Macroeconomics Basics

IntroBooks

02/2018 · IntroBooks

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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.