Macroeconomics Se Yan Guanghua School of Management Peking University Spring 2013 1.

Macroeconomics

Se Yan Guanghua School of Management

Peking UniversitySpring 2013

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Se Yan

Email: [email protected]

Office phone: 62757764

Office: Rm 402 of the new building

Facebook, sina weibo, renren: [email protected]

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The TA

• The TA is your friend

• Any question or concern, please contact TA

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Organization

• 15 minutes’ break

• Strictly English in class, but no language restriction after class

• Students’ participation highly encouraged

• Interruption with questions is welcome, but please identify yourself if I cannot remember you

• Cell phone silent

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Assessment

• Class participation: 5%

• Homework: 15% (5 assignments, 3% each)

• Midterm: 30%

• Final exam: 50%

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Definition of Economics

– Economics is the social science that studies the choices that individuals, businesses, governments, and societies make as they cope with scarcity and the incentives that influence and reconcile those choices.

– In general, economists study how agents make decisions under certain constraints.

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Economic Issues in Your Life

• Issues related to microeconomics

• Issues related to macroeconomics

• Are macroeconomic issues important to your business or your life?

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What do we study in macro?Can I find a good job after graduation?

Why is there inflation? Why is inflation bad?

What will be the GDP growth of China this year? Why do we care?

What happened to US economy a few years ago? What happened to the state of California?

Should Chinese currency appreciate?

Is China’s economic growth sustainable?

Why GDP per capita in Shanghai is tens of times that in Guizhou? Why GDP per capita in US is hundreds of time that in some African countries?

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Definition of Micro- and Macro-Economics

• Microeconomics (managerial economics)– Microeconomics is the study of choices made by individuals and

businesses, and the influence of government on those choices.

• Macroeconomics– Macroeconomics studies economics as a whole

• Two major topics in macroeconomics:– Economic Growth: long-run trend – Business cycles: short-term fluctuations around trend

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Four Goals of Macroeconomics

• Economic growth

• Full employment

• Inflation

• Balance of international payment

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TEN PRINCIPLES OF ECONOMICS How do people make decisions?

人们面临权衡取舍People face tradeoffs.

机会成本The cost of something is what you give up to get it.

理性的人用边际概念思考Rational people think at the margin.

人们接受激励People respond to incentives.

TEN PRINCIPLES OF ECONOMICS

• How do people interact?

– 交易使得每个人变好Trade can make everyone better off.

– 市场是组织经济活动的好方法Markets are usually a good way to organize economic activity.

– 政府有时候能够改进经济的结果Governments can sometimes improve economic outcomes.

TEN PRINCIPLES OF ECONOMICS

The Economy as a whole

生活水平取决于一个国家的生产能力The standard of living depends on a country’s production.

当政府印刷太多货币的时候，价格水平会上升Prices rise when the government prints too much money.

短期内，通货膨胀和失业有一个交替关系Society faces a short-run tradeoff between inflation and

unemployment.

Essence of Economics: Critical Thinking

• Critical thinking clarifies goals, examines assumptions, discerns hidden values, evaluates evidence, accomplishes actions, and assesses conclusions.

• A logical way to tackle a question: the way to analyze issues and write thesis

Example: How to measure the value of life?

• Why do we care?– Insurance claims – Wrongful-death lawsuits– Environmental Protection Agency (EPA): justifying cost of environmental

regulation

• Ideas:– We can ask individual directly– Individual’s contribution to the society– Life-time earning projection, discounted to present value (what if people don’t

work?)– How much one is loved and needed by their friends and family

• How do economists think of the problem?(1) How much people need to be compensated if you want them to take a riskier

job? (Black and Kniesner, 2003)(2) How much states raise their speed limit? (Ashenfelter and Greenstone, 2004)

Example: Traffic Jam• Traffic Jam is a serious problem for many big cities

• What is the short-run solution?

• What if we levy a fee for traffic jam?

• More “crazy” problems can be found in Steven Levitt and Stephen J. Dubner’s top selling book Freakonomics, where you can learn how to detect cheating behavior among sumo wrestlers just by sitting in your living room and look at the match results.

• The scope of economics has been expanding:- All kinds of social and economic behavior and phenomena (e.g., crime, law, the family, prejudice, tastes, irrational behavior, politics, sociology, culture, religion, war, etc.)- Tools of economics are adopted by other social sciences.- So-called “Economic imperialism”

•Economics is a powerful analytical tool that can help you see the world in a smarter way

•The key essence: CRITICAL THINKING

Causality

• Causality vs Correlation

• E.g., does weightlifting make people shorter?

• With the same amount and strength of muscle, short people only need to move a weighted bar through a short distance to complete a lift

• All else equal, shorter people are more likely to win. They are preferred by the weightlifting teams.

Challenges to Make Causal Arguments

1. Reverse Causality

• Which came first...the chicken or the egg: Did a chicken cause the egg to come into existence or was it the egg that caused the chicken to come into existence?

• Do improvements in health boost economic growth?

• Similarly: democracy and growth

2. Missing Variable• Return to education: what is the increase in wage when

receiving one year extra in schooling?

• The observed wage difference among people with different level of schooling may just be a spurious result due to the fact that smarter people can past higher level of entry exams and these people can also do better in their jobs.

3. Sample Selection• This usually concerns the validity of inferring behaviors of

general population by studying a selected sample.

• Suppose, for example, that we can show that a training program on migrant workers from the rural area can increase their wage by 10%.

• Does this mean that for anybody who come move from village to the city, if they take the program, their wage will increase by 10% on average?

• In this case, we have to realize that there might be systematic difference between people choosing to migrate to the city and people choosing to stay in the village.

• Therefore conclusion based on one group of people cannot be generalize to the other.

How to establish causality?

• Controlled experiment

• Natural experiment