China and India
30 September 2010
The relation of consumption and investment in China
The Financial Times carries a comment by the author of this blog on a column by Martin Wolf, its chief economics commentator, on the development of consumption in China.
Martin Wolf has a justified reputation as probably the world's most influential economics columnist. However, in this case, his argument confuses the issue of the low percentage of consumption in China's GDP with the rate of growth of China's consumption and its consequences for the population's living standards - China has the world's fastest growth rate of consumption and it is this high rate of growth, not the percentage of consumption in GDP, that determines the most rapid development of living standards and total consumption.
The practical economic significance of this is that in every country, including China, the growth rate of consumption is closely correlated with the growth rate of GDP - as discussed in the article below. In turn GDP growth is correlated with both the quantity and efficiency of investment. Increasing the percentage of consumption in China's GDP via a lower level of investment, other things remaining equal, would therefore lead to lower GDP growth rate, and lower absolute growth of consumption and living standards, than maintaining a higher investment percentage.
China’s present investment level would be unviable only if either it led to falling profits, which is contradicted by the data, or its efficiency of investment from the point of view of GDP growth, that is the ratio of fixed investment to GDP growth rate. was abnormally high – in fact it is almost exactly the same as India’s and around half that of the US, i.e. China's efficiency of investment, from the point of view of GDP growth, is the same as India and almost twice that of the US.
The issues of the relation of investment and growth, and of the relative efficiency of China's investment compared to other countries, have been dealt with
The relation of consumption and investment in China
The Financial Times carries a comment by the author of this blog on a column by Martin Wolf, its chief economics commentator, on the development of consumption in China.
Martin Wolf has a justified reputation as probably the world's most influential economics columnist. However, in this case, his argument confuses the issue of the low percentage of consumption in China's GDP with the rate of growth of China's consumption and its consequences for the population's living standards - China has the world's fastest growth rate of consumption and it is this high rate of growth, not the percentage of consumption in GDP, that determines the most rapid development of living standards and total consumption.
The practical economic significance of this is that in every country, including China, the growth rate of consumption is closely correlated with the growth rate of GDP - as discussed in the article below. In turn GDP growth is correlated with both the quantity and efficiency of investment. Increasing the percentage of consumption in China's GDP via a lower level of investment, other things remaining equal, would therefore lead to lower GDP growth rate, and lower absolute growth of consumption and living standards, than maintaining a higher investment percentage.
China’s present investment level would be unviable only if either it led to falling profits, which is contradicted by the data, or its efficiency of investment from the point of view of GDP growth, that is the ratio of fixed investment to GDP growth rate. was abnormally high – in fact it is almost exactly the same as India’s and around half that of the US, i.e. China's efficiency of investment, from the point of view of GDP growth, is the same as India and almost twice that of the US.
The issues of the relation of investment and growth, and of the relative efficiency of China's investment compared to other countries, have been dealt with