Macroeconomics is the study of the nation’s economy as a whole; it focuses on the issues of inflation (a general rise in prices), unemployment, and economic growth. These issues are regularly discussed on Web sites, in newspapers, and on television. Macroeconomics explains why economies grow and change and why economic growth is sometimes interrupted. Let’s look at three ways we can use macroeconomics.
Using Macroeconomics to Understand Why Economies GrowThe world economy has been growing in recent decades, with per capita income increasing by about 1.5 percent per year. Increases in income translate into a higher standard of living for consumer’s better cars, houses, and clothing and more options for food, entertainment, and travel. People in a growing economy can consume more of all goods and services because the economy has more of the resources needed to produce these products. Macroeconomics explains why resources increase over time and the consequences for our standard of living. Let’s look at a practical question about economic growth.
Why do some countries grow much faster than others? Between 1960 and 2001, the economic growth rate was 2.2 percent per year in the United States, compared to 2.3 percent in Mexico and 2.7 percent in France. But in some countries, the economy actually shrunk, and per capita income dropped. Among the countries with declining income were Sierra Leone and Haiti. In the fastest-growing countries, citizens save a large fraction of the money they earn. Firms can then borrow the funds saved to purchase machinery and equipment that make their workers more productive. The fastest-growing countries also have well-educated workforces, allowing firms to quickly adopt new technologies that increase worker productivity.
Using Macroeconomics to Understand Economic FluctuationsAll economies, including those that experience a general trend of rising per capital income, are subject to economic fluctuations, including periods when the economy temporarily shrinks. During an economic downturn, some of the economy’s resources natural resources, labor, physical capital, human capital, and entrepreneurship are idle. Some workers are unemployed, and some factories and stores are closed. By contrast, sometimes the economy grows too rapidly, causing prices to rise. Macroeconomics helps us understand why these fluctuations occur why the economy sometimes cools and sometimes overheats and what the government can do to moderate the fluctuations.
Using Macroeconomics to Make Informed Business DecisionsA third reason for studying macroeconomics is to make informed business decisions. The government uses various policies to influence interest rates (the price of borrowing money) and the inflation rate. A manager who intends to borrow money for a new factory or store could use knowledge of macroeconomics to predict the effects of current public policies on interest rates and then decide whether to borrow the money now or later. Similarly, a manager must keep an eye on the inflation rate to help decide how much to charge for the firms products and how much to pay workers. A manager who studies macroeconomics will be better equipped to understand the complexities of interest rates and inflation and how they affect the firm.