Bulletin Spring‧Summer 1978

Q. Dr. Lin, let us first congratulate you on the success of the ERC model. Would you please tell us how and when this research project was started? A. As many people in business and economics know, economic forecasting has important theoretical and practical significance. In recent years, a great number of countries have developed their own national forecasting models, but in Hong Kong, such models simply did not exist two years ago. At that time, with more data available, we thought it feasible to construct the model. The Vice-Chancellor, Dr. Choh-Ming Li, and Professor M. H. Hsing enthusiastically supported the idea. After some planning, we decided to undertake the task. Q. Why are econometric forecasts more scientific and accurate than other methods of economic forecasts? A. As a matter of fact, many businessmen also make forecasts of their own and sometimes they may be quite accurate. But strictly speaking, these forecasts are not scientific work because they are mostly based on intuition and may be very much affected by personal biases. An econometrician is different. To make forecasts, he first collects data of the relevant economic variables. Then, guided by economic principles and using mathe matical tools, he finds the statistical relations between these variables. He does lots of experi mentation work with the data and accepts only what has been proven statistically acceptable. In this sense, the model we build is impersonal and objective. As a by-product of the experiments, many hidden relations of the economic variables may reveal themselves. The whole picture of the economy can thus be seen more clearly and the forecasts are more reliable. Econometric forecasts are therefore more scientific than ordinary ones. Q. How does the ERC model relate to the Project link? A. Project Link normally has two functions: to link national models and to make consistent forecasts of imports and exports between various countries. For the former, we shall send some chosen equa tions of our model to the Pacific Sub-Link. As for the latter, 'consistent' forecast means that the forecast of export from country A to country B must to equal to the forecast of import into country B from country A; we shall exchange information with the Sub-link for this study. Q. What are the important features of the ERC model and what predictions does it include to give a full picture of the local economy? A. Like other forecasting models, the ERC model is a system of simultaneous equations, but unlike some other, it is a non-linear system. It contains 42 equations with 'endogenous variables' and 'exogenous variables' inside. The endogenous are those we want to forecast. Their values can be obtained only by solving the system of equations. In the ERC model, they include such important items as the GDP, the values of import and export, consumption expenditure, inflation rate and many others. A complete list of these variables can be obtained from the ERC upon request. Exogenous variables, on the other hand, are the inputs we feed into the model before we solve the system of equations. If their values are wrong, the forecast results will also not be reliable. Their values are also presumably known beforehand. Political factor, rainfall, time trend are some usual examples of the exogenous variables. Q. How is it possible to make predictions on the effects of government policies? A. If we use economic common sense alone, it would be very difficult to assess the effects of govern ment policies. For example, consider the case of increasing government expenditure. This will make national income go upwards. But when income goes up, people will feel they have more money and consume more. The increase in con sumption will again raise the level of income. The whole cycle repeats itself again and again until the effect of each change becomes negligible. To forecast the end result of the increase in govern ment expenditure, we have to add up all these effects. Obviously, common sense will not suffice. In our model, this kind of problem is in fact not difficult to solve at all. Government expenditure is treated as an exogenous variable. To forecast we just feed the new value of this variable into the model and solve the system of equations. The 29