Econ Exam 1

Evidence of success

Fast growth in production and rapid improvement in living standards

GDP

Growth indicator: Increased - fast and persistent

* 13.6 trillion in USD in 2018 (2nd largest after US)

Trade

Growth indicator: foreign __ increased greatly

* Joined WTO in 2000 and __ more than doubled

Physical units

Growth indicators:

* Access to phones and internet increased
* Infrastructure increased (rail lines)

Structural change in employment

* Employment in agriculture decreased
* Most people worked in agriculture at beginning of the reform
* Manufacturing sector increased
* Service sector increased
* Labor moving from the domestically oriented sector to the export oriented manufacturing sector

Poverty Reduction

Poverty decreased from 88.1% in 1981 to 0.3% in 2018

Evidence of problems

* Rising inequality
* Gini coefficient and consumption inequality
* Corruption
* 65 (seen as high)
* China’s economic slowdown

Gross Domestic Product (GDP)

the monetary value of all finished goods and services made within a country during a specific period

GDP

= private consumption + business investment + government \n spending + net exports

Private consumption

durable goods, non-durable goods, and services

Business investment

purchases that companies make to produce \n consumer goods

Government spending

money spent by the public sector on the acquisition of goods and provision of services

net exports

Exports minus imports

Components of GDP decreasing

Long term trends that help explain slowdown

* Changing demographic composition of China
* Transition from top down system to price based market economy
* Successful past exports

Changing demographic composition of China

China is losing its demographic dividend (high ratio of working age to total population)

* One child policy

Transition from top down system to price based market economy

* Enabled emergence of private sector
* Transition is mostly done, marginal contributions to further productivity gains will be smaller.

Successful past exports

* Exports grew by an average of 17% a year for three decades (IMF).
* External demand can be affected by crisis and risks and boosting domestic demand is important

Describe China’s Economic Achievement after 1978

* Poverty reduction
* Infrastructure increase (high speed train, reduces travel/business cost)
* Trade increase
* GDP rapid growth (started to slow in 2015)

What kind of structural change has happened to employment in China since the 1990s?

Agriculture decreased and reform moved employment to manufacturing and service sectors

How did the components of GDP contribute to the economic slowdown in China?

Investment decreased, Net Exports decreased, Consumption decreased

True or false: Without the COVID pandemic the Chinese economy would maintain a rapid growth?

False - demographic of workers and natural slow down

What is regression

* A statistical technique to determine the relationship between variables.
* Primarily used for prediction and causal inference \n Types of regression models:
* Types of Regression:
* Positive Linear Relationship (x increases, y increase)
* Negative Linear Relationship (x increases, y decreases)
* Relationship not linear
* No relationship (horizontal line)

Simple linear regression model

shows the relationship between one independent variable (X) and a dependent variable (Y)

Dependent variable (Y)

the variable we wish to explain

Independent variable (X)

the variable used to explain the dependent variable

Error term

the amount of variation not predicted by the independent \n variable

b0

the estimated average value of Y when the value of X is zero

b1

the estimated change in the average value of Y as a result of a one-unit change in X

t-ratio

Tells us how large the coefficient is relative to how much it varies in repeated sampling.

If the coefficient varies a lot in repeated sampling, then its t-statistic will be smaller, and if it varies little in repeated sampling, then its t-statistic will be larger

* Larger than 1.96 = statistically significant

Statistical significance

tells us how sure we are about the coefficient of \n the model, based on the data

Actual significance

tells us the importance of the variable

B

* We are interested in determining whether there is a relationship between SAT score and college GPA at graduation for the class of 2018 at the University of Maryland.
* We collect a random sample of 84 students who graduated from the University of Maryland in 2018 and record their SAT scores and college GPAs.
* What is the independent variable and the dependent variable?
* A. SAT score is the dependent variable and GPA is the independent variable \n B. GPA is the dependent variable and SAT score is the independent variable

A

* The regression equation for this sample is GPA = 0.275 + 0.0017\*SAT
* Our statistical software outputs the following table describing the relationship between SAT score and GPA:
* Q2: What is the intercept? \n A. 0.275 \n B. 0.673 \n C. 0.0017 \n D. 7.487

A

Q3. What is the interpretation of the intercept? \n - A. The average GPA for students with a SAT score of zero is .275 \n - B. The average SAT score for students with a GPA of zero .275 \n - C. The average GPA for students with a SAT score of zero is .0017 \n -D. The average SAT score for students with a GPA of zero is .0017

C

GPA = 0.275 + 0.0017\*SAT

Q4: What is the slope coefficient? \n A. 0.275 \n B. 0.673 \n C. 0.0017 \n D. 7.487

B

Q5. What is the interpretation of the slope coefficient? \n A. a .0017 point increase in SAT score increases average GPA by 1 point \n B. a 1 point increase in SAT score increases average GPA by .0017 points \n C. a 1 point increase in SAT score increases average GPA by .275 points \n D. a .275 point increase in SAT score increases average GPA by 1 point \n Econ418C/AREC447 19 / 40

A

Q6: What is the correct expression for the predicted GPA of an \n individual with an SAT score of 1950? \n A. 0.275 + 0.0017\*1950 \n B. 0.0017 + 0.275\*1950 \n C. 0.0017\*1950 \n D. 0.275\*1950 \n Econ418C/AREC447 20 / 40

Main difficulty

* establish causality between intervention X and outcome Y
* Causality: X − > Y, where the arrow means ”causes”
* Reverse causality: Y − > X
* Simultaneity: X − > Y and Y − > X
* Omitted variable bias: There exists a third variable Z such that Z − > X and Z − > Y

Difference-in-Difference method

* Measure changes over time
* However, many other things have changed during the same period that may have affected the outcome
* Solution: subtracting the change observed over time among non-beneficiaries

Parallel trend assumption

In the absence of the program, the change in the outcome variable among beneficiaries would have been identical to that among non-beneficiaries: the ”parallel trend” assumption

Data required for DD

For both treatment and control groups: \n -Base line survey before the program and a follow-up survey after the program \n - Outcome data at least two periods before implementation to test the ”parallel trend” assumption

B

We are interested in estimating the impact of a car’s weight on miles per gallon (mpg). We collect a random sample of 74 cars and record their weight \n and mpg.

* Q1: What is the independent variable and the dependent variable? \n A. The car’s weight is the dependent variable and mpg is the independent \n variable \n B. mpg is the dependent variable and weight of car is the independent \n variable \n

C

Q2. What is the interpretation of the intercept? \n A. The average mpg for cars with a weight of zero is 6.008 \n B. The average weight of cars with a mpg of zero is 6.008 (in 1000 pounds) \n C. The average mpg for cars with a weight of zero is 39.44 \n D. The average weight of cars with a mpg of zero is 39.44 (in 1000 pounds) \n

C

Q3. The mean average of the weight of car is 100 (in 1000 pounds) and \n the average of mpg is 20. What is the interpretation of the slope? \n A. Increasing the car weight by 1000 pounds can increase the mpg by 6% \n B. Increasing the car weight by 1000 pounds can decrease the mpg by 6% \n C. Increasing the car weight by 1000 pounds can decrease the mpg by 30% \n D. Increasing the car weight by 1000 pounds can increase the mpg by 30%

* -6 is about 30% of 20

20

If the average household income during 1962-1963 equals 40 thousand dollars in region A and 30 thousand dollars in region B, and the average household income during 1965-1966 equals 90 thousand dollars in region A and 60 thousand dollars in region B: \n - What is the DID estimator?

Why is geography important to economic development:

* Traditional subsistence economy: climate, land, water, other resources, ecology, etc.
* Modern economy: trade, coastal lines, ports, roads, other logistics and infrastructure
* Others: population density, disease burdens

Geography and technology

* Transport technology
* telecommunication
* Air conditioning

Geography of China

* Semi-land locked, only one coastal line
* Arable land is scarce
* Bigger than Russia and Indonesia
* 14.4% of arable land
* Annual rainfall is limited
* Eastern area receives more rainfall than North

Province and regions

* 31 province-level areas in China
* Regional disparity among 4 areas (Eastern, Western, Northeastern, Central)
* Eastern region has most important economic area, not as big but attracts higher population
* 11 largest metropolitan zones (mostly east coast)
* 1st two account for more than half of GDP

China’s Greater Bay Area

* Plan to integrate 11 metropolitan zones into one integrated business and economic hub
* 4 main cities
* Hong Kong
* Macau
* Shenzhen
* Guangzhou
* Boost development of whole area, spillover effect

Hong Kong

Serves as GBA’s international financial center

Macau

Serves as GBA’s entertainment hub

* Has unique link to Portugal and other former colonies

Shenzhen

Serve as GBA’s technology and innovation hub

Guangzhou

Serve as GBA’s transportation hub and advanced manufacturing centre

China’s regional development strategies

* Great Western Development Strategy
* Revitalize Northeast China
* The Rise of Central China Plan

Great Western Development Strategy (begins in 2000):

* Western regions of China lagged behind in economic development compared with coastal regions of eastern China.
* Substantial efforts were put in place to improve infrastructure, especially enchance the density of the transportation network.
* Since 2001, most western provinces have expanded the length of railways in operation to above the national average, and doubled freight volume between 2001 and 2019.
* The Western Region Land-Sea Corridor was launched in 2019 to seek international cooperation with Southeast Asia, South Asia, Central Asia, West Asia and Europe, ease the over-reliance on maritime trade in the \n eastern region, and coordinates with the development of Yangtze River

Revitalize Northeast China (begins in 2003):

* Northeastern China was China’s heavy-industrial heartland but faces challenges including industrial overcapacity, shrinking resources, outdated infrastructure and the outflow of talent since 1980s.
* Targets have been listed in the 14th Five-Year Plan:
* It is expected that the region will have made breakthroughs in key fields like grain production, state-owned enterprise reform, private economic development, industrial structure optimization, infrastructure construction and social security services by 2025.
* Annual GDP growth of this region reached 15.31% from 2003-2011.

The Rise of Central China Plan (begins around the mid-2000s):

Why launch the program?

* There was stark constrast in eonomic development between east and central.
* Central region can obsorb the excess capacity from eastern region.
* Geographic advantage as a transportation and logistic hub.
* The plan emphasizes the industrialization and urbanization in this region.
* 2006-2019, annual growth rate of GDP in this region reached 13.37%, the ratio of the GDP of Central China to the whole country increased from 18.67% to 22.20% and the ratio of secondary industries increased \n from 18.26% to 23.71%.
* Ratio of urban population increased from \n 37.99% in 2006 to 55.60% in 2018.

Transportation connection

* Regions of China becomes more connected due to developed transportation networks in recent decades.
* China has now built a national expressway network that is the world’s largest, at 123,500 kilometers, compared with 76,000 kilometers in the United States.
* High speed railway: up to 300 km/h.
* Helpful for urbanization and internal trade, promote growth for inland provinces.

Economic History of China

\-1840 (Pre-modern period) \n -1840-1911 (Pre-Republic period) \n -1911-1949 (Republic period) \n -1949-1978 (People’s Republic, pre-reform) \n -1979-present (People’s Republic, post-reform)

Pre-modern 1840

* China’s total GDP was the largest in the world until the middle of the
* 19th century:
* High-productivity agriculture, 90% of the population live in the countryside
* Advanced farm technologies
* Fast population growth: 0.4% per year between 1400 and early 1800s
* Commercialized countryside
* Advanced commercial procedures, legal institutions, and highly competitive markets

”Needham puzzle”

* Why did Industrial Revolution not occur in China in the 14th century?
* Demand of technology: Chao (1977) \n Sustained growth of population promoted labor-using technologies, crowded out the demand for capital-intensive technologies
* Supply of technology: Justin (1995) \n Traditional way of improving social status: pass the extremely competitive civil service examination to become a government official
* The exam focuses on memorizing and interpreting the Confucian classics, have nothing to do with math and scientific experiments
* Distracted the attention of intellectuals away from investing the human capital necessary for modern scientific research

Pre-republic (1840-1911)

* In the early 19th century, run an export surplus: expanded the money supply and contributed to economic expansion during early 1800s
* A special commodity to redress the trade imbalance: opium
* The Opium War of 1840, with China’s defeat \n The share of China’s GDP in world GDP dropped from 32% in 1820 to only around 9% in the early 1900s.

Republic Period (1911-1949)

* 1911: Ending of Qing Dynasty and beginning of the Republic of China
* 1911-27: Warlords divided China
* 1927-37: Ten years of peace
* 1937-45: Sino-Japanese war
* 1945-49: Civil war

Republic Period: Industralization

* Between 1912 and 1936, overall industrial output showed double-digit real annual growth:
* Lower-Yangzi area: \n Concentrated in a few treaty ports (Shanghai, Tianjin, Qingdao)
* Textile, food products for domestic markets \n
* Firms started by foreigners but native chinese capitalists soon became a major force
* By 1933, 73% of China’s factory output were produced by Chinese-owned \n companies
* Northeast:
* Japanese government-sponsored industrialization \n
* Heavy industry and railroads to exploit coal and iron ore for the Japanese market
* Rising international trade and FDI

Lessons from History

* Immediate legacy: extreme disruption and serious damage to the economic infrastructure (industrial capital, irrigation networks, financial system)
* The aversion to foreign dominance led to support for closed-door socialist development strategies

Why is geography important to economic development?

* Trade activity across regions and countries (area you are located affects transportation costs)
* Eastern side has only coast line
* Disadvantages: semi-land locked, arable land share is very small for such big population size

False

T or F: China’s economic growth was balanced across different regions

* Eastern area accounts for almost 1/2 of GDP growth and 70% of foreign trade

False

T or F: The east region of China experienced the fastest growth because the Chinese govt. didn’t design policies for other regions

* various policies implemented at different times
* Geographical advantages helped East excel

Challenges to GBA project

* Each area has their own system
* Connecting is hard
* Current regional advantages

Initial Economic Conditions in 1949

* Heavy industry base in Northeast China inherited from the Japanese
* Light industry in a few port cities
* Most population in rural areas working on agricultural production
* On average a very poor peasant economy

the big push strategy

To encourage a rapid economic revival: socialist heavy industry priority development strategy

Development strategy

Patterns in which resources are allocated

Socialist heavy industry priority development strategy:

* High rate of investment
* Priority to heavy industry and military
* Priority to investment in goods-producing capital
* Investment in basic needs: health and education
* Limited importance of foreign trade

Industrial growth

* High investment rate (investment/GDP): > 30%
* Most in heavy industry (producer goods): > 80%
* Rapid industrial growth rate: > 10% per year

Gains in the creation of human capital

* The spread of education reduced the proportion of Chinese aged 16-65, who had not completed primary school from 74 to 40 percent between 1952 and 1978;
* An increase of more than 50% in life expectancy from 42.2 years in 1950 to 66.4 years in 1982 for males
* GDP growth: 6%

Development strategy: Problems

* Slow individual consumption growth
* Per capita growth by 2.3% per year
* Urban faster (3%) and rural slower (1.8%)
* Between 1952 and 1978, rural consumption per capita was only 58%
* Shortage of consumer goods
* Ration coupons for basic goods such as grain and cotton cloth

Ration Coupon

• Grain, meat, soap, etc \n • Specify quantities/location \n • To ensure equal distribution \n • PRC started issuing coupon in 1955 / ended in 1990s

Development Strategies Problem: inefficiency in production

* Emphasize on quantity rather than quality
* Low economic return: an important heavy industrial base was created, but those assets were being used at very low efficiency

Development strategy: Problems - Slow employment creation

* Heavy industry capital incentive, not labor intensive
* Labor force growth much slower than output (5.4% vs. 11%) in industry sector
* Employment in non-agriculture sectors grew from 34 million in 1952 to 105 million in 1978 (net increase of 71 million)
* But: total labor force grew from 207 million to 398 million (net increase of 191 million)
* Bottom line: employment creation only absorbed 37% of the increase in labor force
* Agriculture labor force as 70% larger in 1978 than in 1952, while cultivated land remained constant

How did planners manage to channel resources into the big push industrialization strategy

* the command economic system
* Three fundamental features
* Communist Party in power, guaranteed by the Constitution
* Dominant public ownership
* Central planning as the main mechanism of resource allocation

Market economy

What to produce: consumer’s preferences \n How to produce: producers seeking profits \n Market price is determined by supply and demand

Centrally Planned Economy

What to produce: government’s preferences \n How to produce: government’s preferences \n Price is set by the government

Public Ownership

* Urban: government owns factories
* Rural: government owns land
* Private plots were entirely abolished
* People form ”People’s Commune” to work together and get work points at the end of year
* Incentive to work was very low

Resource Allocation

* Government control over investment
* Five year plan and annual plan determine investment priorities
* Also decide on specific investment projects (large investment projects approved by Politburo)
* Large proportion the necessary resources are allocated to some “key projects”

Price determination

* Prices set by government, not to equate supply and demand
* Main purpose: channelling funds to/from the government

Price distortion patterns (implicit taxation)

* Low prices for agricultural products
* High prices for manufactured goods

The great famine: 1959-1961

* Worst famine in human history
* 30 million people died in rural China - twice the number of fallen in World War

Explanation for Great Famine

* Shortage of food? but China continued to export grain during the Great Famine
* Official explanation: ”Natural disaster”
* Recent economics research:
* Local officials competed and exaggerated their figures
* Higher and higher procurement targets
* Left nothing for peasants to eat

Interpretation of data for Great Famine

* Shortage of grain due to bad weather doesn’t explain the results
* What transformed the fall in grain production to the largest famine in history?
* The government over-purchased grain output at very low price
* Left insufficient food for farmers
* It was not about production, but about how resources were distributed

Procurement policy

This stylized example illustrates a procurement policy that is:

* Inflexible: procurement does not respond to contemporaneous production
* Progressive: procurement is always a larger share of production in the more productive regions

Great Famine impact

Higher on women, especially on level of education

Industrial Policy

Policy interventions to promote industrial development - any \n intervention which shifts incentives away from policy neutrality

Hard Industrial Policy

Tariffs and subsidies \n Tax breaks for new businesses or FDI

Soft Industrial Policy

Trade promotion \n Infrastructure provision \n Overcoming coordination failures

Industrial Policy Categories

* Scope: horizontal (broad-based) or vertical (sector-specific)
* Type of intervention: public inputs (e.g. phytosanitary control) or market interventions (subsidies)

Motivations for industrial policy:

* Learning by doing at sector level
* Learning externalities

Practice industrial-policy interventions have been subject to a variety of problems:

* Governments may be ill-informed about which sectors have learning potential
* Interest groups may pressure governments to promote sectors with little learning potential
* Governments or politicians are (partly) self-interested, which makes them open to influence by interest groups

Solutions?

Government officials have to be ”embedded”, so they can learn from private sector, figure out how to target resources

Industrial policy should focus on broad promotion of activities that foster innovation, not particular firms or sectors