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Why Study Macroeconomics?

Why Study Macroeconomics?

Author: Kate Eskra
This lesson covers why study macroeconomics.
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Source: Image of Business Cycle created by Kate Eskra

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Hi, welcome to Macroeconomics. This is Kate. This tutorial is called Why Study Macroeconomics? As always, my key terms will be in red, and my examples for you will be in green.

So in this tutorial, you'll be learning that to really be an informed and educated participant in our society it's so important to understand this field of macroeconomics. And I'll talk about the following things that people really need to understand. First of all, the key economic indicators-- how the economy functions overall, how economic policies work. The difference between monetary and fiscal policy, and what each of these really involve. And then international issues, like global trade and the flow of capital.

So any time we hear or see news about the economy in the media-- for example, things like, the Fed cut interest rates for the third time this year, or maybe you read in the newspaper that the unemployment rate fell to 7.9% percent this quarter, those are macroeconomic issues, because they involve how the economy is functioning overall. And when we really understand what these are trying to tell us, then we become much better citizens, because we're educated about them, and we're much more capable of participating in our government and society.

I find very often, especially with my students, that people come into an economics course certainly knowing how they feel about social issues. So you very well may know whether you're conservative or liberal socially, but I always tell my students that how you feel about the economy and economic policies is just as important, sometimes even more important, when you're deciding how to vote, really depending on the time.

So first of all, let's talk about what key economic indicators are. These are the things reported in the media, to help give us a picture of what's the economy doing. And they're really important to understand what they're telling us.

So there's three different kinds of indicators, but all of them are data that are specific to some kind of economic outcome or behavior. They give us an indication either of the past, the present, or the future economic activity. So there are lagging, coincident, and leading economic indicators.

So just a few examples of economic indicators that you may be familiar with are certainly the unemployment rate, the inflation rate, how the stock market's performing-- we hear about these all the time. And then a kind of a more specific one would be new building permits. And we're going to talk about all these in this macroeconomics course.

It's also really important to understand how our economy functions overall. We really can only participate in something effectively when we understand how it functions. So for example, if you hear that maybe interest rates are going to rise in the near future, if you don't know how that might impact you yourself, you're not effectively participating in our society. So how might that impact your spending and your saving habits now, or in the future, when they do rise? That's just one example of how understanding these things is very important to you personally, and as a participant in our economy.

So when our government or our Federal Reserve System does decide to kind of enact some sort of economic policy, we need to be able to understand why are they doing it, and then how it's expected to help the economy. So for example, why might the government cut taxes during recession? Or why might the Federal Reserve System look to increase interest rates, once the economy has rebounded from a recession?

So there are two different kinds of economic policies-- there are monetary policies, and fiscal policies. So the Federal Reserve System is a monetary policy, and our federal government is who makes decisions for fiscal policy. They're both going to be designed to stabilize our economy. And it's important to understand that both of these can really be valuable in helping our economy move through the natural business cycle, which I'll show you an a slide. But it's also really important to understand that both of these monetary and fiscal policies do have limits.

So let's talk about what business cycles are, briefly. Business cycles are the movement of the economy through what it is, a cycle. So there's an expansion, it peaks, and then a contraction, and it reaches a trough. And then it repeats itself, as the name indicates here with cycle. And it's really just an assessment of economic activity through time.

So this is what a business cycle looks like. Here is our economy's output. And this is time. So as our economy is producing more we're in an expansion, and then we peak, and then as our output shrinks, briefly, there's a contraction. It it lasts longer, it's called a recession. And then there's a bottoming out, or a trough, and the cycle repeats itself.

It's really quite normal for the economy to go through periods of growth and contraction like this. Most people, as it's moving these cycles, are concerned about things like the unemployment rate and inflation. And as I suggested, there's two kinds of policies, monetary and fiscal, that work to stabilize our economy and make sure that we maintain movement through these cycles, and that for example we're not stuck in a recession for a really, really long time.

So monetary, policy defined here, is policy typically set by some kind of central banking authority-- I'll talk a lot about the Federal Reserve System-- where money supply access, and then the cost, or access to money, which is the interest rate, is varied to assist in stabilizing economic activity. So really this kind of policy works through interest rates and our money supply.

Whereas fiscal policy is different. Fiscal policy is determined by the central government, where government spending and taxation can be adjusted to stabilize economic activity through our business cycles. Finally, we have this issue of international impacts in the macroeconomy. And most people today are very well aware that countries are interconnected.

Our economy is very much tied to the economies of nations worldwide, and we certainly have a huge impact on those nations, too. Almost everyone in the world is concerned about the United States economy, because when something happens here, you can bet that that's going to impact economies worldwide. And so it's important to understand both things like international trade, and the flow of capital among nations. We'll be doing tutorials on both of these things, but I want to briefly define them for you here.

Global trade-- international trade-- is trade that occurs across nations, typically involving foreign exchange transactions. So when we purchase goods and services from other nations, we are importing those things. When other nations purchase things, goods and services from us, we are exporting them to other countries. So this is the flow of goods and services between countries.

Whereas capital flow is a little bit different because it's not goods and services necessarily moving throughout, and between countries, but this is the movement of usually financial capital into and out of countries. So when, for example, countries invest, or loan money to other nations, that's the flow of financial capital. And that has a huge impact on our economy, and the economies of the other countries, as well. So we'll certainly be talking about this capital flow throughout macroeconomics.

So in this tutorial we talked about how it just is very important to understand macroeconomics, in order to participate in our society. And the things that we covered briefly today-- here are the key economic indicators, how our economy functions overall. How economic policies work. we talked about monetary and fiscal policy, and then finally I just ended up briefly discussing for you international issues like global trade and the flow of capital. Thanks so much for listening. Have a great day.

Notes on "Why Study Macroeconomics?"

Terms to Know

Economic Indicators

Data specific to an economic outcome or behavior that provide an indication of the direction of past (lagging indicator), present (coincident indicator), or future (leading indicator) economic activity.

Monetary Policy

Policy typically set by a central banking authority, whereby money supply access and the resulting cost or access to money (interest rate), is varied to assist in stabilizing economic activity.

Fiscal Policy

Policy typically set by a central government authority whereby government spending is adjusted to stabilize economic activity.

Business Cycles

The movement of an economy through expansion, peak, contraction, and trough over time; an assessment of economic activity through time.

Global Trade

Trade that occurs across nations, typically involving foreign exchange transactions.

Capital Flow

The movement of capital, typically referencing financial capital, into and out of an entity or country.