Aaron Choi Brian Lim Jomer Lu Anton Santiago EC 112 Group Exercise 1

A Macroeconomic Analysis of Taiwan

Since 2018, Taiwan’s economy has been doing relatively well. Its GDP growth is steadily
rising. Moreover, the inflation rate in the country is also stable. In addition, the unemployment rate is
steadily decreasing with majority employed in the services sector. As a result, the household income
per capita is increasing. Furthermore, the GINI ratio is doing comparatively well compared to other
countries that have relatively equal income distribution. However, the country lacks in terms of GNI
growth rate as it has been decreasing since 2016.

This paper will attempt to describe the macroeconomic situation of Taiwan. An analysis of
macroeconomic indicators such as GNI and GDP growth rates and their expenditure, inflation rates,
unemployment rates, poverty and inequality indicators and other macroeconomic indicators. It will
end by highlighting the potential sources of the country’s growth in the short run and medium run.

Gross Domestic Product and Gross National Income

Figure 1: The Value and Growth Rate of GNP and GNI in US dollars

When computed in terms of US dollars, the GDP growth of Taiwan has been increasing since
2015; however, there was a slight decrease in economic growth in 2018. On the other hand, the GNI
growth of Taiwan has been slowing down after reaching its peak in 2016. These figures show that
although the GDP growth is quite good, Taiwan has not been growing in terms of net primary income.
One reason for this could be due to the lack of Taiwanese working in other countries that could
potentially increase the net primary income. Another reason for this could be that the foreign workers
contribute much to the GDP.
 Figure 2: GDP Growth Rate by Expenditure in New Taiwan Dollars

Next we look at the GDP growth rate by expenditures. We observed that there were
discrepancies with the figures shown above, specifically in the GDP growth. The discrepancy was a
result of the different exchange rates between US dollars and New Taiwan dollars at different years.
In order to avoid external factors, we used the GDP computed in terms of New Taiwan dollars.

The figure above shows that private consumption has been growing at a steady rate with an
average of 3% from 2016 to 2018. Meanwhile, government spending has been erratic. There was no
increase in government spending during 2015 while in 2016, government spending grew to 5%.
Afterwards, in 2017, there was a decline in government consumption while in 2018, it went up to
2.6%. Investments also behave similarly. During 2015 and 2017, there was almost no increase in the
amount of investment while in 2016, there was a 2.6% increase. In 2018, investments grew to a 4.8%.
In addition, net exports also show a similar pattern in growth. During 2015, net export was the
primary factor for the GDP growth while during 2016, net exports declined. During 2017, net export
helped increase the GDP growth once again but declined the year after. Although the GDP growth is
slowly increasing, Taiwan needs to give focus on government spending, investments and net exports
since they do not show any observable growth pattern.
 Figure 3: Total Investments Growth Rate

Looking at the factors of investment, we also observe an erratic pattern. First, investments
from private firms are generally increasing except for 2017. Second, the growth rate of investments
from public enterprise dropped to -10% in the year 2015. This is partly due to the period between
2015 to 2016 where Taiwan hit a record low interest rate. The low interest rates in 2015 was due to a
global drop in oil prices. To make up for this, the government dropped the interest rates to encourage
households to spend. A low interest rate would then mean that there would be less cost of investment.
As a result of this, it can be seen that the investment growth rate of Taiwan slowly recovered from the
dip in 2015.

Figure 4: Net Exports Growth Rate

Meanwhile, focusing on components of net exports, we see that in 2015, both exports and
imports declined. But the faster decline in imports caused the net exports to significantly increase.
Taiwan has since been one of the top 20 exporters and importers in the world (Central News Agency,
2019). As a result of this, global trends have a large bearing on the performance of the country’s
economy. This is seen in the year 2015, where there was a global slow-down in consumer electronics,
one of Taiwan’s largest export market, in the entire world. This trend reflects in Taiwan’s net export
rate as net exports dropped by 35% and imports took up a larger portion of the country’s
import/export mix. Furthermore, during 2016, exports continued to decline while imports slightly
improved which caused net exports to decrease. Meanwhile, in 2017, both exports and imports started
to grow causing net exports to grow as well. However, during 2018, exports started to decline causing
net exports to decline as well.

Overall, in the short run, the economy of Taiwan is developing as indicated by its increase in
GDP growth. Consumption, government spending and investments are the main drivers of economic
growth. Specifically, both firms and government continue to increase their investments. However, net
exports severely slowed down due to the significant decrease in exports.

In the medium run, the GDP growth has been relatively stable with an average of 2.64%. In
terms of expenditures, consumption was also stable; however, government spending, investment, and
net exports exhibit an erratic pattern. Government spending exhibited growth in alternating years
similar to investments and net exports. On the one hand, for investments, firms and government are
showing an increase in their investments. On the other hand, both exports and imports do not show
any stable pattern.

Inflation Rate

Figure 5: Inflation Rate

The world saw a massive drop in oil prices in the year 2015. Taiwan, a country that imports
most of its oil, is one of the countries that is most affected by this global trend. A decrease in oil
prices reduces both transportation cost and electricity costs; both of which make up a large portion of
the market’s costs and expenses. As such, prices decreased, and the purchasing power of the Taiwan
dollar increased; which resulted in net deflation for the currency. The decrease in oil prices meant a
lower cost for electricity and thus a slowdown in the country’s economy. The inflation rate recovered
in the year 2016 as Taiwan’s government may have adjusted their fiscal policies (interest rates) to
incite more consumption from households. In the short run, the inflation slightly increased from
1.03% in 2016 to 1.1% in 2017. In the medium run, however, inflation rates are slowly decreasing
from more than 1.5% in 2012 to around 1%.
Unemployment Rate

Figure 6: Unemployment Rate

The unemployment rate of Taiwan shows a decreasing trend that was broken in the year 2015
to 2016. A possible explanation to the broken trend is due to the fall in aggregate demand for
electronics. Since the electronics manufacturing sector of Taiwan is one of its largest assets, a drop in
aggregate demand will make this sector less profitable. This decrease in demand will lead to firms
having a smaller market to rely on. As a result, firms would need less workers to be able to meet the
aggregate demand. In the short run, unemployment decreased from 3.71% in 2018 to 3.70% in the
first half of 2019. In the medium run, unemployment rate is also showing a decreasing trend from
3.96% in 2014 to 3.70% in 2019 with the exception of 2016.

Table 1: Employment by Sector

Year 2014 2015 2016 2017 2018 2019 (Jan-Jul)

Total 11 079 11 198 11 267 11 352 11 434 11 486

Agriculture, Forestry, Fishing and

548 555 557 557 561 562
Animal Husbandry

Subtotal 4 004 4 035 4 043 4 063 4 083 4 089

Mining and
4 4 4 4 4 4
Quarrying

Manufacturing 3 007 3 024 3 028 3 045 3 064 3 066

Goods-
producing Electricity and
29 30 30 30 30 31
industries Gas Supply

Water Supply and

Remediation 82 82 82 82 81 83
Activities

Construction 881 895 899 901 904 905

Services-producing industries 6 526 6 609 6 667 6 732 6 790 6 835

Looking at employment by sector, we see that agriculture, forestry, fishing and animal
husbandry had the least number of employed across 6 years. Goods-producing industries came in
second in the number of employed. Specifically, mining and quarrying had the least number of
employed and remains constant within the last 6 years followed by electricity and gas supply. The
sector with the greatest number of people employed was manufacturing. Because electronics
manufacturing sector is one of Taiwan’s assets, a large number of people are expected to be employed
in the manufacturing sector. Overall, services still had the greatest number of people employed. The
figures show that Taiwan is moving towards the services sector. In the short run, the number of people
employed in the agricultural and industrial sector remains almost constant while there was a slight
increase in the number of people employed in the services sector. In the medium run, the people
employed in the agricultural and industrial sector remains almost constant with only a small growth.
The number of people employed in the services sector seems to be increasing from 6,526 in 2014 to
6,835 in 2019.

Figure 7: Household Income per capita

Taiwan household income per capita saw a huge boost in growth rate both in the short run and
medium run as a result of the “Taiwan economic miracle.” The rapid industrialization of the IT sector
of Taiwan boosted the country’s GDP and as a result its household income per capita
Poverty and Inequality Indicators

Figure 8: GINI Ratio

In terms of the GINI ratio, Taiwan is doing relatively well with the index running from 33.6
to 34.6 in the last decade whereas the average GINI ratio for countries with relative equality in
income distribution is between 20 to 35 (Han, 2019). In the short run, the GINI ratio increased which
meant that there was an increase in income distribution inequality. However, in the long run, the GINI
ratio decreasing from 34.5 in 2009 to 33.6 in 2016.

Figure 9: Percent of Population Below Poverty Line

In terms of the percentage of population below poverty line in Taiwan from 1999 to 2012,
there seems to be an increase in the number of people below poverty line. However, the poverty
threshold varies in each city which could distort the validity of the figure (Alemdar, 2017).
Other Macroeconomic Indicators

Figure 10: Balance of Trade

The balance of trade of Taiwan has been positive for the last 5 years. Taiwan experienced a
peak in balance of trade four times during this period. Both in the short run and medium run, trade
balance seems to be near 500.

Figure 11: Investment and Savings Rate

Comparing the two charts, we see that gross national savings for the past 2 years had been
more than 31% of the GDP while investment for the past 2 years had been less than 23% of the GDP.
Therefore, Taiwan has a greater supply of savings. This difference could suggest that large amounts of
money are not being properly used which could potentially increase the productivity of the country. In
the medium run, there was no pattern observable in both charts. However, in the short run, national
savings seems to be decreasing while investments seem to be increasing.

Short run growth

In the short-run, Taiwan’s growth rate is affected by two main factors: Government policies and
world oil prices. In 2015, a world oil price drop caused Taiwan’s inflation rate to drop as the nation is
heavily reliant on oil for electricity and transportation. During this year, Taiwan saw -0.6% deflation
which in turn discouraged local firms from producing and investing more into the market. From this
example, it is seen that in the short-run Taiwan’s GDP relies heavily on world oil prices.
 On the other hand, an internal factor that dictates the short-run would be government policies
that aim to either stimulate or slow-down the market. After the year 2015, Taiwan’s finance arm
released government policies in order to stimulate firms and households into investing. The finance
department is able to do this by lowering the reserves banks are required to hold in order to increase
the money multiplier effect.

Medium run growth

In the medium-run, Taiwan’s growth rate is largely dictated by government projects or

incentives. Government incentives enable existing firms to expand and invest more into a sector.
Incentives also allow new players to enter the market. Furthermore, these policies allow a nation to
delve into a new technology and grow faster as firms are taxed less.

An example from this may be taken from Taiwan’s electronic industry. When Taiwan’s
electronic industry was still in the making, the government subsidized a portion of firm’s research and
development costs in order to encourage more competition in the market. Currently, the electronics
sector contributes 40% of Taiwan’s exports and 15% of the country’s total GDP.
Issues with Measurement of Macroeconomic Concepts

The measurement of economic growth plays a big role in how policy makers manage a
country. The relationship and connection between economic growth and changes in an economy such
as poverty reduction, productivity growth, energy demand and tax revenue are vital in the formulation
of economic policies and plans. An inconsistency in data accuracy can cause long term discrepancies
in projecting and presenting economic data. In line with this, we will be highlighting issues in the
measurement of macroeconomic concepts with two examples: (1) miscalculations in the Philippine
GDP after the Asian Financial Crisis; and (2) under-counting of the unemployed in the country.

The Asian Financial Crisis (AFC) was a period of financial crisis concerning mostly East
Asia and Southeast Asia from 1997 to 1999 (Chappelow, 2019). It was a series of money devaluations
that began July of 1997 which started in Thailand. The crisis led to some much-needed government
and financial reforms from countries across Asia. There was, however, statistical data that the
Philippine economy had remained resilient and seemed unaffected by the AFC. Medalla and Jandoc’s
paper on provides some light and explanation on the truth of what happened to the Philippine
economy.

In their paper entitled “Philippine GDP Growth After the Asian Financial Crisis: Resilient
Economy or Weak Statistical System?”, Medalla and Jandoc initially proposes a hypothesis that the
Philippines’ unique experience after the AFC may be a reflection of a weakness in the Philippine
national income accounting system rather than saying that its economy was resilient through the AFC.
The data from their paper showed that…

the (Philippine) domestic economy grew 1.5 percentage points faster after the AFC, in spite
of the fact that domestic demand and exports contributed 2.3 percentage points less to output
growth, because import growth compression more than compensated for the fall in the growth
of demand by contributing 3.7 percentage points more to GDP growth after the AFC. This
translated into the compression of import growth being responsible for 250% of the increase
in the growth rate of the Philippine Gross Domestic Product (GDP) after the AFC. (Medalla
& Jandoc, p.5, 2008)

In the same discussion, Medalla and Jandoc (2008) talked about how the pattern of the
decline in growth rates of capital formation, government consumption and exports more than balanced
out the projected rise in the growth rate of personal consumption expenditures. As a result, the
average growth rate of GDP would have fallen after the AFC if not for the large fall in the growth rate
of imports that still holds despite replacing the original figures by the NIA with data from the
National Statistical Coordination Board (NSCB) which were deemed to be more accurate.
 The AFC incident is a prime example of how misleading data may be. In this context, the
Philippines seemed to be performing well after the crisis; however, deeper analysis showed that the
compression in import growth was responsible for the GDP growth. Without accurate data, policy
makers and legislators might have focused their attention on other efforts when, in reality, the
compression of import growth was a signal to them that something was wrong with the economy.

Aside from the miscalculations in the Philippine GDP after the Asian Financial Crisis,
another issue in the measurement of macroeconomic concepts is that of the undercounting of the
unemployed in the country. The unemployed refers to employable and able-bodied individuals
seeking a job but are unable to find one. A paper by Dante B. Canlas from The Philippine Review of
Economics reveals that there was a deviation in the pro-cyclical nature, that is, the positive correlation
between real/GDP per worker and real GDP. Real GDP/worker showed a low elasticity of money
demand with respect to real GDP. Because of this, the methods used in measuring employment and
unemployment were revisited and reevaluated in order to determine and remedy the cause of this
erratic trend.

In examining the methodology for determining the unemployed, it was revealed that National
Statistics Office was using “so-called” International Labor Organization standards wherein one of the
questions determining unemployment was, “Was ___ available for work the past week.” Answering
no to this question would then remove a person from the labor force and the calculations for
unemployment. Through this erroneous system which greatly differed from the PH definition of
unemployment, those without, available, or seeking work (NSA), the unemployment rate was 4 points
lower. Hence, a GDP inconsistency in the two date sets, where two methods of calculations were
used, was seen.

Philippine Labor Market Outcome and Scenarios, another study by Dante Canlas further
criticizes the methodology used in determining whether one is “in” or “out” of the labor force and
emphasizes the detriment brought about by it. The questionnaires used show that one’s availability
defines his status in the labor force. Thus, A person who is not available in a given period of time is
removed from the labor force and the consequent calculations regarding unemployment. Because of
this, the statistics regarding the unemployment are heavily padded and will therefore affect GDP. This
shows the significance of asking the right questions at the right time. The question of availability
resulted in a slippery slope affecting the number of unemployed, the rate of unemployment, and
finally the GDP. Because of this, ILO counsels’ statisticians to be wary in classifying working
individuals out of the labor force.
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