Macro & Micro economics
china’s business cycle and government policy in economy development
The purpose of this project is to get you to apply the analysis that we have learned in the course to a real country of your choosing. You will focus on where countries are in the business cycle and the policy stance the government has taken in response. To understand the position of the economy relative to the business cycle, you’ll need to gather data on the economy and use that as a guide to understand the current situation. For policy-making, you’ll be gathering data as well as reading commentary about what is going on in order to understand what policy-makers are doing and why. To conclude, you’ll need to assess these policies and make suggestions as to future policies that you believe would be appropriate—all while explaining your reasoning.
To receive honors credit you need to submit a paper (and fill the necessary paper work with the honors program). In this paper you will collect data and evaluate economic indicators over the past 10-15 years, present a summary of the current economic situation of the country you select and suggest policy recommendation that you would make to the leadership of the country. You need to 1. Get the paper work signed by Prof. Petry. 2. Inform your TA at the beginning of this semester. 3. Meet with your TA at least twice during this semester to discuss the progress of your paper (perhaps after completing milestones 3 and 5). 4. Include tables and graphs summarizing GDP, unemployment, inflation, and CPI (and any other relevant indicators). 5. Use the past and current data to analyze the present economy (additional graphs may be appropriate in this and remaining sections). 6. Suggest policy recommendations. 7. Defend your recommendations using sound economic reasoning. 8. Cite all the resources.
The paper will be submitted with the regular term paper on the day of the last TA discussion session and should be 10-15 pages plus an appendix. This project will not contribute to your grade for the course. If you have signed up for honors credit and meet all the requirements for the paper and the Honors program, then you will receive an H for this class in addition to your course grade.
We have broken down the project in to milestones. It is recommended that you follow these milestones as you work through the project. You are required to meet with your TA on two separate occasions during the semester as you complete your work—after completing milestones 3 and 5 would be good times to do this.
There are many good sources of information and data for you to utilize. A few suggested sources: TradingEconomics.com, Country’s Central Bank and/or statistical bureau, IMF, World Bank, OECD, International Economic Calendar, Economist Intelligence Unit Country Reports. Always site your sources and make your paper look consistent and professional. Good luck!
Milestone 1. Milestone 1 is to gather data on key macroeconomic indicators. It’s a good idea to start with the 3 principal macroeconomic variables that we are studying: GDP (growth rate is probably most helpful here), inflation, and the unemployment rate. For a typical business cycle, what would you expect each of these variables to look like as a country proceeds through a business cycle? Given the current values for each of these variables, where do they suggest your country is in the business cycle?
For each variable you gather, you should comment about why you chose it and what you believe it is telling you about the economy. What is driving the behavior of this variable? What does it indicate about the current state of the economy vis-à-vis the business cycle? For business cycle questions, you should be gathering something like 10-15 years of data, as this will give you some context for the way the variable has behaved in the past. This will better enable you to comment on its current value.
The way the data is displayed is also an important consideration. Is it best to show the actual values of the indicator or year-over-year comparisons? (To find answers to these questions, watch how data is displayed on the databases and articles you find and ask yourself why is it being displayed this way? If you can, compare different ways the data can be displayed—some databases will let you do this—and ask yourself which is most helpful in providing the information we are trying to gather.)
Milestone 2. Milestone 2 is to collect data on other variables. For instance, you could gather data on indicators that relate to parts of the economy that are particularly cyclical by nature—in other words they go up and down more dramatically than most parts of the economy depending upon the stage of the business cycle; retail sales, investment spending by businesses, construction (residential, commercial), and the stock market are good examples of these types of indicators. Capacity utilization is another informative indicator about the state of the economy—it calculates what percentage of the productive capacity of the economy is actually being utilized at a point in time. Given the importance of consumers to the economy, you might be interested in gathering some data on consumer-related behavior as well—consumer spending and consumer sentiment are good examples.
If information is available about the length of the business cycles in your country, this can give you some perspective on the average length of recessions and expansions. Business cycles are notoriously unpredictable, but having some basis of comparison can be helpful.
In some countries, you may be able to find Leading Economic Indicators (in the U.S. these are produced by The Conference Board). This an index that combines a series of the indicators you have already collected and is used to predict where the economy is heading in the future: Is the expansion strengthening? Weakening? Are we heading into or out of recession? Some countries also calculate “potential GDP” and where the economy is relative to potential GDP.
Milestone 3. Milestone 3 is to cull your indicators to ones that are particularly helpful, and refine and edit your commentary. Not all of these variables will be available in each country, and you don’t need them all, even if they are available in each country. You should decide which are the most helpful in understanding where the economy is in the business cycle and use those. To get a good sense of where the economy is relative to the business cycle, 5-8 variables should be more than enough for this section. You will have more graphs later on as you analyze other aspects of the economy.
Please don’t make the mistake of including too many indicators, thinking more is better—generally less is more. Your TA and Professor will be grading this paper—if we feel like you are wasting our time—your score will suffer! Less is more is also true of the amount of text included. In my experience, people oftentimes write more, rather than making what they have written concise and clear—the latter will be scored more highly every time! Shorter is good as long as it conveys what you are trying to say.
Milestone 4. For milestone 4, you should focus on fiscal policy. Start by looking at the basic government balance (G-T) and how this has evolved over time. Is the government pursuing expansionary or contractionary policy, or does it have a balanced budget? If it is expansionary, are there particular areas they are trying to stimulate? Why are they focusing on those areas? Is it working? How much debt has the government accumulated over time? What is the country’s debt/GDP ratio? Is this reasonable? More generally, regarding fiscal policies being pursued, does everyone agree that the policies being followed are the right policies for the country? What are the main points of disagreement and why? What do you think and why? A few illustrative graphs on fiscal policy and related variables
such as debt levels would be helpful.
Milestone 5. For milestone 5, you’ll want to focus on monetary policy. You want to be sure to show the money supply overtime as well as a graph of interes