RM_Midterm - Risk M anagement Topic#9: The cycle of...

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Risk Management Topic#9: The cycle of inflation and recession (1) Please briefly describe the event China's economy continued growth 9.7% in 1 st quarter of the year and inflation accelerated to the fastest rate on Match (5.4%) since 2008 July (6.3%). In February, the annual figure was 4.9%. Rising food prices have been the main cause of inflation. The cost of food was up 11.7% (world food price up 36%). Housing costs have also risen sharply. Retail sales in the 1 st quarter were up 16.3% on last year. In another sign of the impact of strong growth, oil demand for February increased by 10.3% on a year ago, driving global oil prices higher. T he government has been taking steps to try to cool property and food prices. On April 13, Prime Minister Wen Jiabao said at a cabinet meeting that the government would use all the tools at its disposal to tackle inflation. To control inflation, the Chinese central bank has already increased the amount of money Chinese banks need to keep as a reserve in order to limit lending three time also rise the interest rate twice in this year. Analysts are expecting the bank to order further increases alongside possible interest rate rises. (2) Please discuss about the frequency of the relevant event. Discussion about the trend of similar event in the city, region, country, and continent is welcome. The world now is fighting with two kinds of economic. The United States and the euro countries are struggling to do not fall into deflation, meantime the emerging exporters such as China and India are worrying inflation. The cycle of inflation and recession is happening everywhere all the time. However, the situation of China economy is unique compare to not only other developing countries but also other great economic power countries. While I search the frequency and consequence of China‟s inflation, found one interesting column “China‟s dilemma: Higher inflation or deflation of exportables”. It gives an example of the Japanese economy after WWII as a comparison of current phenomenon in China. It explains two reasons for having an inflation differential in rapidly growing economies by “Balassa-Samuelson effect”, which Samuelson and Béla Balassa gave the arguments for explaining the higher inflation in countries that were catching up with US productivity levels in their tradable sectors in 1964, and deterioration of the
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terms of foreign trade, which have to import food and raw materials because they lack the necessary natural resources to produce them. The significant rise of oil and other primary commodities in the 70s meant a sharp deterioration of its terms of trade that
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This note was uploaded on 08/28/2011 for the course IMBA 101 taught by Professor Trott during the Spring '11 term at National Cheng Kung University.

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RM_Midterm - Risk M anagement Topic#9: The cycle of...

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