A2 Macro Revision: South Korea
Chart 1: Real economic growth and the current account
South Korea is the 15th-largest in th...
oriented conglomerates, whereas household income growth and service sector productivity
have been sluggish. Moreover the p...
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A2 Macro Revision - South Korean Economy

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Revision extract and some questions on the South Korean economy

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A2 Macro Revision - South Korean Economy

  1. 1. A2 Macro Revision: South Korea Chart 1: Real economic growth and the current account South Korea is the 15th-largest in the World with a relatively high GDP per capita. It has a strong, diversified and internationally highly competitive industrial and manufacturing base. It is one of only two OECD countries to have avoided a recession since the start of the global financial crisis. And South Korea is also one of the relatively few countries to have escaped the middle-income trap. South Korea’s economy is very open (import + exports amount to 114% of GDP) and heavily dependent on exports. As a result, South Korea is vulnerable to external shocks in the Asian region and wider global economy. Korea’s main exposures are to China, the USA, the EU. and Japan and significant value chain links with these and other Asian countries. The country’s large and sizeable trade and current account surpluses and a vast amount of FX reserves make that the country is among the strongest and thus safest emerging markets. The country operates with a managed floating exchange rate. The IMF estimates that Korea’s potential growth rate decreased from around 7 percent during 1990-97 to 4¾ percent during 2000-07 and further to 3¼–3½ percent in 2011–12. The country's prosperity has been concentrated lately within the highly competitive export- Real GDP and Current Account (%) South Korea - Growth and Current Account Real GDP, annual % change Current account balance, as a percentage of GDP Source: Reuters EcoWin 05 06 07 08 09 10 11 12 13 14 15 0 1 2 3 4 5 6 7 Percent 0 1 2 3 4 5 6 7
  2. 2. oriented conglomerates, whereas household income growth and service sector productivity have been sluggish. Moreover the population is aging rapidly. On current trends, the working age population is projected to peak in 2016, and Korea is expected to become one of the oldest countries in the OECD by 2050, with the dependency ratio increasing rapidly. Korea’s employment rate is below the OECD average, particularly for women—their participation rate was around 60 percent in 2012 compared to 70−80 percent in the most advanced countries—and for young males, due to high enrolment in tertiary education and mandatory military service. According to IMF and OECD research, without offsetting policies, Korea’s potential real GDP growth would decrease to around 2–2½ percent by 2025 and its per capita GDP would cease to converge with other high income countries and instead plateau at the present rate (about 65 percent of the U.S. level). Sources: IMF Staff Review of South Korea (2013) and OECD World Economic Outlook (April 2013) Revision questions 1/ Define the following terms (3 marks each) 1. Middle income trap 2. Open economy 3. Export oriented conglomerates 4. Dependency ratio 5. Participation rate 2/ The South Korean economy is vulnerable to global external shocks. Identify and analyse how two of these shocks could affect the macroeconomic performance of the South Korean economy (8) 3/ Assess the relative merits of a country such as South Korea choosing to operate with a managed floating exchange rate rather than a free floating exchange rate (12)

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