inflation weakens the economy and does damage to the personal incomes of the people. The 1920’s and 30’s in Germany is the perfect example of this. The Wiemar Republic, which was established after World War One, was charged with repaying billions of German Marks to the French government. They printed so much money and raised inflation so high that the German Mark became worthless and unusable. It was at one point that $130,000,000,000 German Marks was equal to $1 in American money (3), and it only went up from there. This hyperinflation is obviously not occurring presently in the world but it none-the-less shows the crippling effect of too much inflation on an economy. In China they have a system of price fixing. The government fixes the price of their money and it is therefore artificially matched to what they need. It is also therefore very tricky to measure inflation in the country. In the United States the government does not control the value of money but the market does, which is much easier to measure. This is one of the results of the invisible hand at work, the market fixes its own prices and values to its products.
The inflation rate of the United States in 2010 was 1.6%, which was down .3% from 2009. In China, however, the inflation rate was higher at 3.2%, but still down .7%. We are not sure why the inflation rate went down in 2010 other than the idea that government spending went down a smidgen from 2009 to 2010. In 2010 Government Spending went down $42 billion from what it was in 2009. As the economists say “inflation is taxation without legislation.” It is in the best interest of the government that inflation occurs because they will receive more in taxes as the prices of things go up. The more inflation there is the more people get paid to compensate for the inflation; and when they get paid more they are moved into a higher tax bracket. Therefore, inflation causes excess taxes on the population when no laws were passed to raise taxes; the government just had to spend more to effect this change. They don’t seem to realize, however, that too much inflation weakens the economy and does damage to the personal incomes of the people. The 1920’s and 30’s in Germany is the perfect example of this. The Wiemar Republic, which was established after World War One, was charged with repaying billions of German Marks to the French government. They printed so much money and raised inflation so high that the German Mark became worthless and unusable. It was at one point that $130,000,000,000 German Marks was equal to $1 in American money (3), and it only went up from there. This hyperinflation is obviously not occurring presently in the world but it none-the-less shows the crippling effect of too much inflation on an economy. In China they have a system of price fixing. The government fixes the price of their money and it is therefore artificially matched to what they need. It is also therefore very tricky to measure inflation in the country. In the United States the government does not control the value of money but the market does, which is much easier to measure. This is one of the results of the invisible hand at work, the market fixes its own prices and values to its products.
Economic Freedoms have led the United States to the forefront in world economies. If it were not for the free market system that was adopted here in 1787, it is doubtful whether or not this country would have grown at the pace and to the size that it did grow. Without the free market system millions of immigrants would never have come here to build on the American Dream and would have never built the fortunes America is known for. That was the American Dream. Since the early 1900’s, and especially from 1933-36 (the New Deal), government has been increasingly regulating business and trade in the United States. Some things have helped the economy but the vast majority have hindered progress and slowed trade. Economic freedom is somewhat becoming a thing of the past in the United States, although we are still the freest in the world. Increasing government fees and regulations are making it harder for the entrepreneur to start and develop a business. The Chinese have been de-regulating business and the amount of production, employment and GDP have been increasing. Since the 1980’s China has been less severe on business regulation and the economy has been growing steadily. If China would deregulate all of its business their economy would grow even faster than it is right now. However, no economic and political system has ever eliminated poverty and grown the economy faster than the free market system that the United States had in the 1800’s. This is strong evidence that the free market system works better, though not perfectly, than any other system to date.
So now the final question is: Why does the United States have an economic output 1.5 times larger than China, even though China has 1.3 billion people and the United States only has 310,000,000? From what we have discussed already in the paper it seems clear that government intervention is the answer to the question. Communist China controlled all of the means of production and regulated every aspect of business. They had a much smaller economy than the U.S. because of the role government played in the lives of all the people and all the businesses. Ludwig von Mises explains that a farmer does not decide what he want to grow, the same way that the state should not decide what people should sell. Speaking of the farmer he says: “He does not decide the purpose of his production; those for whom he works decide it – the consumers. They, not the producer, determine the goal of economic activity. The producer only directs production towards the goal set by the consumers.” (4) the consumers knows what they want and if government intervention would not play such an active role in economics the economy would direct itself in the direction it wants to go. China, and even recently Cuba, has realized this and is moving away from state controlled business. They began changing their policies and becoming a freer society. Once they did this, once they allowed free agency to enter the system, the economy started to grow rapidly and is now the second largest in the world. Even though the United States is still largely a free country the economic output in the past few years has become almost stagnant due to increasingly strict government regulations. If the United States government continues to follow this path we will end up like the government and economy China had five decades ago.
Works Cited
1. Wagener, Hans-jurgen; Economic Thought in Communist and Post-Communist Europe, Routledge, 1998, p. 201
2. Ebeling, Richard M., The Global Failure of Socialism; Hillsdale College Press, 1992
See also: Freidman, Milton; Free To Choose, Harcourt Brace Jovanovich Inc., 1980, p. 3
3. Bullock, Allen; Hitler a Study in Tyranny, Bantam Books, 1961, p. 64
4. Mises, Ludwig von; Socialism an Economic and Sociological Analysis, Liberty Classics, 1981, p. 30
4. Mises, Ludwig von; Socialism an Economic and Sociological Analysis, Liberty Classics, 1981, p. 30
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