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Class notes B2000 (ECX3550)
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Table of ContentsOverview of Asia .................................................................................................................... 1
The Middle Income Trap ........................................................................................................12
Compe;;veness, Exchange rate, and Interna;onal network .................................................20
Japanese Economy ................................................................................................................26
Indian Economy .....................................................................................................................35
Macroeconomics prospects in Asia ........................................................................................44
China .....................................................................................................................................52
Economic Growth ..................................................................................................................66
Overview of Asia
Ques&on
• Statement ques&on: There are no adverse consequence of the rise of Asian middle class
o Define middle class and prospect of it (see facts)
o Although there are larger benefits of the rising of Asian middle class, making asia
as a strategic and growing market for Asian economies and the rest of the
worlds. For instance, larger opportunity for service provider (i.e, financial
service), larger opportunity for goods which allows larger produc&on of goods
(economics of scale) due to increase in demand (i.e, innova&ve products).
However, there are adverse consequence of such growth. For instance,
environmental damage which occurs due to increase in private transporta&on
(find stats of the proposi&on of private and public transporta&on) causing higher
carbon emission, increase in obesity or other health hazard due to change in
lifestyle nega&vely (i.e., ea&ng out, larger intake of fast food) which happen due
to increase in produc&vity in workforce, and decrease in fer&lity rate which
means many Asian countries experience aging popula&on (and that thing called
age dividend advantage), indica&ng decrease paIern of popula&on growth.
Therefore, the statement is false by omiJng such hazards as men&oned.
Rapid Economic growth for several decades
- The five largest economies in Southeast Asia: Indonesia, Malaysia, Thailand, the
Philippines and Vietnam account for the majority of Australia's trade with the region.
Collec&vely, the share of these five economies in Australia's export make them
Australia's third-largest trading partner aUer China and Japan (RBA Bulle&n, 2018)
, Proof that Asian economies gaining importance to Australian
economies
https://www.dfat.gov.au/sites/default/files
-
Source: DFAT –Trade at a Glance 2013
/trade-investment-glance-2020.pdf
- The economy of Asia comprises about 4.7 billion people (60% of the world popula&on)
living in 50 different na&ons. Asia is the fastest growing economic region, as well as the
largest con&nental economy by both GDP Nominal and PPP in the world
-
- Over nearly 3 decades, developing Asian economies recorded impressive growth.' The
region's income grew from about $3.3 trillion in 1980-in 2005 purchasing power parity
(PPP) terms--to an es&mated $24.5 trillion in 2009-an expansion of 7.5 &mes. During the
same period, the world economy managed to record an expansion of less than three
&mes, while the incomes of the industrial economies increased just about two &mes. Per
capita income in developing Asia is s&ll lower than the global average, but it is also rising
fast. From just over a quarter of the world average in 1980, it had increased to nearly
two-thirds in 2009.
- Moreover, Asia is the site of some of the world's longest modern economic booms,
star&ng from the Japanese economic miracle (1950-1990), Miracle on the Han River
(1961-1996) in South Korea, economic boom (1978- 2013) in China, Tiger Cub Economies
(1990-2020) in ASEAN, and economic boom in India (1991-present).
o Growth of a large middle class and increase in income inequality
- Deepening Asian economic integra&on - while all Asian economies are also closely linked
to wider global economy
o Increase in Intra-Asian trade
o Produc&on networks and mul&na&onals
o Labour migra&on across Asia
o Financial market integra&on
- Challenges
o Reopening in the PRC could cause a faster-than-expected rebound.
o Disinfla&on in the US and other advanced economies could take longer than
expected, prolonging the restric&ve monetary stance- capital oullow
o Higher interest rates and debt has raised financial stability risks-as seen in recent
banking turmoil in US and Europe.
o Escala&on of the Russian invasion of Ukraine could renew energy and food
security challenges and rekindle infla&on pressure.
, o Other challenges include global fracturing and climate change.
§ Global fracturing: many countries involve in blocs due to dispute and
interest
- Comparing growth –what is more useful - PPP or market exchange rate based
o If both the nominal exchange rate and real exchange rate are measured in x of
domes&c currency per a unit of foreign currency, then
!"#$%&' )#%*$ +$,$+
§ 𝑅𝑒𝑎𝑙 𝑒𝑥𝑐ℎ𝑎𝑛𝑔𝑒 𝑟𝑎𝑡𝑒 = 𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝑒𝑥𝑐ℎ𝑎𝑛𝑔𝑒 𝑟𝑎𝑡𝑒 ∗ 3-".$/0%* )#%*$ +$,$+4
§ Implica&on
• Real exchange rate increase if:
o Nominal exchange rate increase, or
o Foreign price level increase, or
o Domes&c price level decrease
• Real exchange rate decrease if:
o Nominal exchange rate decrease, or
o Foreign price level decrease, or
o Domes&c price level increase
o If both nominal exchange rate and real exchange rate are measured in x of
foreign currency per a unit of domes&c currency, then
-".$/0%* )#%*$ +$,$+
§ 𝑅𝑒𝑎𝑙 𝑒𝑥𝑐ℎ𝑎𝑛𝑔𝑒 𝑟𝑎𝑡𝑒 = 𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝑒𝑥𝑐ℎ𝑎𝑛𝑔𝑒 𝑟𝑎𝑡𝑒 ∗ 3 !"#$%&' )#%*$ +$,$+ 4
§Implica&on
• Real exchange rate increase if:
o Nominal exchange rate increase, or
o Domes&c price level increase, or
o Foreign price level decrease
• Real exchange rate decrease if:
o Nominal exchange rate decrease, or
o Domes&c price level decrease, or
o Foreign price level increase
o Nominal exchange rate based
§ Official exchange rates
§ The rate at which the currency of one country would have to be
converted into another country’s currency
§ Financial flows à money
o PPP based à real exchange rates
§ The rela&ve price of basket of domes&c goods in terms of a basket of
foreign goods
§ This relates to popula&ons income and price level
§ Arbitrage opportunity due to difference in price level (buy at lower price
level countries, sell at high price level countries.
§ In long run, PPP hold which indicates price level across countries are
equal
§ i.e., Big mac index à undervalue for developing countries
, § Compare the “true” standard of living and growth across countries
• Capture change in price level à countries with low price level is
more compe&&ve because of cost advantage they can offer (i.e.,
low labour cost and price of goods)
Growth of a large ‘middle class’ à correlate all of these
- define middle class
o Defini&on (ADB, 2010): Per capita daily consump&on of $2-S20 (in 2005 PPPS)
§ Lower middle class ($2-54)
§ Middle-middle class ($4-$10)
§ Upper -middle class ($10-$20)
§ Not applicaple for all ci&es (i.e., Shanghai, Beijing) which are considered
expensive
o For the current 2023 fiscal year,
§ low-income economies with a GNI per capita, $1,085 or less in 2021;
§ lower middle-income economies are those with a GNI per capita between
$1,086 and $4,255;
§ upper middle-income economies are those with a GNI per capita between
$4,256 and $13,205;
§ high-income economies are those with a GNI per capita of $13,205 or
more.
o oUen thought of as people or households who make sufficient income to be able
to afford a reasonable standard of living, which includes things like Basic
necessi&es, healthcare, educa&on, and some discre&onary spending(Sending kids
to study overseas).
o Facts
§ KPMG (2012) " The most fundamental and revolu&onary development in
Asia has been the rise of the middle class. ......
§ In 2008, China: 250-300 millions; India: 160 millions; Indonesia: 50
million.
§ World economic form (2020) "In 2030, two in three members of the
middle class will be Asian"
- Determinants
o Economic growth
o Two factors for crea&on and sustenance
§ Stable, secure, well-paid jobs with good benefits.
§ Higher educa&on
• According to the Asian Development Bank, policies for
accumula&ng and maintaining human capital are important for
the emergence of the middle class in Asia. (Asian Development
Bank. 2010).
o Educa&on and health are essen&al for the development of
human capital, which can increase people's skills,
knowledge, and abili&es.
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