An article in the Chinese economy in 2012 notes that business inventories had be
ID: 1204589 • Letter: A
Question
An article in the Chinese economy in 2012 notes that business inventories had been increasing. As a result, the author argued: "China's growth rate will not be as robust as it has been over the last few years, as the economy needs to work off this excess supply." What does this article mean by "work off this excess supply?" Why would the result be a reduction in China's growth rate (growth of GDP)? An article in the Chinese economy in 2012 notes that business inventories had been increasing. As a result, the author argued: "China's growth rate will not be as robust as it has been over the last few years, as the economy needs to work off this excess supply." What does this article mean by "work off this excess supply?" Why would the result be a reduction in China's growth rate (growth of GDP)?Explanation / Answer
BY "work off this excess supply" , the author means that the excess inventory that has been produced in the previous years has to added to the supply of this year , thus firms in this year has to produce less to decrease the pile up of tthe inventories from previous years.
This results into reduction of GDP growth rate because an excessive increase in inventories may signal that aggregate demand is slowing down and that firms will soon cut back production and output in face of such a fall in the demand for goods and services, and hence the production or output in coming years is going to be less due to this excess inventory and hence there will be a reduction in the growh rate of GDP.
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