Economics

Chapter 1: Economic Background

1.1 Economic background of Country A: Japan

        Japan is an island nation in East Asia. Located in the Pacific Ocean, it borders China, North Korea, South Korea, Russia, Taiwan, the Sea of Japan, the Sea of Okhotsk, and the East China Sea. It is an archipelago of 6,852 islands, most of which are mountainous and many are volcanic. The government system is a parliamentary government with a constitutional monachy. The chief of state is the Emperor and the head of government is the Prime Minister. Japan has a market economy in

which the prices of goods and services are determined in a free price system. Besides, Japan is a member of the Asian Pacific Economic Cooperation (APEC).

The economy of Japan is the third largest in the world by nominal GDP and also is the world's second largest devoloped economy. Japan has the largest electronics goods industry and it is the world’s third largest automobile manufacturing country. Manufacturing in Japan today now focuses primarily on high-tech and precision good, such as Hybrid vehicles, optical instruments, and robotics.

The Japanese economy slowed dramatically in the early 1990s after achieving one of the highest economic growth rates in the world from the 1960s to the 1980s. When the “bubble economy” collapsed, marked by plummeting stock and real estate prices. Japan eventually recovered from its worst period of economic stagnation since World War II. The real GDP in Japan grew at an average of roughly 1% yearly in the 1990s, compared to growth in the 1980s of about 4% per year. After sustaining several consecutive years of growth in the early 2000s, the Japanese economy began to slow in line with global economic conditions, and the country fell into its first recession in roughly 6 years in 2008. The Bank of Japan reported real GDP growth of -5.5% in FY 2009 as the worldwide demand for its goods tumbled. Japan recovered slightly in 2010 and reported real GDP growth of 404%.

1.2 Economic Background of Country B: Brunei

        Brunei is a country which located in Southeast Asia on the island of Borneo. Aside from the South China Sea coastline, Brunei is surrounded by Malaysia. The coastal position puts Brunei close to vital sea lanes linking the Indian and Pacific Oceans. Brunei is mostly flat with mountains in the east. The government is a constitutional sultanate; Sultan and Prime Minister is the chief of state and head of government. Brunei has a mixed economic system in which the economy includes a variety of private freedom, combined with centralized economic planning and government regulation. Brunei is a member of the Asian Pacific Economic Cooperation (APEC) and the Association of Southeast Asian Nations (ASEAN).

        Brunei is a country with a small, wealthy economy that is a mixture of foreign and domestic entrepreneurship, village tradition, and government regulation and welfare measures. This country is almost totally supported by exports of natural gas and crude oil, with revenues from the petroleum sector accounting for over half of GDP. The government provides for all medical services and subsidizes food and housing. Government also has shown the progress in its basic policy of diversifying the economy away from oil and gas. Brunei is the third-largest oil producer in Southeast Asia, averaging about 180,000barrels per day (29,000 m3/d). It also is the fourth-largest producer of liquefied natural gas in the world.

         Brunei's economy enjoyed moderate growth in the mid-2000s, primarily due to high world oil and gas prices. However, Brunei's growth has fallen sharply in recent years. In 2009, GDP shrank from U.S. $15.6 billion (BND 20.4 billion) to U.S. $12 billion (BND 15.6 billion). Brunei continues to have one of the lowest GDP growth rates of any ASEAN nation. However, Brunei is also ranked as having one of the highest rates of macroeconomic stability in the world and the highest in Asia. Brunei’s conservative economic policies insulated it from much of the global financial crisis in 2008-2009.

Chapter 2: Analysis

[pic 1]2.1 Comparison of real Gross Domestic Product (GDP) between Japan and Brunei and its reasons (Real Growth Rate).

Figure 2.1 Line graph of real GDP growth rate of Japan and Brunei between years 1991 to 2010

*Note: Aggregates are based on constant 2005 U.S. dollars.

Based on the line graph above, the real GDP growth rate of Japan in 2010 is 4.7%, which is the highest in these 20 years. Though Japan's economic in 2010 were still under threat from Europe's debt turmoil and consequent rises in the yen, the revival in exports and consumer spending helped the country climb out of its worst recession. The increase of consumer spending was due to government incentives that fueled consumer spending on home appliances have faded. Besides, demand from Asia led the resurgence in trade. Shipments to Asia and exports to China both increased in fast pace led by demand for automobiles. However, the lowest real GDP growth rate that Japan has reached is -5.5% in 2009. It was caused by the global financial crisis of 2008-2009. The outbreak of the US subprime loan crisis caused a decline in Japanese stock price. This placed a strain on the commercial banks and, as a result, limited their willingness to lend. This explains the sluggishness of industrial activity in some sectors. The downward movement of industrial production closely followed the downward movement of exports. The additional factors behind the collapse of Japanese exports were the world shrinkage of demand and trade shock, as well as the sharp appreciation of the yen. The decline was most pronounced in the export of industrial supplies, capital equipment, and consumer durables, Japan’s three main categories of export products, which together account for over 90% of Japan total exports. Moreover, we can know that the average GDP growth rate of Japan in these 20 years is 1.0%.

The highest real GDP growth rate of Brunei has reached in these 20 years is 4.8% in 1992. This was due to the household final consumption expenditure that contributed 43.45% of GDP, which is the highest for the period year 1991 to 2010. An increase in financial wealth and the constant unemployment rate of Brunei motivated the household sector to increase consumption and decrease saving. Whereas the lowest real GDP growth rate that Brunei had is -1.9% in 2008. This was caused by the net export that contracted sharply in 2008. The fall in export mainly due to the decline in export of crude oil and liquefied natural gas (LNG), while import rose driven mainly by imports of machinery and transport equipment, manufactured goods, as well as food. In 2008, the Weighted Average Crude Oil Price Index of Brunei has rose by 68.1% year-on-year, however, the crude oil production decline due to oil well fire. Moreover, the production of LNG declined mainly due to the below satisfactory production level from the existing wells. As the graph showed, the average real GDP growth rate of Brunei is 1.8%.