Readers Question: Use the ideas and theories you have encountered in your study of the macroeconomic business environment to assess the possible impacts on China of holding the Olympic games in Beijing in 2008.
The Olympic Games will effect the Chinese economy in the following way.
Increase in Tourism. This is a short term effect but will help increase spending in the economy. It will come from the athletes, spectators and media who will travel to Beijin. It is argued the Olympics will also provide a long term boost in repeat tourism; this could be quite significant for China as the tourist industry is largely underdeveloped.
Increased Investment in Infrastructure. To prepare the economy for the Olympics, the Chinese authorities have attempted to improved infrastructure and transport links, these will have some effect in increasing the productive capacity.
Macro Economic Effects of the Olympics
Higher Economic Growth. The increase in spending related to the Olympics will help to boost Aggregate Demand and economic growth.
However, the increased spending will only represent a relatively small % of GDP. Some estimates suggest around 0.5% of GDP. Also the Chinese economy is already growing very quickly so it is debatable whether a further boost will help.
Inflation. The extra spending could help fuel inflation, which is already a problem in the Chinese economy. The Olympics will certainly create some localised inflation.
Exchange Rate. The influx of tourists could put more upward pressure on the Chinese Yuan. The government have been trying to hold the exchange rate down, but the influx of foreign visitors will only cause further increases in demand.
How Significant will the Olympics be?
From a macro economic point of view it is not clear how important the Olympics will be. There is a definite increase in AD, but, it remains a relatively small % of total GDP.
There could be a multiplier effect though and the initial increase in AD could be magnified. Similarly, the investment improvements could lead to future economic growth.
Problems of the Olympics.
- Does nothing to address the regional inequality in China. It is the Northern regions of China which need investment and growth not Beijing and the South
- Cost. The cost of the Olympics is very high and it is not certain whether they will get their investment back