Introduction

1. Introduction JunhuiQian Intermediate Macroeconomics

2. Content • What macroeconomics is about • Case studies • The economy of China • The economy of the United States • Macroeconomic modeling • Conclusion Intermediate Macroeconomics

3. Macroeconomics • With microeconomics, macroeconomics (macro) is one of the two pillars of economics. • Macroeconomics studies the performance, structure, behavior, and decision-making of an economy as a whole. (From Wikipedia) • Key macroeconomic variables: GDP, unemployment, inflation, interest rate, exchange rate, etc. Intermediate Macroeconomics

4. Objectives of Macroeconomics • To understand causes and consequences of “business cycle” • To understand why some countries achieve long-term economic growth while others do not • Macroeconomic policy making • Fiscal policy • Monetary policy • Macroeconomic forecasting Intermediate Macroeconomics

5. Case Study 1: Chinese Economy • We look at: • Real GDP per cap • Growth in real GDP per cap • Inflation • Exchange rate with USD Intermediate Macroeconomics

6. The GDP per cap (in Yuan) is plotted on log scale, so that the line looks more linear. The up-trend includes the effect of inflation. As of 2012, the GDP per cap of China is 38448.5 Yuan. Intermediate Macroeconomics

7. This diagram shows the real GDP per cap (1978-2011) in 2010 RMB price. The real GDP per cap started from a mere 2025.8 Yuan in 1978 and grew to 32571.6 Yuan in 2011. Intermediate Macroeconomics

8. This diagram shows the real GDP per cap of China from 1960 to 2012 in 2005 USD. This diagram contains the effect of the exchange rate. As of 2012, the GDP per cap of China is 3,348 USD (2005). Intermediate Macroeconomics

9. This diagram shows the growth rate of real GDP per cap. From this diagram, business cycles are clear. Note that before 1978, the year China started the Reform, the economy was very volatile. Intermediate Macroeconomics

10. This diagram shows the inflation rate of China since 1979. Two rounds of severe inflation are evident in the diagram, 1987-1988, 1993-1996. Since mid-1990s, inflation has been moderate. Intermediate Macroeconomics

11. The exchange rate before 1994 and that after 1994 are not quite the same thing. While the latter is largely determined by market force (with the intervention of the central bank, PBC), the former is not. Intermediate Macroeconomics

12. Case Study 2: The US Economy • We look at: • Real GDP per cap • Inflation • Unemployment Rate Intermediate Macroeconomics

13. The US Real GDP per Cap Intermediate Macroeconomics

14. The US Inflation Intermediate Macroeconomics

15. The Unemployment Intermediate Macroeconomics

16. Macroeconomic Modeling • Professional economist approach economic problems by scientific modeling. • From data we summarize empirical facts (phenomenon) to be explained. These empirical facts are usually some statistics of some endogenous variables. For example, the average growth rate of real income. • To explain, we conjecture a model (that is, a toy economy) that involves both endogenous variables and exogenous variables. • A successful model explains the empirical facts about the endogenous variable using the exogenous variables involved. • The model may succeed in explaining one phenomenon may fail to explain some new facts. Or speaking differently, the model may be refuted by some new facts. Then a new model (theory) is proposed to accommodate the new facts. • This dynamic process goes on. Intermediate Macroeconomics

17. Example: To Explain the Rise in Cement Price in 2013 • In 2013, the cement price in China rose substantially. How do we explain that? • In this question, the cement price is the endogenous variable. • The empirical fact is that the cement price rose in 2013. This empirical fact can be expressed in the average price increase, a statistic of the endogenous variable. • The model is the simplest model of supply and demand, with exogenous variables shifting the supply and demand curves. • The exogenous variables may include • Demand side: an increase in real estate or infrastructure investment • Supply side: a more strict enforcement of environmental protection Intermediate Macroeconomics

18. The Application of Macro Models • To explain macroeconomic phenomena • To make forecasts on trends in the economy and the financial markets • To come up with and evaluate policy recommendations Intermediate Macroeconomics

19. Structural Model and Reduced Model • In the previous cement example, the simple model of supply and demand is an example of structural model. • We are essentially explaining the variation in endogenous variable (cement price) using the variation in the exogenous variables (e.g., infrastructure investment) via the working of a model. • If without a model, we may still make forecasts based on the correlations between endogenous and exogenous variables. The set of correlations constitutes a reduced model. • The reduced model is nothing but statistical associations, which cannot explain. • As time goes by, the reduced statistical model may change. This point is known as the “Lucas Critique”, which was raised by Robert Lucas, the winner of 1995 Nobel Prize in economics. Intermediate Macroeconomics

20. Concluding Remarks • Macroeconomics is the study of the economy as a whole. • Compared with microeconomics, macro is more empirically based. So it is important to know things. At the minimum, we should be familiar with the macroeconomic performance of the Chinese and the US economies. • To explain macroeconomic phenomenon, professional economists rely on models that contain both endogenous variables and exogenous variables. Intermediate Macroeconomics