Macroeconomics Basics

Macroeconomic forces affect all of us in our daily lives. Inflationrates influence the prices we pay for goods and services and, in turn, the value of our incomes and our savings. Interestrates determine the cost of borrowing and the yield on bankaccounts and bonds, while exchange rates affect our commandover foreign products as well as the value of our foreign assets. And all of this represents just the tip of the iceberg.
Numerousmacro variables-ranging from unemployment toproductivity-are equally important in shaping the economicenvironment in which we live. For most business managers, a basic understanding ofmacroeconomics allows a more complete-as well as a morenuanced-conception of market conditions, on both the demandside and the supply side. It also ensures that they are betterequipped to anticipate and to respond to major macroeconomicevents, such as a sudden depreciation of the real exchangerate or steep hike in the federal funds rate.
Although managers can enjoy success even if they don't trulyunderstand these sorts of macro variables, they have thepotential to outperform their competitors-to see hiddenopportunities and to avoid unnecessary (and sometimes verycostly) mistakes-after incorporating basic macro concepts andrelationships into their management toolbox. In the 1990s, forexample, managers who knew how to read and interpret abalance of payments statement had a definite leg up in dealingwith the Mexican and Asian currency crises.
Similarly, thosewho understood the essential dynamic of a bank run-and thepower of negative expectations-were better positioned to copewith the financial crisis of 2007-2009. Nor is the practical value of macroeconomics confined tobusiness. A basic understanding of the subject is important tous as consumers, as workers, as investors, and even as voters. Whether our elected officials (and the individuals they appointto lead crucial agencies, such as the Federal Reserve and theTreasury Department) manage the macroeconomy well orpoorly obviously has great significance for our quality of life, both now and in the future.
Whether a large budget deficit isadvantageous or disadvantageous at a particular moment intime is something that voters should be able to evaluate forthemselves. Unfortunately, even many well-educated citizens have neverstudied macroeconomics. And those who have studied thesubject too often learned more about how to solve artificialproblem sets than about the true fundamentals of the macroeconomy.
Macroeconomics is frequently taught with a heavyfocus on equations and graphs, which, for many students, obscure the essential ideas and intuition that make the subjectmeaningful. Here we attempt to provide a conceptual overviewof macroeconomics, emphasizing essential principles andrelationships, rather than mathematical models and formulas. The purpose is to convey the fundamentals-the buildingblocks-and to do so in a way that is both accessible andrelevant.