001：You are an Actor in a Play Called "Economics"

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Hello, Himalaya subscribers. My name is Timothy Taylor. Today we're going to discuss you are an actor in a movie called the Economy. Imagine you have a part in a movie. You aren't the big star, you don't have to fall in love or be an action hero, but you do play a lot of different rules in the background.

Sometimes you're in a store or perhaps online buying something. Sometimes you play a worker at a certain company or a manager at that company, or perhaps you start your own company. Sometimes you're planning to get a loan from a bank or thinking about whether to invest your money in stocks or real estate. Now you try your best to be a good actor in this movie. You think to yourself, what are the lines I need to say, what is my motivation for this scene, what emotion should have been showing? But you often feel a little confused because the situation keeps changing. Sometimes you're supposed to buy a certain product, but the price is a lot higher or lower than you expected.

Sometimes you need to wait in an enormous line to buy something;sometimes it's easy to buy the product. Sometimes you go to work, and you find out the company is firing a bunch of people and you are out of a job or hiring a bunch of new people. Sometimes you get a bank loan; sometimes you don't. You don't quite understand why. Sometimes you're just trying to play your role in this movie, but you don't understand the plot. There are a lot of people running around in the background doing other things. Sometimes the movie seems to go smoothly. Sometimes it doesn't seem very well organized at all. You would like to know what is actually going on.

Well, the name of this movie, of course, is the Economy. And it's not a movie, it's your real life. Studying what happens in this movie, the whole thing, not just your part, is called economics. In this series of lectures, we're going to introduce many of the basic terms and ideas that economists use. I'll be starting from the idea you have never studied economics before or barelystudied it.
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But I am also starting from the idea that you would like to learn something about economics. You would like to learn something about the economy of China and the economy of the world. And you'd like to figure out if there are some ways you can use economic thinking to make better decisions in your own life.

In this lecture, I’ll start off this introduction to economics with three main points. First, we'll talk about the circular flow, which is a way of thinking about the economy. Second, we'll talk about the difference between microeconomics and macroeconomics, and give an idea of the kinds of topics these lectures will cover. And third we will talk about China's economy——why economists have been talking about it all over the world.

Our first theme is about the circular flow diagram. And a circular flow diagram is just a way of visualizing the major flows and an economy in your mind. The idea of the circular flow has two main groups of economic actors. On one side, one group are households, and by household, I mean a group of people who live together. It could be one person, it could be  a married couple with children, it could be young people, old people, just a group living there.

On the other side there are producers or firms and those firms' could be private companies or state own. They can be big or small. Obviously we're using some really big categories here households and firms, but we want to think about how households and firms interact with each other. From an economic point of view, they interact in three main areas, which we will call markets. The first market where they interact is called the goods market. Firms produce goods and services which flow over the households, and payments for those goods and services flow back from households over to the firms. This is the first circle in the circular flow. In the jargon of economists, firms are the suppliers of goods and services, and households are the demanders of goods and services.

The second area is the labor market. Labor flows from households to firms. Whenever households include workers, they are hired by companies, and payments for labor flow from the firms back over to the households.This is another circle in the circular flow, and households are suppliers of labor, while firms are demanders of labor. The third major market is the financial market.

On one side of the financial market are all those who say whether they are households or firms. On the other side of the market are those who borrow their savings because they want to use them to spend on something right now. It might be a household that wants to buy a new house or buy a car, or it might be a company that wants to borrow money to build a new factory. Payments for savings or rates of return flow from those who want to borrow money, want those cash investments back to those who do the saving, who receive an interest rate or rate of return. That's the third flow in a circular flow diagram.

Now, all of these circles flowing back and forth to each other, help show a deeper lesson. Anything that affects one of these connections is likely to have effects elsewhere in the economy. For example, let's say the labor market changes in a way that causes higher wages. That will change the amount that households can spend on consumer goods. And it will change the amount they can save in financial markets.

Now, we could, of course, expand this basic idea of the circular flow. For example, we could add a third actor of government and we could show tax payments going to the government and services received from the government going back in the other direction to households, or we could expand and have an international trade area. And we would show exports going out, payments for exports coming back, imports coming in, payments for imports going out, and all the forms of international financial investment, too. Now all of this is beginning to sound a little theoretical.

So let me bring it back to the basics. People in an economy act as consumers, workers and his savers or investors; businesses in an economy, act as producers, employers. And they're also thinking about investing in the future, too. Economics is about the interaction that happens when lots of households and firms become involved in this kind of cycle.

Many years ago back in eighteen ninety, a famous British economist named Alfred Marshall said economics is the study of people in the ordinary business of life. It's a nice phrase I think. The circular flow diagram is just a way of thinking about the ordinary business of life.

Let's now move to our second point. The study of economics is commonly divided into microeconomics and macroeconomics. What does those terms mean? Well, microeconomics is the study of decision making of individual people, individual firms. It's the individual decisions about consuming, working and saving; it’s decisions by companies about what to produce and how to produce it, and the real results of these decisions as they all work together.

Macroeconomics on the other side is a study of the economy as a whole. It looks at the overall size of the economy, at economic growth as things like the unemployment rate or inflation or international trade. It might be useful to think about this difference in terms of a circular flow we just talked about. In the goods market, microeconomics is decisions made by firms and consumers. Macroeconomics is the total amount, the total amount of output and how it's growing. In the labor market, microeconomics is about people's decisions to work, and of how firms make decisions about how many people to hire and what to pay. Macroeconomics is about total employment and total unemployment for the economy as a whole.

In the financial market, microeconomics is about people and firms and how they save and invest. Macroeconomics is about how overall in the economy, how do banks work, or the stock market work? What are the patterns in giant real estate markets? The important thing to remember about microeconomics and macroeconomics is there are just two different ways of looking at the same subject. For comparison, imagine there are two different people who are studying a forest, not an economy, but a forest.

One of them looks at a small scale. What are the individual trees and animals and birds in the forest? What's in the soil of the forest? The other one looks the overall forest as a whole. Is the forest expanding or contracting, are perched the forest healthier than others? What are the forces over all of whether an environment or the effects of human beings on the size of the forest? Now these two people are both studying the same forest, but they have a different emphasis, a different focus. And if you want to learn about a forest, they probably both have some useful ideas you should learn about.

Professional economists, like professors at universities, often specialize in studying just one little part of microeconomics or one little part of macroeconomics. But as we get started with the subject of economics, we want to do some of both. We want to describe both how the economy works and how it sometimes goes wrong. And think about what actions government might take in response. For example, on the micro economic side, we'll talk about how markets work, but we'll also talk about how they can have problems related to what happens with the circular flow producing poverty or inequality or problems when environmental pollution happens or whether a market does enough to encourage education and technology.

Once we've talked about the basics of how markets work, we'll spend some time in these lectures on all of these issues and many others. We want to look at both, the good and the more worrisome side of markets. On the macro economic side, we'll start off by explaining specifically what economists mean when they use terms like gross domestic product or economic growth, or unemployment, inflation, and the balance of trade. Once we've got those in mind, we can talk about how government policies might affect these different things, like government spending and tax policies, or policies involving money, banking, and financial markets that might be carried out by the people's bank of China, or policies that involve international trade treaties and disputes.

Again, we want to talk about both the benefits markets provide and also the problems that can arise as well. So let's move to our third subject, economics in China——why are economists all over the world talking about China? Well, starting in nineteen seventy eight, China started a series of economic reforms, and we'll talk about these reforms in more detail throughout the lectures that follow. The bottom line here as a starting point is that China's economy expanded very very dramatically, and China's wages and standard of living have expanded ,too.

Let me give you just a couple of quick comparisons between China and the United States. If I go back to nineteen seventy eight, the United States had the largest economy in the world. And that year, the US economy was about twenty times as large as China's economy. Even though China's economy had about four times as many people. Now, since nineteen seventy eight, the US economy has almost tripled in size over those forty years. But China's economy has grown so fast that the economy of the US and China are now roughly about the same size.

And in the next two years, China's economy will probably be the largest in the world. Now, of course, China has many more people than the United States. China's population is about one point four billion people, and that's about four times as many as the US population. So if you take the size of the economy and you divide by the population, you look at the average on a per person basis, the US economy per person is still much larger than China's. It's about four times as large. Back in nineteen seventy eight, the US economy on a per person basis was something like sixty times as large as China's economy. So it's a really substantial change. And it's not just the overall size of the economy. These things apply to people's daily lives, too. For example, if you look at the share of China's population below the poverty line, which is defined as having per person consumption levels of roughly eighteen yuan per day, that has fallen from ninety nine percent of the population was below that level in nineteen seventy eight to about eleven percent at present. Life expectancy in China was sixty six years in the late nineteen seventies. Now it's seventy six years. Infant mortality was forty eight deaths for every one thousand live births in the late nineteen seventies. Now it's only nine deaths for every thousand live births. China's literacy rate that is those who can read for those fifteen and older was sixty six percent in the late nineteen seventies. And now it's ninety six percent. Economics and the growth of the economy is providing changes that affect education, health, and standard of living in so many ways.

Let me end with a couple of review questions for you to think about. Can you name the circles in the circular flow description of the economy? What's the difference between microeconomics and macroeconomics? As we go through these lectures, we don't have to turn everyone into an expert economist ready to become an economics professor at some major university. All we want to do is give you the basic economists way of thinking, understand the basic terms that are used by economists, see how economic intuition works, how it applies to your own role, and to the overall plot of this movie called the Economy.

In this lecture series, we can achieve these goals. I'm Timothy Taylor. Thank you for listening to Himalaya.