Macroeconomics Basics

Macroeconomic forces affect all of us in our daily lives. Inflation
rates influence the prices we pay for goods and services and,
in turn, the value of our incomes and our savings. Interest
rates determine the cost of borrowing and the yield on bank
accounts and bonds, while exchange rates affect our command
over foreign products as well as the value of our foreign assets.
And all of this represents just the tip of the iceberg. Numerous
macro variables—ranging from unemployment to
productivity—are equally important in shaping the economic
environment in which we live.
For most business managers, a basic understanding of
macroeconomics allows a more complete—as well as a more
nuanced—conception of market conditions, on both the demand
side and the supply side. It also ensures that they are better
equipped to anticipate and to respond to major macroeconomic
events, such as a sudden depreciation of the real exchange
rate or steep hike in the federal funds rate.
Although managers can enjoy success even if they don't truly
understand these sorts of macro variables, they have the
potential to outperform their competitors—to see hidden
opportunities and to avoid unnecessary (and sometimes very
costly) mistakes—after incorporating basic macro concepts and
relationships into their management toolbox. In the 1990s, for
example, managers who knew how to read and interpret a
balance of payments statement had a definite leg up in dealing
with the Mexican and Asian currency crises. Similarly, those
who understood the essential dynamic of a bank run—and the
power of negative expectations—were better positioned to cope
with the financial crisis of 2007–2009.
Nor is the practical value of macroeconomics confined to
business. A basic understanding of the subject is important to
us as consumers, as workers, as investors, and even as voters.
Whether our elected officials (and the individuals they appoint
to lead crucial agencies, such as the Federal Reserve and the
Treasury Department) manage the macroeconomy well or
poorly obviously has great significance for our quality of life,
both now and in the future. Whether a large budget deficit is
advantageous or disadvantageous at a particular moment in
time is something that voters should be able to evaluate for
themselves.
Unfortunately, even many well-educated citizens have never
studied macroeconomics. And those who have studied the
subject too often learned more about how to solve artificial
problem sets than about the true fundamentals of the macro
economy. Macroeconomics is frequently taught with a heavy
focus on equations and graphs, which, for many students,
obscure the essential ideas and intuition that make the subject
meaningful. Here we attempt to provide a conceptual overview
of macroeconomics, emphasizing essential principles and
relationships, rather than mathematical models and formulas.
The purpose is to convey the fundamentals—the building
blocks—and to do so in a way that is both accessible and
relevant.