Article - China risks deflation

Feb 24, 2009 (ST)

China's producer price index (PPI), a measure of inflation at the factory level, decelerated sharply to an annual rise of 2 percent in November. It was the slowest pace for the PPI since May 2006

SHANGHAI - CHINA is facing deflationary risks due to overcapacity in many industries amid a sharp downturn in demand, the central bank said in a report issued late Monday.

'Against the backdrop of shrinking general demand, the power to push up prices is weak and that for driving down prices is strong,' the People's Bank of China said in its report on fourth quarter 2008 monetary policy.

'There exists a big risk of deflation,' said the report posted on the central bank's Web site.

While falling prices might seem a welcome trend, a long spell of deflation can lead to destructive declines in wages, stocks and property prices, sapping corporate profits and prompting businesses to cut jobs and investment.

China's consumer price index, which had spiked last year to 12-year high of 8.7 per cent, has eased to 1 per cent in January.

Meanwhile, wholesale prices fell 3.3 per cent, the second straight month of decline, as costs for oil and other raw materials eased.

Such a fall in wholesale prices, which measures the cost of goods as they leave the factory, can indicate an impending decline in consumer prices.

The central bank's comments underscore China's challenge in balancing policy to suit fast-changing global and domestic pressures.

Until July, it noted, the prevailing concern was with surging inflation. But a sharp decline in demand for many products that began in the autumn has left many industries with excess inventory and too much production capacity - a chronic problem even before the downturn.

China's torrid economic growth slowed to a seven-year low of 9 per cent in 2008.

But the central bank also warned of potential longer-term risks from inflation due to the worldwide effort to expand credit and increase liquidity in the global financial system. -- AP

Questions

1. From the article, what are the causes of deflation in China?
2. Why would the Central Bank be concerned about deflation?
3. Explain why credit expansion and increased liquidity globally may lead to inflation in the future
   

Recommended Textbooks - 2 options

1. IB Economics Course Companion: International Baccalaureate Diploma Programme (Paperback)by Ian Dorton (Author), Jocelyn Blink (Author) - S$53 (Popular Bookshop price = S$85)

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2. Principles of Economics by O'Sullivan, 1st Edition (an adaptation of O’Sullivan, Economics, 4th Edition) - S$39

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Why buy a textbook when you already have your lecture notes?

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Budget 2009 - If I Were the Finance Minister Game

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Related websites

• Singapore Budget 2009 Website
  

Opportunity Cost (in Cantonese)

conceptually correct, albeit a little lame... hahaha... apologies to those who cannot understand Cantonese.. do get a friend to explain to you..

Is Economics a "Science"?

Science refers to a system of acquiring knowledge. This system uses observation and experimentation to describe and explain physical, natural, and societal phenomena.

The methodology employed by economists has a lot in common with that employed by natural scientists. Both attempt to construct theories or models which can then be used to explain and predict.

The scientific approach involves the 4 following steps:

1. Observation
2. Reasoning
3. Formulation of Theory
4. Testing
   

In the video shown below from the movie "A Beautiful Mind", you can see part of this scientific approach in use: The scene is set in a bar in which John Nash (played by Russell Crowe) rebutted Adam Smith's idea that, 'the best result comes from everyone in the group doing what's best for himself'. Adam Smith had said: "In competition, individual ambition serves the common good."

But John Nash took an opposing view.

In the movie, he observed what was going on in the bar, in which it was clear that all his friends had the same idea.. to go straight for a pretty blond girl who had just walked into the place with her other pretty (but not quite as pretty) friends. He related to his friends how they could all score if they all didn't go for the blonde but for her friends instead... He told them that, 'the best result will come where everyone in the group does what is best for himself ... and the group.' He envisioned a scenario -- a bargaining strategy -- in which nobody loses.. Watch how the idea (which was later developed into a theory) was conceived after he carefully observed the scene...

In case you missed the dialogue, here's the transcript:

Nash : Adam Smith needs revision.

Hansen : What are you talking about?

Nash : If we all go for the blonde...we block each other. Not a single one of us is gonna get her. So then we go for her friends, but they will all give us the cold shoulder because nobody likes to be second choice. Well, what if no one goes for the blonde?
We don't get in each other's way, and we don't insult the other girls.
That's the only way we win.
(Laughs)
Adam Smith said the best result comes from everyone in the group doing what's best for himself, right? That's what he said, right?

Others : Right.

Nash : Incomplete.
Incomplete, okay?
Because the best result will come...from everyone in the group doing what's best for himself...and the group.

Hansen : Nash, if this is some way for you to get the blonde on your own, you can go to hell.

Nash: Governing dynamics gentlemen. Governing dynamics. Adam Smith...was wrong.

Nash leaves the bar.

However, unlike natural sciences, economics lacks the ability to make precise predictions with accuracy due to the problems of:

• Impossible to conduct controlled experiments - Unlike physical and natural scientists who can actually hold other factors constant (in a lab setting) while changing a particular variable, economists deal with a constantly changing environment and complex interactions between individuals, groups and instituitions, etc, resulting in a need to make simplifying assumptions that will frequently not hold true (e.g. assuming "other things remain constant")

• Human behaviour is unpredictable -although people behave in broadly similar ways under similar conditions (e.g. when price falls, quantity demanded tends to increase), it is impossible to predict this behaviour with any accuracy. For example, factors such as consumer and business confidence are almost impossible to predict with any degree of accuracy.
  

Related link: Is Economics a Science by Leiter Reports? ; and Is Economics a Science by Greg Mankiw

Opportunity Cost of George W. Bush

Opportunity Cost of George W. Bush and 10 Trillion Dollars

View more presentations or upload your own. (tags: opportunitycost economics)

Is this a fair assessment of the choice of George W. Bush as the 43rd President of the United States? Share your views!

Global Recession – Singaporeans’ Perspective (PAYM Forum)

Click image to enlarge

Singapore slumped into a technical recession following the crash of the monetary market in October last year (see news). Although there are many uncertainties in the economy, our nation is confident that the job market will gradually pick up this year. Our Trade and Industry Minister, Mr Lim Hng Kiang, reassured the nation that more than 30,000 jobs will be created this year, enough to absorb the pool of fresh graduates and new job seekers in a recent speech.

• How will our economy fare in the near future?
  
• What is the impact of the recession on the job labour market?
  
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Join the PAYM Policy Forum @ West Coast GRC to discuss the topic, Global Recession - Singaporeans' perspectives, with Guest-of-Honour Mr Cedric Foo, Member of Parliament for West Coast GRC and Adviser to Pioneer GROs.

Date: 21 February 2009 (Saturday)

Time: 2.00pm - 4.30pm
Tea reception will be provided at the end of the forum.

Venue: Jurong West Community Library @ The Frontier CC
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Programme Room, Level 1
60 Jurong West Central 3, Singapore 648346

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