# Case study the rise of china and the global economic crisis

Being as though the United States is one of the world 's most hegemonies countries after its economy suffered from an immense downturn many smaller countries were affected, most specifically the Caribbean. Many countries within the Caribbean were affected greatly by the recession due to the fact that most of their gross domestic product comes from.

It is the world's second-largest brewer after AB InBev. But we will not be able to sustain this growth if it favours the few, and not the many.

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Third, benefactors and global advancement organizations have swung to entrepreneurship to enhance the efficiency and supportability of assistance. As we assess the economic development and correlation with Entrepreneurship, we measure how Entrepreneurship has had an effect on the economy of India.

The GEM is viewed as venture is a yearly evaluation of the.

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What were the benefits of such strategy? S economy because of its simultaneous budget and current account deficit since s Miller and Russek, ; Darrat, ; Tallman and Rosensweig, ; Bahmani-Oskooee, However, researchers from different countries have studied twin deficit hypothesis and obtained different results for different countries Like India, U. These studies do not support the REH but rather accept the Keynesian traditional theory, finding that budget deficit does have an impact on current account deficit in the long run. There are studies that support the Ricardian equivalence theorem which denies any correlation between budget deficit and current account deficit Feldstein, ; Abell, ; Kaufmann et al.

These contradictory results may be due to differences in the sample period and the methods of measuring variables, which use different econometric techniques. Khalid researched 21 developing countries from the period of —, taking three variables into consideration: real private consumption, real per capita gross domestic product GDP as a proxy of real disposable income and real per capita government consumption expenditure as a proxy of real public consumption. This was done using Johansen cointegration and full information maximum likelihood FIML for parameter estimates.

The model gives us restricted and unrestricted parameter estimations when restricted parameters are used, meaning that parameter estimation is non-linear when testing the REH for the sample countries. The results did not reject the REH for twelve of the countries, but the remaining five countries do diverge from the REH. The rejection of Ricardian equivalence in the latter group of countries demonstrates lack of substitutability between government spending and private consumption.

Ghatak and Ghatak studied variables such as private consumption, government expenditure, income, taxes, private wealth, government bonds, government deficits, investments, government spending and interest on bonds to test the Ricardian Equivalence hypothesis for India for the period from to The study employed multi-cointegration analysis and rational expectation estimation, and both the tests rejected the REH, finding evidence that tax cuts induce consumption.

Thus, the results invalidate the REH for India. Ganchev rejected the Ricardian equivalence theorem for the Bulgarian economy using monthly time series data for the period — The long-run results of the vector error correlation model VECM showed evidence of the structural gap theory, which states that fiscal deficit influences current account deficit. However, vector autoregression VAR results did not show any evidence of a short-run relationship between budget deficit and current account deficit. The study, therefore, found that fiscal policy should not be used, in the Bulgarian economy, as a substitute for monetary policies in maintaining the internal equilibrium.

Nazier and Essam studied the Egyptian economic data from to The data included five variables: GDP, government budget deficit as primary deficit , current account deficit, real lending interest rate RIR and real exchange rate RER. The study used structural vector autoregression SVAR analysis, which also gave an impulse response function IRF to capture the impact of budget deficit on current account deficit and real exchange rate.

The findings support the twin divergence hypothesis. This contradicts the theoretical framework, which finds that a shock given to a budget deficit leads to an improvement in the current account deficit and exchange rate. Sobrino investigated the causality between budget deficit and current account deficit for the small open economy of Peru for the period — using the Granger causality and Wald tests, generalized variance decomposition and the generalized impulse-response function. The study found no evidence of a causal relationship between budget deficit and current account in the short run.

Goyal and Kumar investigates the connection between the current account and budget deficit, and the exchange rate, in a structural vector autoregression for India over the period Q2 to Q4. The impact of oil stuns and the differential effect of consumption and venture propose compositional impacts and supply stuns rule the conduct of India's CAD, directing the total request channel. Ricardian hypothesis is not supported.

Afonso et al. The results find the existence of fiscal policy reduces the effect of budget deficit on current account deficit. When there is an absence of fiscal policy rule twin deficit hypothesis exists. Bhat and Sharma examines the association between current account deficit and budget deficit for India over the period of — to — using ARDL model.

The results accepts Keynesian proposition and rejects Ricardian equivalence theorem. The results find long-run relationship between current account deficit and budget deficit. Rajasekar and Deo find the long-run relationship and bidirectional causality between the two deficits in India. Garg and Prabheesh investigate the twin deficit for India by using ARDL model and confirm the twin deficit hypothesis. Badinger et al. Their results confirm the twin deficits hypothesis.

The empirical results suggest negative relationship between saving and current account deficit in all three countries. It is clear that the research so far has not yielded any concrete evidence regarding the causal relationship between budget deficit and current account deficit. As such there is a disagreement on the causality between the two deficits. In this paper we test the theory with the support of autoregressive distributed lag ARDL bounds testing approach using data for the emerging country China.

In , the global economic crisis badly affected the Chinese economy, resulting in a decline in exports, imports and foreign direct investments FDI inflow and millions of workers losing their jobs. It is visible from the Fig. It is said that China responded to the crisis with a greater fiscal stimulus in terms of tax reduction, infrastructure and subsidies when compared to the Organization for Economic Co-operation and Development OECD countries Herd et al. Behavior of Macroeconomic variables. Source: Compiled based on data taken from the World Bank.

However, we draw an important inference from the Fig. The negative shock to the budget deficit reduces current account surplus and positive shock to the budget deficit increases current account surplus.

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The deprecation of the exchange rate is directly related to the elasticity of demand which improves the exports of the country and finally enhances current account surplus. However, the negative shift in the current account is due to structural and cyclical forces. The cyclic forces can be seen from the trade prospective: the increasing prices of Chinese imports like oil and semiconductors, pulls the current account balance downwards.

However, the structural shift can be seen from the financial side, which affects Chinese saving and investments.

For undertaking the empirical analysis, we use the World Bank data for the following variables. The study covers the period from — and is based secondary data. Current account deficit CAD indicates the value of goods, services and investments imported in comparison with exports on the basis of percentage of the GDP. Budget deficit BD indicates the financial health in which expenditure exceeds revenue as a percentage of the GDP.

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Deposit interest rate DIR as a proxy of interest rate INT the amount charged by lender to a borrower on the basis of percentage of principals. Inflation INF is measured on the basis of consumer price index which reflects annual percentage change in the cost of goods and services. Broad money MS a measure of the money supply that indicates the amount of liquidity in the economy. It includes currency, coins, institutional money market funds and other liquid assets based on annual growth rate and real effective exchange rate REER.

Based on Fig. To estimate the above models we have employed various econometric techniques to achieve the objective of the study are as below:. As we are using time series data, it is important to check the properties of the data; otherwise, the results of non-stationary variables may be spurious Granger and Newbold, To assess the integration and unit root among the variables, numerous unit root tests were performed. The results of the unit root test suggest that the RER and INF series is integrated of order zero I 0 , and other variables are integrated of order I 1.

The ZA model is as follows:. The null hypothesis for Eqs. The ZA test suggests that small sample size distribution can deviate, eventually forming asymptotic distribution. The results of the unit root tests are given below.

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## China’s Economic Rise: History, Trends, Challenges, and Implications for the United States

Table 1 , above, provides the results of the ADF and PP tests, which suggest that four out of six variables are non-stationary at level and two variable is stationary at level. However, it is important to check the structural breaks and their implications, and the ADF and PP tests are unable to find the structural break in the data series. To avoid this obstacle, we applied a ZA test with one break, the results of which are given in Table 2.

The structural break test reveals four breaks in Model A. The first, in , may be due to inflation caused by privatization; the second, in may be due to higher inflation which caused the consumer price index to shot up by We applied the ARDL bounds testing approach to check the cointegration long-run relationship by comparing F -statistics against the critical values for the sample size from to The bounds testing framework has an advantage over the cointegration test developed by Pesaran et al.

Thus, it is inappropriate to apply a Johansen test of cointegration, and we applied ARDL bounds testing to determine the long-run and short-run relationships. The F -statistics are compared with the top and bottom critical values, and if the F -statistics are greater than the top critical values, it means there is a cointegrating relationship among the variables Table 3.

We accept the null hypothesis when F is less than the critical value for I 0 regressors and we reject null hypothesis when F is greater than critical value for I 1 regressors. For t-statistics we accept the null hypothesis when t is greater than the critical value and reject the null hypothesis when t is less than the critical value. The results over the period of to suggest that there is a long run relationship among the variables and the null-hypothesis of no cointegration is rejected meaning acceptance of traditional Keynesian approach for China.

The bounds test results conclude that there is strong cointegration relationship among budget deficit, current account deficit, interest rate, exchange rate, inflation and money supply. Since the F-statistic was greater than the upper bound critical value, we performed a diagnostic testing based on auto-correlation, normality and heteroskedasticity, the results of which were insignificant based on the respective P -values.

The Fig. Both the graphs are stable, and the sum does not touch the red lines. Hence there were no issue of serial corelation, Heteroscedasticity and normaility in this model see Table 5. Plot of cumulative sum of recursive residuals and plot of cumulative sum of squares of recursive residuals. After discovering the cointegrating relationship among the variables, it is important to determine the long-run and short-run relationships using the ARDL model. The above Eqs. The results of Eqs. The results find a strong long-run relationship among the variables for the period from to Thus, our study upholds the empirical validity of the Keynesian proposition for China, while rejecting the Ricardian equivalence hypothesis.

This shows that a small change in the budget deficit has a significant impact on the current account deficit; similarly most of the macroeconomic variableshave a significant impact on the current account deficit. As we found evidence of a long-run relationship, we calculated the lagged ECM from the long-run equations. The Chinese economy is one of the most integrated economies in the world and has emerged as a powerful actor in the global economy.

In the early s, it was reported in the Chinese print media that although the Chinese economy was expanding rapidly, the deficits still existed.

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Deficit financing may also increase interest rates because once the monetary accommodation of the deficit is ruled out, the government has to incentivize consumers and firms to buy more government bonds. If the purchase of government bonds does not increase in direct proportion to the rise in deficit, government must borrow more money. This, in turn, crowds out private investment.