China is making a bold move to bolster its economy by allocating an additional 1 trillion yuan ($137 billion) towards infrastructure projects. This strategic decision comes as China aims to counteract the economic pressures it has faced over the past year. By increasing its spending, the nation will exceed its self-imposed budget deficit cap of 3% of GDP. This indicates the lengths to which China is willing to go to ensure economic stability and growth.
For our young business and economics enthusiasts, here’s a bit of context. Infrastructure spending is a classic tool governments use to stimulate economic growth. Think of it as investing in the “hardware” of a country – roads, bridges, airports, and more. By funding these projects, jobs are created, businesses receive contracts, and money circulates in the economy. However, there’s a catch. While such spending can boost economic activity in the short term, it also increases the country’s deficit, which is the difference between what the government earns and what it spends. A higher deficit can have long-term economic implications.
The decision by China underscores the importance of infrastructure in driving economic growth. But it also highlights the challenges governments face in balancing short-term gains with long-term fiscal responsibility.
THINK LIKE AN ECONOMIST!
Q1. Define supply-side policy.
Q2. Explain one benefit and one consequence of economic growth.
Q3. Analyse the impact of the China’s infrastructure spending on long-run potential output of the Chinese economy.
Q4. Discuss whether infrastructure spending is the most effective policy to overcome an economic downturn.
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