It is paramount that every government conducts an economic analysis of the country. Economic analysis refers to a systematic process of determine the effective utilization of resources. The analysis involves a comparison of a number of alternatives in attaining a specific objective. For efficiency, there are a set of constraints that are set and various assumptions are made. Economic analysis enables effective planning and forecasting of the countries economic affairs.Let our writers help you! They will create your custom paper for $12.01 $10.21/page 322 academic experts online
The analysis should be comprehensive by considering all the macroeconomic variables that impact the economy. In line with this, the analysis should be continuous so as to establish the trend of economic performance. The article ‘Hong Kong economic analysis’ illustrates the macro economic condition of Hong Kong’s economy. In this article, various macro economic variables have been considered. These include economic growth, rate of inflation, exchange rate, and economic policy in relation to monetary policy. The discussion of the paper is a critique of various variables in the article ‘Hong Kong’s economic analyses.
The first part of the paper identifies the gaps that have been left in relation to analyzing the rate of inflation. These include the increased economic growth, effects from other countries especially Thailand, effect of property market and the effect of reduction in the rate of unemployment. The second part involves a critique of Hong Kong’s exchange rate policy. More emphasis is given to the impact of pegging Hong Kong’s dollar onto the US dollar. It also involves a critique of the impact of pegging the currency on US dollar in implementing various monetary policies due to the contagion effect. Thirdly, the paper critiques the assumption that there is low correlation between mainland China and Hong Kong and hence minimal effect on Hong Kong’s money market.
In conducting macro-economic analysis in relation to inflation, the consumer price index is considered (Peter Para. 1). However there are many gaps that have been left in analyzing the rate of inflation. One of the major factors that resulted to an increase in Hong Kong’s rate of inflation is the increase in foodstuff prices from the mainland China. Considering the fact that Hong Kong’s increase in rate of inflation resulted from foodstuffs, the article only identifies China as the major source of inflation in relation to food stuffs. This shows that the analysis of inflation did not consider impacts of imports from a number of countries.
This is due to the fact that the rise in inflation rate in Hong Kong was worsened by foodstuff imports from other countries especially Thailand.This is due to the fact that Hong Kong imports a significant amount of foodstuffs from Thailand.Thailand experienced a high rate of inflation compared to the mainland China in relation to food stuffs (‘An examination of the recent sources of recent food price hike and its impact on Hong Kong’s inflation’ 2).
Despite the fact that economic growth is beneficial to a country, there are costs that are associated with it. In the case of Hong Kong, the increase in inflationary pressure is associated with economic growth that it experienced in the recent past. Joseph asserts that Hong Kong has undergone a high rate of economic growth for the last four years (Para. 4). The high rate of economic growth is associated with spill over effects of economic growth from Mainland China. According to Melissa, Daniel, and Wing, the increase in economic growth has culminated into an increase in the rate of consumption demand (Para. 4). The effect is a general increase in prices of goods and services.Order now, and your customized paper without ANY plagiarism will be ready in merely 3 hours!
With regard to Hong Kong’s inflation, the article does not comprehensively analyze how the country’s rate of unemployment has affected the economy’s rate of inflation. The rate of unemployment in Hong Kong has been relatively low in the recent past. Despite the fact that the rate has been on an upward trend from 3.5% in October 2008 to 5.4% in August 2009, the rate is not worse since it’s still single digit. According to Joseph, the rate of inflation is inversely related to unemployment (Para. 6). The low rate of unemployment has resulted into a rise in Hong Kong’s rate of inflation. The article asserts that the country will continue to experience a decline in the rate of inflation resulting into a low rate of consumer price inflation.
The government has adopted a policy aimed at easing the rate of inflation within the public housing sector. This is through helping the public pay rent. This has enabled the households to have access to homes. However there is a possibility of housing prices edging higher despite the implementation of this policy. This is due to the fact that land is limited in Hong Kong. On the other hand, the government has the capacity to hold back land or issue it out for development. This shows that the government is contributing to an increase in residential rental rates. This is due to the fact that there is a reduction in construction of homes. This culminates into an increase in the rate of rents due to reduction in supply of houses.
The analysis of inflation does not consider the effects of housing sector bubble in the economy (‘Hong Kong: housing market back to the bubble territory’ Para. 3). Hong Kong is the largest market in relation to housing. The increase in housing prices in Hong Kong originates from an increase in the number of Chinese buyers who are purchasing luxury homes in Hong Kong (Christopher Para. 6). The increase in number of investors who are buying homes from China arises from the fact that the Chinese government has relaxed its monetary policies.
This has made it easy for investors to obtain loans from financial institutions. The increase in luxury house prices will have spill over effect to the public residential homes (Sun & Zhang Para. 5). This is due to the fact that there will be an increase in the rate of rent in relation to residential homes. This will gradually result into an increase in consumer price inflation. This means that there is a high probability of the rate of consumer price inflation being higher than the projected 1.6% by the end of 2009.
The probability of occurrence of housing bubble is increased by the low rate of interest within the market. This is evident from the fact that Hong Kong housing industry has adopted a variable rate in relation to the mortgage. Through the variable rate, individuals in the low income bracket will be able to own homes. The variable rate of mortgage is reversed after some time. This means that it will be difficult to pay the mortgages. The effect is that the number of mortgage defaults will increase resulting into a crash in the economy.
The government will be required to bail out the housing market resulting into an increase in government expenditure. In analyzing Hong Kong’s housing industry, the article does not consider the impact of pegging its currency on US dollar. The fluctuations in the value of the dollar will result into an increase in the value real rate of interest (Henry Para. 5). This will result into an upsurge in housing prices (‘Hong Kong housing market imbalance’ Para. 2).We'll complete your 1st custom-written order tailored to your instructions with 15% OFF!
Critique of Exchange Rate and Monetary Policy
According to Kenneth and Hsiu-Yun, Hong Kong has adopted the fixed exchange rate regime by implementing the currency board (2). Currency board is defined by two main rules which include exchange rate and budgetary rule (William & Clemens 10). Through the exchange rate policy, the currency is fixed to a particular currency. In relation to this Hong Kong, has pegged its currency on the US dollar. Kenneth and Hsiu-Yun assert that there is a strong correlation between US dollar and Hong Kong’s dollar (p.3).
This is due to the fact that Hong Kong’s dollar is pegged to US dollar. Pegging the currency on another hard currency leads into reduction in the rate of inflation (Dalia para.3). However, this does not completely insulate the country from the inflation.
According to Atish, Jonathan, Anne and Holger, a pegged currency results into a slow rate of growth in the country’s productivity (para.3). This means that the rate of growth of Hong Kong’s Gross Domestic Product (GDP) will be slow and hence the per capita income. Despite the fact that Hong Kong’s rate of inflation is on a downward trend, there is a high probability of the rate rising in the future. This increase will result from the fluctuations of the US dollar. Currently US housing market is undergoing a crash.
This will result into depreciation in the value of the dollar. This will have spill over effects to Hong Kong’s dollar and hence its exchange rate. Despite the fact that countries that have adopted a pegged exchange rate regime experience a high rate of growth, the growth is not guaranteed. In order to increase the level of output, the government of countries that have pegged their currency on some other hard currency is forced to conduct currency devaluation (Herbert 4).
Fixed exchange rate regime limits Hong Kong’s Central Bank in implementing some policies (Francis& Kweung 3). This is due to the fact that the government through the central bank has strict fiscal policies. This means that it is not easy to undertake monetary policies to make necessary reforms. This means that pegging Hong Kong’s dollar on US currency limits the authority of Hong Kong’s central bank in undertaking necessary monetary policies (Henry Para. 4). This is due to the fact that the US Fed will dictate Hong Kong’s monetary policy. For instance, the regime puts a limitation in implementing a monetary policy aimed at reducing Hong Kong’s unemployment rate which is on an upward trend (‘ Hong Kong’s rate of unemployment’ Para. 2).
Considering the degree of correlation between US and Hong Kong economies, pegging the exchange rate on US dollar is disadvantageous to Hong Kong’s international trade. This is due to the fact that the Hong Kong’s currency does not respond to forces of demand and supply. Currently, US dollar is undergoing a high rate of fluctuations in relation to other currencies. According to Henry, this will consequently have greater impact on Hong Kong’s dollar in relation to other currencies (Para. 7). The effect is that the fluctuations will result into a reduction in the competitiveness of Hong Kong’s exports. This means that there will be a reduction in Hong Kong’s GDP.Just $12.01 $10.21/page, and you will get your custom-written original paper by our team
The analysis does not consider the possibility of occurrence of contagion effect from US and its effect on Hong Kong’s banking system (Henry Para. 7). This is due to the high degree of correlation between US and Hong Kong. Currently, Hong Kong’s economy is experiencing a low rate of interest which makes it attractive to investors. However, there is a probability of investors pulling out of Hong Kong’s economy due to effects of current fluctuations in the value of the US dollar.
To counter this, the domestic rate of interest will increase so as to maintain the established currency peg. This will have a negative impact towards Hong Kong’s banking sector. Upon this occurring there is a probability of Investors within the banking sector pulling out their investment from Hong Kong. This will culminate into a distortion of Hong Kong’s financial market and in adverse situation result into bankruptcy. This means that the fact that Hong Kong has pegged its currency on US dollar does not result into absolute economic stability.
Critique on Low Economic Correlation with Mainland China
In analyzing Hong Kong’s macro economics, the paper does not consider the effect of mainland China’s money market on Hong Kong’s economy. According to Dong, Zhiwei and Honglin, China and Hong Kong are economically integrated but their money markets are highly segmented (12).
This means that the degree of correlation between China and Hong Kong is low compared to that of US and Hong Kong. Despite this, the analysis does not consider the indirect impact that China’s money market had on Hong Kong’s money market and hence the interest rate in the financial sector. This is due to the fact that there is a possibility of mainland factors spilling over to Hong Kong’s Inter-bank Offer Rate (HIBOR) through the Initial Public Offers (IPO’s) in Hong Kong. This is due to the fact that most of the IPO’s in Hong Kong are Hong Kong’s shares (H-Shares) from mainland China (Dong et al 12).
Arguments and Logics Used to Make Critique
The critique is based on the concept that there are gaps that have been left in analyzing various the various macroeconomic variables. This means the analysis on the variables is biased and not comprehensive. The analysis also does not consider the negative long term consequences of adopting some economic policies.
For effective in conducting economic analysis of a particular economy, all the economic sectors should be considered. This is due to the fact that they contribute to economic growth and development of the country. The economic analysis should take into consideration the diverse macroeconomic variables. The analysis should be comprehensive by detailing the causes and impacts of specific macroeconomic variables on the economy. In line with this, both the short term and long term implications should be analyzed. The analysis should also consider the different sources of impacts on the variables considered, that is, domestic and foreign sources. Through effective economic analysis, the government is able to forecast the country’s economic performance more effectively.
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