ECON 1220 Principles of Macroeconomics

Semester 2, 2011/12

Introduction to Macroeconomics
1. What is Macroeconomics? Microeconomics: the study of how individual economic units make choices and their interaction in individual markets. Macroeconomics: the study of the behavior of the overall economy as a whole and concerns with major economic totals or aggregates. Three major concerns of macroeconomics are: o Economic Growth o Inflation o Unemployment Each of these three issues is linked to the total output produced in the economy, which is measured by the real gross domestic product (real GDP).

Economic Growth: The increase in the output level over long periods of time (the longrun trend). Usually one to several decades Output per person is commonly used as a measure of average standard of living. Business Cycles: The short-run fluctuations in real output around its long-run trend. Typically one to five years The duration and intensity may vary substantially. Expansion: A period of increasing output and decreasing unemployment. Recession (or contraction): A period of decreasing output and increasing unemployment. Depression: A prolonged and deep recession

ECON 1220 Principles of Macroeconomics

Semester 2, 2011/12

Real output Peak Long-run trend: growth in potential GDP

Peak

Trough

Trough Expansion Recession Expansion Time

Inflation Rate (%)

Unemployment Rate (%)

Real GDP in (Millions of 2008 Dollars)

10

12

14

1,000,000

1,200,000

1,400,000

1,600,000

400,000

600,000

800,000

ECON 1220 Principles of Macroeconomics

-6

-4

-2

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Real GDP in Hong Kong, 1982 - 2009

Unemployment in Hong Kong, 1982 - 2009

Inflation in Hong Kong, 1982 - 2009

19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09

19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09

Semester 2, 2011/12

ECON 1220 Principles of Macroeconomics

Semester 2, 2011/12

2. Disagreement and Development in Macroeconomics The Classical School (since Adam Smith, The Wealth of Nations, 1776) o Assumes wages and prices adjust rapidly enough to maintain equilibrium in all markets (the invisible hand). o Argue that government should have, at most, a limited role in the economy. The Keynesian School (since John Maynard Keynes, The General Theory of Employment, Interest, and Money, 1936) o Assumes wages and prices adjust slowly (price stickiness) o More willing to advocate a role for government in improving macroeconomic performance. o Enjoyed dominance until 1970s. The stagflation (high unemployment and high inflation) experienced in the U.S. contradicts the prediction of the Keynesian theories. The assumption of price stickiness was criticized as being without sound theoretical foundations. Evolution of the Classical-Keynesian debates o New classical economists have improved in their explanations of business cycles and unemployment. o New Keynesian economists have worked on the development of sound theoretical foundations for price stickiness and models that can accommodate stagflation. In this course, we will take an approach to macroeconomics that is as balanced and unified as possible, i.e. a consensus approach: o Individuals, firms, and the government interact in goods (and services) market, labor market and money market (sometimes referred as financial market or asset market). o While Keynesians believe that price stickiness is a better assumption for studying the short-run behavior of the economy, both Keynesians and classical economists agree that price flexibility is a good assumption for studying long-run issues.

Readings: Chapter 17

Chinas economic decision-making: Prudent and proactive | The Economist

http://www.economist.com/node/21541873/print

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Chinas economic decision-making China unveils its economic policy for 2012, sort of
Dec 17th 2011 | BEIJING AND HONG KONG | from the print edition

AT A ceremony on December 11th to mark the anniversary of Chinas admission to the World Trade Organisation a decade ago, President Hu Jintao commemorated a new historical stage in the countrys opening up. The next day he and fellow leaders retreated to an army-run guesthouse for a secretive three-day meeting to decide how to run Chinas economy in 2012. Their gnomic conclusion: to maintain a prudent monetary policy and a proactive fiscal policy in the face of an extremely grim and complicated global outlook. The annual Central Economic Work Conference (CEWC) sets the tone for Chinas economic policymaking for the next 12 months. Attended by members of the ruling Politburo, government ministers, provincial chiefs, military leaders and heads of banks and other big state-owned companies, secrecy is the watchword. No dates are officially announced in advance, nor even the location (although it is an open secret that it takes place at the heavily guarded Jingxi guesthouse in western Beijing, the Communist Partys favourite spot for large closed-door gatherings). This years conference, which ended on December 14th, seemed more worried about growth than about price pressures. Inflation is now receding (consumer prices rose by 4.2% in the year to November, after peaking at 6.5% in the summer); and dollar inflows are also slowing, removing one source of extra liquidity. That has allowed the government to cut the amount it tells banks to keep as reserves. Most economists expect it to carry on cutting in the year ahead. Nonetheless, the CEWC chose to describe its monetary policy with the same word (prudent) it used last year, when fighting inflation was the priority. It suggests the leaders will cut cautiously. The Politburo (whose 25 members, amazingly, do not include the ministers responsible for finance and commerce) also struck a hawkish note on the eve of the conference, promising to remain unswerving in its campaign against property-market speculation. That sent Shanghais stockmarket index down to its lowest level since March 2009 (see chart), with property developers suffering especially. Despite the scale of the meetings, little detail of the discussions is revealed to the public beyond a bland description of the main points. For a more detailed explanation, ordinary Chinese have to wait until the countrys rubber-stamp legislature, the National Peoples Congress (NPC), meets in March. The NPC will also reveal the official growth target for the year. In 2011 and the six previous years, it was 8%, a figure Chinas economy typically overshoots by two percentage points or more. But 8% would be more of a stretch in 2012. Nomura, a bank, forecasts growth of only 7.9%. To meet their 8% growth target in the extremely grim year of 2009, Chinas leaders invited local governments to indulge every pet project, and encouraged the banks to finance them. Nothing in

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Chinas economic decision-making: Prudent and proactive | The Economist

http://www.economist.com/node/21541873/print

this years statement suggests they will resort to anything so dramatic. Their proactive fiscal policy will instead cut taxes on small firms and service industries, as well as increase spending on public services. For a rare glimpse into conference proceedings, those without invitations can turn to Chinas former prime minister, Zhu Rongji, who retired in 2003. A series of his speeches published in September includes several delivered at CEWCs. In one, he warned that if growth were to slump, immediate chaos would follow. And Mr Zhu also revealed something about the venue itself. He described the Jingxi guesthouse as resplendent and magnificent, even as he castigated local officials for building edifices of similar glamour. At these meetings, Chinas leaders are always caught between their worries about growth and their fears of excess. Thats no secret.
from the print edition | Asia
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China aims to keep urban unemployment rate within 5 pct: Cabinet

http://us.china-embassy.org/eng/gdxw/t888194.htm

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China aims to keep urban unemployment rate within 5 pct: Cabinet

2011/12/16 BEIJING, Dec.16 (Xinhua) -- China aims to keep the registered urban unemployment rate within 5 percent in the 2011-2015 period, according to a statement released after an executive meeting of the State Council, or China's Cabinet, on Friday. The government targets creating new jobs for 45 million people in cities and 40 million people in the rural surplus labor force in the five-year period, the statement said, citing the decisions of the meeting, which was presided over by Chinese Premier Wen Jiabao. "The overall employment pressure will continue to build up in the 12th Five-Year Plan period (2011-2015)," said the statement. During that time, urban residents will require 1 million more jobs annually than the average level of the 2006-2010 period, it noted. China had a registered unemployment rate of 4.1 percent for urban regions at the end of the third quarter of this year, the same level as the previous quarter.

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