1.
Comparative Analysis of the
Economic Performance of
China & Portugal
Macroeconomics (ECO 583)
Dr Karuna Gomanee
19th
April 2013
Word Count: 3496
Lars Friedel
Sumeet Khushalani
Carlos Possenti
Ziv Reichert

2. Table of Contents
I.
Introduction
......................................................................................................................................
2
II.
Economic
Growth
............................................................................................................................
2
A.
China
............................................................................................................................................
2
B.
Portugal
.......................................................................................................................................
3
III.
Unemployment
...............................................................................................................................
4
A.
Portugal
.......................................................................................................................................
4
B.
China
............................................................................................................................................
6
IV.
Inflation
...........................................................................................................................................
7
A.
Portugal:
......................................................................................................................................
8
B.
China:
...........................................................................................................................................
9
V.
Balance
of
Payments
.....................................................................................................................
10
A.
China
.............................................................................................................................................
10
B.
Portugal
.........................................................................................................................................
12
VI.
Conclusion
.....................................................................................................................................
13
VII.
Bibliography
:
................................................................................................................................
14
VIII.
Appendices
....................................................................................................................................
17

3. I. Introduction
The aim of this report is to compare the macroeconomic performance of China and Portugal
over the last three years. For this purpose, we conducted analysis on the performance of each
country based on the four main objectives: economic growth, unemployment, inflation and
the balance of payments.
In the last couple of years, China and Portugal experienced inversed economic cycles. China’s
rapid economic growth has made it the second largest economy in the world, while the EU
crisis has led Portugal to a recession.
This report is based on secondary research; for a full list of sources please refer to the
bibliography.
II. Economic
Growth
In order to measure the economic growth of a country, GDP is used to make precise
comparisons between countries. The growth rate in Gross Domestic Product (GDP) measures
the increase in value of the goods and services produced by an economy over a defined period
of time (Trading Economics).
In the last decades China is moving more and more from a centrally planned system to a more
market-oriented global player and is since 2010 the world’s largest exporter. (CIA, 2013) The
strong economic performance and the important role in the global market can be easily proved
by indicators, which are measuring important aspects of a country’s economy. As you can see
in Appendix 1, China has had a sustainable and strong economic growth in the last 10 years
measuring between 6 and 13 percent on yearly average. At the moment China is the 2nd
largest economy in the world with a purchasing power parity (GDP) of 12.38 trillion US
Dollar but has a GDP per capita with only 9.100 US Dollar (worldwide rank: 118) due to their
very high population (CIA, 2013).
Portugal is an increasingly service-based economy, which has joined circulating the Euro on 1
January 2002. (CIA, 2013) As pictured in Appendix 2, Portugal is struggling in their
economic growth over the last decade and could not manage a continuous and stable
economic growth. With purchasing power parity (GDP) of $245 billion Portugal is the 52nd
largest economy in the world but has with $23.000 a higher GDP per capita than China (CIA,
2013).
A. China
2010:
After more than one year of rebound in the economic growth, the growth rate contracted
because the Chinese government wanted to stop overheating the economy and property prices
were out of control (Inman, 2010). The fear that the economy of China could be overheating
was supported by the fact that the inflation was higher than expected with 4,6% (Branigan,
2011). In order to work against this process the government tried to curb growth by raising

4. banks' required reserves seven times in the last year and has raised interest rates twice (
Branigan, 2011). This led to a decrease in the consumption and also in the GDP but the
average was still at 9,5%.
2011:
The decline in the economic growth continued through 2011 as the Europe’s debt crisis and
the high US unemployment had a negative influence on the economic performance in China
(McDonald, 2011). The second-largest economy in the World had undergone a decline in the
GDP from 9.5% to 9,1% which was the lowest level since two years (McDonald, 2011).
Furthermore, the government still tried to cool the inflation, which had a 37-month high in
July with 6,5%, by increasing interest rates and putting curbs on construction and other
investment (McDonald, 2011).
2012:
In the third quarter in 2012, the economic growth slowed down to 7,4% which was the
weakest since early 2009 (Yao, 2012). This slowdown was a result of the weak global demand
as Europe is struggling with their debt crisis and the economic adjustments of the Beijing
government in order to guarantee a more sustainable growth without acceleration in inflation
(Yao, 2012). But nevertheless the Beijing government wanted also to support the economic
growth by cutting benchmark interest rates twice this year and lowering bank reserve ratios
three times since late 2011. Furthermore, they injected large amounts of money into the
market in order to encourage consumption (Yao, 2012).
B. Portugal
2010:
Although Portugal had one of the best recovery rates in terms of economic growth in the
European Union in the first quarter of 2010, the markets plummeted because they feared that
Portugal could be the next Greece (Donadio, 2010). The loss in confidence in Portugal was
due to its high deficit with 9,3% of gross domestic product in 2009. Another Problem which
Portugal hit hard was the eastward expansion to Asia and the loosening of its trade barriers.
As Portugal based his economy on labor costs they were dependent on foreign investment
(Donadio, 2010). Furthermore, there debt was 76,6% of gross domestic product in 2009
because of rising in unemployment and government spending (Donadio, 2010).
2011:
As the problems continued and the government of prime minster Socrates collapsed, Portugal
was forced, after Greece and Ireland, to seek a bailout. The Government cut public spending
and raised taxes to meet terms of a 78-billion Euro aid plan from the EU and IMF
(Bloomberg, 2012). This bailout was necessary because the country’s borrowing costs
increased extremely and they were not able anymore to borrow from the markets (Bloomberg,
2012). But as we can see in Appendix 2, the economic growth contracted in 2011 and

5. Portugal was facing a deep recession. As a result of the tax increases the consumption
declined and unemployment went up.
2012:
These problems continued in 2012 and the budget deficit grew continuously as a result of a
decline in domestic consumption and the increase of unemployment benefits (Indexmundi,
2013). The economy shrank for the 8th
quarter in a row and was experiencing a deep recession
as the fiscal consolidation of the country had negative impacts of the economic growth (Lima
and Almeida, 2012). Furthermore, Portugal struggles to comply with the conditions of the
EU-IMF to reduce their deficit till 2013 below 3% (Lima and Almeida, 2012).
III. Unemployment
One of the key economic factors to measure the performance of a countries economy is the
unemployment rate. (Investopedia, 2012).
It is a closely guarded statistic because a rising rate is seen as a sign of a weakening economy
that may call for cut in interest rate. (Business Dictionary 2013)
Unemployment occurs when a person is actively searching for employment is not receiving
wages.
Therefore the unemployment rate is archived by calculating the number of unemployed in the
workforce, which includes people who are able to work. This includes people who are in the
appropriate working age minus children, students, people who are incapable of work and also
people who do not aspire a job (Bls, 2009).
There is a linked relationship between economic growth and unemployment known as the
Okun’s Law, the previous statement can be seen when comparing the Chinese and Portuguese
growth rate and looking at their respective unemployment rates afterwards. (Investopedia
2012)
A. Portugal
Portugal is in deep economic recession. When analyzing its employment rate since the
European crisis, there is no doubt that Portugal its in a social and economical turmoil. Lima J,
and Reis A 2013)
Portugal’s economy is mainly service based (76% of GDP) unlike China, this sector was
largely affected after the 78 Billion in bailouts issued by the IMF and European Central Bank.
The current Unemployment rate is 16.9% and has been increasing since the 2008 global crisis.
(Index Mundi, 2013)
Austerity measures led to a steady increase in unemployment, which became one of the
highest in Europe. (Pattinger, 2012)

6. In just one quarter after the Bailout in 2011, the unemployment rate rose 4% points.
Despite the current cost of austerity for the unemployment rate in Portugal, it is predicted in
the 2013 budget to propose more austerity measures including enormous tax increases.
(Pattinger, 2012)
Youth unemployment is so high, currently at 8.6% that even the prime minister has
encouraged its youth to show more efforts leaving the country and finding new jobs in
Portuguese speaking markets abroad like Angola and Brazil who are currently experiencing
extensive economic growth. (Pattinger, 2012), (CIA 2013)

7. B. China
Since the late 1970’s China has moved from a closed, centrally planned system to a more
market oriented economy. (CIA 2013)
The Chinese labor market has been transitioning from a previously high Agricultural
setting to a more Industrial. (Cai F, Park A 2012)
In 2010, China became the world’s largest exporter. (CIA 2013)
Today, in the Chinese economy, the labour force engaged in agriculture is still high at
49%, but quickly decreasing and moving to services currently at 29%. (Cai F, Park A
2012)
Unlike Portugal, China is experiencing very high economic growth rates.
The current unemployment rate in China is 4.1%, according to the data graph below it
shows it has been consistent for many years with no significant drops of rises. (Trading
Economics 2013)
However many economists around the world are criticizing this unemployment rate
offered by the official Chinese government labour institution as it only calculates urban
unemployment. (Cai F, Park A 2012)
Estimated Real Unemployment rate calculated by some institutions, which includes
private enterprises and migrants range around 6.5%. (CIA, 2013)
It is predicted that China will have to deal in the future with the increasingly problem of
sustaining adequate job growth for tens of millions of migrants and new entrants to the
work force, who are transitioning from the previously based primary sector economy. (Cai
F, Park A 2012)

8.
IV. Inflation
Inflation is defined as an increase in prices and goods in an economy over a period of time
(Investopedia). There is a clear relationship between economic growth and inflation. This
means if the economic growth of country A rises, most probably there will be a decrease in
the inflation rate.
There are two causes of inflation. A country has cost-push inflation or demand-pull
inflation (Bized, 2001).
Cost-push inflation is caused when there is an increase in costs of production and an
increase in the prices of raw materials (Bized, 2001).
This diagram clearly shows that there is a upward shift in the aggregate supply which
demonstrates and increase in prices, which therefore is causing and increase inflation
(Bized, 2001).

9. Demand pull inflation is caused when there is strong consumer demand. This is when
individuals want to buy the same good (Bized, 2001). Nevertheless, the price of the
product automatically rise (Investopedia).
This diagram shows that there is a right shift in the aggregate demand curve (Bized,
2001). Therefore as I said before, and increase in aggregate demand will increase the
prices (Bized, 2001).
A. Portugal:
The Euro crisis has been one of the reasons why Portugal has not had a proper economic
growth, which has lead to a low inflation (The economist, 2013). Portugal`s inflation rate
fell in 2009 to negative value while the unemployment rate was rising. This has been there
lowest inflation rate in the Eurozone. While relating it with the economic growth further
up, the growth has also fallen. From this we can say that there is a linear relationship
between inflation and economic growth. Furthermore. We can see that by looking at the
last two years there has been fluctuations and inflation rates have therefore not been
constant.
It is clear from the graph that Portugal has gone through several changes as soon as the
Eurozone crisis started in 2008. This is shown as reaching to a negative value in 2009, it
has jumped into 4.2 percent in the end of 2011 (Bloomberg, 2011).
Looking the actual inflation rate in March 2013 was 0.5% (Trading Economics).

10. B. China:
China has been conquering the market from the last decade. There is no doubt about this.
However since 2010 there economy has started to “overheat¨ which means that there are
higher taxes and unemployment rates are being completely sustainable (Priyanka, 2010).
It is said that in 2010 they should had a inflation rate between 1-3% however it has
reached to 4% (Priyanka, 2010). This means that there is a rapid increase in the inflation
rate. So everyone ask there selves if China should turn into monetary policies which
would increase the interest rates and would help to decrease inflation or should the use
fiscal policy which relates in increasing taxes which will probably decrease the consumer
disposable income (Priyanka, 2010).
China has used the monetary policies. This could be raising interest rates and also
increasing the value of their currency, Yuan (Priyanka, 2010).
Analyzing the graph we can also see that there is a pattern between Portugal and China
graph in where deflation has occurred (Phil for Humanity, 2011). One of the problems of
China is that inflation not only affects them but globally. There has been a cost-push
inflation, which has affected labour and factories to outsource their factories (Phil for
Humanity, 2011). This means that expenses have increased for the manufactured goods
and so has the inflation (Phil for Humanity, 2011). Therefore there has been a link
between the global and china´s inflation rate.

11. V. Balance
of
Payments
The balance of payments is a key indicator towards determining a country’s economic
performance, as it measures all of a country’s inflows and outflows, showing whether a
country is undergoing a deficit (more outflows than inflows) in their total economic
transactions or whether it is experiencing a surplus (more inflows than outflows). The balance
of payments consists of three fundamental figures: current account, capital account and the
financial account (note: capital account and financial account are usually merged). While the
current account measures net exports of goods, services and transfer payments, the capital and
financial account measure the net flows of financial securities and the ownership of assets.
A.
China
Ever since new economic reforms were established in the late 1970’s, the Chinese economy
has been growing at unbelievable rates. The country’s immense population of over 1.3 billion
people - and thus its reputably large labour force, has allowed it to produce with incredibly
low costs and thus has led the country to become the largest exporter in the world (CIA, 2012)
and has pushed it to become the second largest economy in the world with over $7.2 trillion in
nominal GDP as of 2012 (CIA, 2012). Though due to recent circumstances and the
continuous growth in economic volatility, the upward trend-line that China has possessed for

12. so long is no longer as apparent
as it once was. By looking at China’s Balance of Payments, we can see that in 2008 its current
account was in a surplus of $421 billion, an all-time high for the country’s economy and an
impressive figure by all means. China’s exports prior to the 2008 financial crisis accounted
for roughly 34% of its economy, though quickly dropped to under 29% only two years later in
2010, representing a decline of roughly $375 billion. The increased volatility in the global
financial markets and the apparent bearish outlook, have led to a substantial decrease in the
country’s exports – leading to a steady decline in its current account surplus from $421 billion
in 2008 to $214 billion in 2012, nearly halving in only five years time. In addition to the
global recession, a large contributing factor to the decline in China’s current account surplus
was the devaluation of the currencies of many of its largest importers (e.g. India, Russia and
the United States of America). The United States has long been in conflict with China,
criticizing the country for purposely devaluing the Yuan through its intensive buying of
foreign currencies (particularly the USD) and treasury bills. In response, the United States has
applied quantitative easing throughout the last three years, a monetary policy used to increase
money supply and depreciate the value of the currency. By looking in the appendices, in
figure ‘appendix 3’, the affect of the United States quantitative easing policy is shown,
through the stark decline in the balance of trade in 2012. Even though a tremendous decline
the current account surplus has occurred the country still has a healthy exporting sector,
particularly growing in its service sector, representing around 35.7% of the country’s
economy as of 2011 (CIA, 2011). In addition, increased emigration has led to 50 million
Chinese living outside of the country and thus increased the amount of remittances and
therefore inflows into the economy.
Unlike China’s current account, its capital and financial account have shown a steady increase
up until 2010, from roughly $40 billion in 2008 to $287 billion. Though due to economic
turbulence, the capital and financial account have since plummeted from a surplus to a deficit
of $117 billion. This is mainly due to the continuous fluctuations in the Yuan; a currency
noted for its relatively stable performance had begun to experience volatility, pushing away
investors from buying it, towards buying other similar substitutes. To combat the stark decline
in its capital and financial account, in 2012, China bought up the least amount of currency
reserves since 2003. The financial crisis and the fears of a real estate bubble (Forbes, 2013),

13. have led investors to stir away from investing in the country, while the Chinese private and
public sector have continued investing outside the country. This has of course led to the
current state, leading to a very large capital and financial account deficit. By looking in the
appendices at figure ‘appendix 4’ you can see that Chinese investment outflows have
increased, while foreign investor confidence in the country has substantially decreased, as
represented by the capital and financial account deficit.
As of 2012, China is relatively balanced within its balance of payments, indicating that it has
a rather healthy, yet volatile-prone economy.
B.
Portugal
Like most European countries, Portugal was heavily hit following the 2008 financial crisis
and the Eurozone Crisis. With Portugal having experienced the largest dip in GDP growth in
the EU after Greece, it could be said that it was affected a lot more than other countries in the
region. With a current account deficit of around EUR 2.1 billion in 2008, Portugal managed to
reduce the figure to EUR 250 million by 2012. Though the country’s export sector only
accounts for roughly 35% of its economy and thus is not completely detrimental to its full
economic performance. Even though the country managed to decrease its current account
deficit substantially, as of 2012, it was still undergoing a deficit. It’s possession of the Euro
currency, means that it has little to no influence in intervening to the change currency’s value.
The relatively high value of the Euro has of course led to a decrease Portugal’s exports,
maintaining its apparent deficit. Ironically, the large decline in Portugal’s nominal GDP has
led to a fall in wages and thus lower production costs in the country. This has of course helped
reduce the deficit, but by no means managed to eliminate it. Another factor that helped
improve the deficit has been the trade contracts that Portugal signed with China in 2010,
increasing its exports by 8% by 2012 and reducing its imports by 3.3%. By looking at figure
‘appendix 5’ in the appendices, you can see that Portugal’s trade balance has steadily
increased since 2010, following its contract establishment with China.
Furthermore, Portugal’s capital and financial account surplus has decreased from EUR 2.1
billion in 2008 to EUR 200 million in 2012. The Eurozone crisis and its $103 billion bailout
has decreased investor confidence tremendously, while Portuguese outflows have increased
following a strong decline in 2010, as seen in ‘appendix 6’ in the appendices. In addition,
increased volatility and weak performance of global financial instruments have led to
Portugal’s portfolio investments to fall from a surplus of EUR 1.5 billion in 2008 to a deficit
of EUR 200 million in 2012. As portfolio investments represent an extremely large part of the

14. Portuguese capital and financial account, the large fall has had a great contribution to the
large decline in country’s capital and financial account surplus.
As of 2012, Portugal is experiencing a deficit in its Balance of Payments estimated to be
around EUR 473 million.
VI. Conclusion
Portugal and China were affected by domestic and international factors, which influenced the
performance of the country.
The financial crisis in 2008, the Europe’s debt crisis and the struggle of the USA led to a
slowdown in economic growth in China. Furthermore, the Chinese government tried to work
against overheating the economy by their fiscal and monetary policy in order to achieve a
more sustainable growth. Yet, the Chinese economy is growing on a very high rate as they are
still considered as a developing country.
In Contrast, Portugal is in a deep recession as their unemployment is increasing and they are
struggling with their public deficit. This is also a result of EU and IMF bailout for which the
Portugal government had to increase taxes and cut government spending in order to comply
with the conditions. Furthermore, the Europe crisis with troubled countries had a negative
impact on the performance of Portugal’s economy, as there is a loss in confidence that the
economy will recover in the future.

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18. VIII. Appendices
Appendix 1: China GDP Annual Growth Rate
Appendix 2: Portugal GDP Annual Growth Rate

19. Appendix 3: China Trade Balance
Appendix 4: China Investment Outflows
Appendix 5: Portugal Trade Balance

20. Appendix 6: Portugal Investment Outflows