Understand economics from scratch

Chapter 3 After understanding the ten principles of economics, you will graduate with a bachelor's degree - an introductory course by Harvard professor Mankiw (3)
The main task of government intervention in the economy is to maintain the balance of the total economic output, curb inflation, promote the optimization of major economic structures, and achieve stable economic growth.The main means of regulation are price, taxation, credit, exchange rate and so on.

From an economic point of view, macro-control is macroeconomic policy, which means that the government can improve market outcomes at a certain time.People say that the market itself is an invisible hand, so why does the economy need government regulation?Because no matter how great the hand of the market is, it can never be separated from the protection of the government.With the guarantee of the government's macroeconomic policies, the market can operate effectively.In other respects, although the market is the main way of organizing economic activities, there are also some situations where the market itself cannot effectively allocate resources. Economists call this "market failure".Of course, the fact that the government can sometimes improve market outcomes does not mean that it can always regulate markets.When can it be controlled, and when can't it?This requires people to use the economic principles of macro-control to judge what kind of government policies can promote a virtuous circle of the economy and form an effective and fair economic system under what circumstances, and when macro-control cannot achieve the set goals.

Productivity: A country's standard of living depends on

its production capacity
According to the world GDP ranking released by the International Monetary Fund (IMF) in 2007, China's GDP ranks fourth at US$4 billion, but its per capita GDP is US$32500.83, ranking 2460.79th.The total GDP of the United States in 106 was 2007 billion U.S. dollars, and its per capita GDP was 1 U.S. dollars, ranking 138430.83th.China's total GDP is less than 45845.48% of that of the United States, and its per capita GDP is only about 11% of that of the United States.

From the above data, we can see that the gap between our living standards and that of the United States is still very large, but why is the gap so large?What should we use to explain the large differences in living standards across countries and over time?This leads to the eighth principle of Mankiw economics: a country's standard of living depends on its ability to produce goods and services.Mankiw's explanation for this difference is: "Nearly all variation in the standard of living can be attributed to differences in productivity across countries—that is, differences in the goods and services produced by a worker in an hour."

Productivity is a term used to express the ratio of output to input.If more output is produced with the same amount of input, this indicates that productivity has increased, and conversely, if output from the same amount of input has decreased, this indicates that productivity has decreased.For laborers, their labor productivity level can be expressed by the quantity of products produced per unit time, or by the labor time consumed to produce a unit product.The more products produced per unit time, the higher the labor productivity, and vice versa, the lower; the less labor time required to produce a unit product, the higher the labor productivity, and vice versa.It can be seen that the status of labor productivity is determined by the development level of social productivity.

Mankiw cites the example of the famous novel "Robinson Crusoe" to illustrate the concept of productivity, if Crusoe can catch more fish, then his standard of living will improve.The same is true for a country. Only when a country can produce a large amount of goods and services can its members enjoy a higher standard and quality of life.In countries where workers produce large quantities of goods and services per unit of time, most people enjoy a high standard of living; in countries where productivity levels are low, most people must suffer a life of poverty.Therefore, the growth rate of a country's productivity determines its growth rate of per capita income.

The reason why there is such a big gap in living standards between my country and the United States, especially the gap in per capita GDP, is mainly due to the low productivity in my country, especially the very low labor productivity.Therefore, in order to increase the per capita income level of our country, we must increase productivity.Specifically, there are five main factors that determine the level of labor productivity:
(1) The average proficiency of the laborers.The higher the average proficiency of workers, the higher the labor productivity.It includes the practical skills of labor and the ability of workers to accept new technologies.

(2) The development level of science and technology.The faster science and technology develop and the more widely they are used in production, the higher labor productivity will be.

(3) Organization and management of the production process.It mainly includes the division of labor and cooperation of laborers, as well as craft and economic management methods.

(4) The scale and efficiency of means of production.It mainly includes the use efficiency of labor tools, the utilization degree of raw materials and power fuels, etc.

(5) Natural conditions.This is a natural condition, which mainly includes the geological state, resource distribution, and climate conditions related to production.

Combining the five elements that affect productivity levels mentioned above can help us understand the productivity status among different countries, and further understand the living standards among different countries in the world today.

When considering the improvement of productivity, it is necessary to involve various factors affecting productivity, which have been mentioned above.However, it should be noted that the improvement of productivity must be achieved under the joint action of various factors, rather than just focusing on one of them.Take IT as an example. Today, the concept of "technology is the primary productive force" is being widely accepted, and the application of IT has a considerable or even transformative role in promoting social production.However, this effect will only occur when larger changes in business practices, competition, and institutions are combined with IT.

In the 20s, the U.S. economy continued to grow for 90 months from March 1991, creating a miracle in the post-World War II economic history. On December 3, 112, the American "Business Weekly" first put forward the concept of "new economy", believing that its main driving force is the information technology revolution and the wave of economic globalization.But before that in the 1996s, people were skeptical about the promotion of IT to the economy.In particular, Robert Solow, an economist who won the Nobel Prize in 12, proposed the productivity paradox. He said: "The computer age can be seen everywhere, except for productivity statistics."In his view, the information technology revolution seems to be only vigorous in terms of input, but not significant in terms of output performance.According to a report in February 30 by two American economists, Oleiner and Siechel, computers "made a relatively small contribution" in the early 80s, "however, this contribution In the next five years, there was a sudden increase."According to McKinsey's research on productivity growth in the 1987s, it was found that "increasing competition" was the "most critical catalyst" for productivity growth industries, although the application of IT played a significant role. .In other words, the improvement of the business competition mechanism makes IT play a greater role.Studies have shown that for an enterprise, it takes many years for IT to significantly improve the productivity of the enterprise, and the benefits of the enterprise not only depend on the technology itself, but also on the related enterprise process and organizational innovation.

Through the above examples, the relationship between productivity and production factors is obvious: only when greater changes in business practices, competition, and institutions are combined with IT, can a significant increase in productivity occur. Improvement does not have an immediate effect.

Inflation: rising prices when the government prints too much money

Only when the government issues too much money will rising prices become a common phenomenon. This is the ninth principle of Mankiw's economics, an important principle about the relationship between money supply, prices, and inflation.This principle states that changes in the money supply will affect the price level in the economy, so the central bank must consider the impact of inflation when implementing monetary policy.

At present, all countries use banknotes to perform the function of precious metal gold as a general equivalent.Banknotes are the legal currency circulation symbols of a country and are issued by the central bank of a country.If the amount of currency needed in circulation exceeds the value indicated on the issued banknotes, the value of the banknotes will depreciate and prices will rise.

In the winter of 1948, homeless people on the streets of Shanghai used money to build walls to keep out the cold wind. Every household was piled up with money. To buy a piece of paper, it cost a carload of money.This is exactly the hyperinflation caused before the KMT regime collapsed.

The above example is by no means alarmist. This is a true story that happened in the Kuomintang ruled area before liberation. The cause was that the Kuomintang government issued too much currency, which led to a rapid rise in prices.The famous economist Mankiw has such an assumption about the national money supply to help people understand the cause of inflation.

Assuming that before the money supply increases, the society has achieved full employment, which means that everyone has a job. At this time, the money supply increases. At the current price level, because the money supply exceeds the demand, people will Find ways to spend this excess money, but since everyone has jobs and there is no spare capacity left, the economy's capacity to produce goods and services cannot be increased, and the excess money now tries to chase more goods and services Demand will inevitably lead to an increase in the price of goods and services, leading to an overall increase in the price level. If the money supply continues to increase, the only consequence is that the price level will continue to rise, and inflation will occur.

Economist Milton Friedman said: "In the final analysis, inflation is a monetary phenomenon." In fact, if inflation is not so serious, or within expectations, it is not necessarily a bad thing, or even a good thing.

However, when the degree of inflation exceeds people's expectations, it will come out like a beast, destroying the credit foundation of the society, causing the transfer of wealth, and making people lose patience with the future.Therefore, for inflation, policies cannot be left alone, but must be managed.

From historical experience, there are many means of governing inflationary government:

(1) Reduce the money supply.Milton Friedman said that inflation is necessarily and only a monetary phenomenon at any time and any place.In other words, inflation is caused by the central bank failing to control the money injection gate, allowing too much money to enter the market.Friedman's words pointed directly at the crux of inflation. To stop inflation, we must take quick and decisive measures, and we must first block the gate of currency issuance.

(2) Compress aggregate demand.On the one hand, fiscal policies can be used to compress aggregate demand, such as raising taxes and reducing personal disposable income, thereby reducing consumption demand; reducing after-tax profits of enterprises, reducing investment demand of enterprises; reducing fiscal purchase expenditure; raising exchange rates, compressing foreign demand.On the other hand, contractionary monetary policies can be used to compress aggregate demand, such as raising interest rates, converting part of the demand into deposits, and simultaneously reducing investment in enterprises; raising the reserve ratio, increasing the discount rate, and selling government bonds in the open market, etc. .These means can reduce the loan scale of commercial banks.

The Phillips Curve: The Trade-off Between Inflation and Unemployment
The tenth principle of Mankiw's economics is: Phillips curve.

In 1958, based on the empirical statistical data of the unemployment rate and money wage change rate in the UK from 1867 to 1957, Phillips proposed a curve to express the alternating relationship between the unemployment rate and the money wage change rate.This curve shows that: when the unemployment rate is low, the growth rate of money wages is high; conversely, when the unemployment rate is high, the growth rate of money wages is low, or even negative.According to the theory of cost-push inflation, money wages can represent the rate of inflation.Therefore, this curve can represent the alternating relationship between the unemployment rate and the inflation rate. That is, a high unemployment rate indicates that the economy is in a depression stage. At this time, wages and price levels are low, so the inflation rate is also low; A low unemployment rate indicates that the economy is booming, when wages and prices are high, and inflation is high.There is an inverse relationship between the unemployment rate and the inflation rate.

Mankiw discusses the relationship between inflation and unemployment at length in his book, and the Phillips curve is a good illustration of the short-run trade-off between the two.Western economists believe that the increase in the money wage rate is the cause of inflation, that is, the increase in the money wage rate exceeds the increase in labor productivity, causing prices to rise, which leads to inflation.Therefore, the Phillips curve has become a curve used by contemporary economists to express the trade-off and alternation relationship between unemployment and inflation.Recall that one of the principles of economics earlier is that people face trade-offs.Here, one is faced with a short-run trade-off between inflation and unemployment.That is to say, if people want to reduce the unemployment rate, such as reducing the unemployment rate to a level below the natural unemployment rate, then people must accept an increase in the level of inflation.This is an extension of "You can't have your cake and eat it too". Of course, such a trade-off is only valid in the short term, that is to say, there is no long-term trade-off between inflation and unemployment.

Historically, the economic stagflation caused by the oil crisis in the 20s brought about a situation where high inflation and high unemployment coexisted, and broke the trade-off relationship between inflation and unemployment in the short run.

(End of this chapter)