Business Education: Basics of Macroeconomics

Macroeconomics
Macroeconomics is a branch of economics that examines the structure, performance, and behavior of an entire economy, focusing on large scale factors such as employment, distribution of wealth, sustainability, national income, growth rate, gross domestic product, prices, and inflation. There are many models that look for the reasons behind national income fluctuations and economic growth to find ways to maximize income and economic growth. Popular theories include those of Milton Friedman, John Maynard Keynes, supply-side economics, and monetarism. It looks at regional, national, and even global economies. Economic policies often come from macroeconomic model forecasts.

Terminology Utilized in Macroeconomics
Economic indicators are statistics that provide information about economic activity. These statistics let people evaluate economic performance and forecast the future based on it. It includes gross domestic product, the consumer price index, and bankruptcies.

Aggregate supply and demand refers to the price level for the country as a whole and the total goods and services made by suppliers in the country.

Deflation is when the general price of goods and services go down, while inflation is when it goes up.

Fiscal policy is the government's use of spending and taxing to influence the economy. It must balance these two practices. Fiscal policy can have an effect on individual spending, interest rates, deficit levels, exchange rates, and more.

Monetary policy can also lead to the growth or slowing of the economy, but it is done through the Federal Reserve. They can influence with open market operations such as transactions with US government bonds.

By changing reserve requirements, the supply of money can be changed. In addition, they can make changes by altering the discount rate.

Taxes
Tax cuts greatly affect people, companies, and the economy.
If they are done in the right way, they can be stimulating to the economy. With reduced taxes, people may spend more. If done incorrectly, it can cut the ability of the government to spend by too much, which can be a significant problem for governments and citizens. Taxes can be progressive, which means people earning lower incomes pay a lower percentage. This is how the income tax system is in America. This allows the lower income people to keep more of their money, and the higher income people who have more to spare give a greater proportion. A regressive tax is the opposite—those who make less pay a higher percentage. With a proportional or flat tax, everyone pays the same percentage no matter what they make. Taxes are a common source of discussion and dissention in the government.

Economic Theories and Systems
There are many different theories of economics. John Maynard Keynes (1883-1946) was an economist who helped create modern macroeconomics. He promoted government financial intervention to calm the results of the expansion and contraction phases of the business cycle. Keynesian economics, developed by Keynes, purports that increasing demand by lowering taxes and increasing government spending can grow the economy. This is also known as demand-side economics. Milton Friedman thought people consumed an amount based on permanent income. He advocated free markets and thought government intervention should be reduced. Monetarism is a theory surrounding the government controlling the quantity of money in a market. It asserts that inflation is dependent upon the amount of money printed. Milton Friedman thought this amount should be relatively level. Supply-side economics, also known as 'Reaganomics,' is the trickle-down policy.
It states that giving tax cuts for entrepreneurs and investors will allow them to invest more and give economic benefits to everyone as these benefits 'trickle-down' to consumers through cheaper and more varied products. The three pillars it stands on are regulatory policy, tax policy, and monetary policy, and it asserts that supply is the most vital element to economic growth. All of these theories have both proponents and opponents.
There are various economic systems, including traditional, market, command, and mixed. A traditional market system is, as the name suggests, based on tradition. They make products because of customers, traditional beliefs, and cultural history. Many of these are in developing countries. A command economic system is one in which the government controls a great deal of the economic system. They may regulate resources or own everything. A market economic system is like a free market. Organizations are run by the people, and they shape the market, not the government. In a mixed economic system, the command and market system are combined. This is very common and can vary in the combination. The free market does a lot, but the government will control some things such as preventing monopolies. This is seen in the United States, as well as many other developed nations.

Open and Closed Economies
A closed economy is one that is wholly self-sufficient. There is no international trading of any kind, no exporting, and no importing. There is no investment in other countries, either by the country or by others into the country with the closed economy. Everything produced within the country is sold and used within that country. An open economy is the opposite of a closed economy. The people and businesses may export and import goods and services as well as exchange technology. Citizens can invest in projects in foreign countries and the country accepts investments from foreigners. This is advantageous in that the people can enjoy products and services from many countries, giving them a larger selection. It also gives them the opportunity to invest in other countries as well as an outlet to export items.

Capitalist, Communist, and Socialist Economies
A capitalist economy allows for private ownership and a free market. Supply and demand drive the market, and individuals can own businesses and personally enjoy the profits. Supply and demand keep prices in check. There is free competition without government interference. In communism, everything is owned communally. The point is to eliminate the gap between the wealthy and the poor with everyone owning everything and everyone seeing the benefits. In socialism, most of the production is run through the government for the benefit of all, although there can be some ownership of private property. There should be less of a gap between the wealthy and poor, although not a completely nonexistent one. The government should work to redistribute wealth to promote fairness. Most economies are not purely one of these but a combination of two or more.

Business Cycle
The business cycle describes the changes in the economy.
These include production, trade, and the economy in general. Expansion is a time when production and pricing are being increased. Interest rates and unemployment are low while the GDP is higher. Some theorists feel that government spending should be less at this time. The peak is when production and pricing are at their highest. Contraction is a time when the opposite is happening. Production and the GDP are going down while unemployment is going up. Some feel that the government should be spending more at this time to stimulate the economy. When it gets to its lowest, it reaches the trough.

Inflation
Inflation is the increase in prices that leads to a lowering of dollar value as time passes. Many economies experience about two to three percent inflation a year. If the inflation rate is three percent, for instance, then a candy bar that costs $1.00 at the beginning of the year will cost $1.03 at the end. Hyperinflation occurs when inflation is extremely high. This is very rare and can be disastrous for an economy. Stagflation is when high inflation occurs at the same time as stagnation in the economy.
The opposite of inflation is deflation, in which prices decrease.
Inflation is caused by various factors. Demand-pull inflation occurs when demand is increasing at a higher rate than supply, so prices go up. Growing economies might see this. In cost-push inflation, companies have higher costs and increase prices so their profit margins do not go down. Inflation can show growth in the economy and the lack of it can show a weakening economy. Anticipated inflation is not usually a big deal, but unanticipated inflation can hurt the economy. For instance, uncertainty might mean people don't spend as much and the country might not be as competitive as other countries.

Gross National Product
The gross national product is comprised of the market value of everything produced by a nation's citizens in a one-year period. It is whatever goods and services are produced by one people. It does not matter where it is produced, but instead who produces it. Thus for the United States, it would include all products and services produced by Americans, both in the United States and abroad. It does not include items produced in the United States by foreign entities. It is calculated by taking the market value of the production in a country, adding the market value of goods and services produced by the people of that country in foreign areas, and subtracting the value of items produced by foreigners. The number can aid in government policy making as well as business decision making. It can also be used in the evaluation of economic theories. It can give an idea of the health of an economy.

Gross Domestic Product
The gross domestic product describes the value of goods and services produced within a country, typically annually. It is calculated by adding consumer spending (private consumption) within a country, spending by the government, capital spending, and net exports (exports minus imports). This is called the expenditure approach. It can also be calculated with a production approach and income approach. It does not matter who owns the products or services, only that it occurs within the country. It is used to evaluate the health of an economy, especially growth. It can give an idea of whether a recession is occurring and what the results of an economic policy are. It can affect the stock market and will often signal other things such as unemployment and wages.

Consumer Price Index and Producer Price Index
The consumer price index (CPI) looks at the weighted mean of prices of a basket of goods or services to see how the price changes.
To calculate it, the prices of a variety of representative items are gathered for a period of time. The price changes for each item are averaged, and the items are weighted based on how important they are. This calculation can show changes in the cost of living as well as deflation and inflation.

The equation for one item is
. It is not perfectly accurate in estimating the cost of living.

The producer price index (PPI) calculates the mean difference in selling prices domestic producers get over a period of time. The areas of production it considers are commodity-based, industry-based, and stage-of-processing-based companies. The PPI is often used because it can help predict the CPI.

Index of Leading Economic Indicators
The index of leading economic indicators is used to forecast the economy in future months. There are a variety of components used in its calculation. These include the following: manufacturing employees' weekly hours, unemployment insurance applications, orders going in to manufacturers for goods and materials for consumers, how quickly merchandise travels from vendors to suppliers, capital goods' new orders, residential buildings' new building permits, S&P 500 stock index, monetary supply adjusted for inflation, the difference between short interest rates and long interest rates, and the sentiment of consumers. These indicators can give an idea of where the economy is headed. Firms and investors look at it when making business decisions.

Unemployment
Unemployment occurs when people are actively looking for work but are unable to find it. There is always some unemployment, but the number varies. When there is a lot of economic growth and the economy is in a state of expansion, unemployment is lower; alternatively, when it is in a decline, unemployment is higher.
There are different types of unemployment. Structural unemployment occurs when the labor market has inefficiencies. There will be structural economic issues. For instance, the skills needed for the jobs and the skills of the workers might not match. This might occur when the technological needs of jobs increase and the workers do not have this knowledge.
Frictional unemployment happens when a worker is moving between jobs. The worker might not have the information or the skills for the new job or may not get a good offer. Cyclical unemployment is due to contractions in the economy.
For instance, if there is a recession, the job openings will go down. Seasonal unemployment is expected because of the time of year. For instance, there may be fewer employees at a ski resort in the summer.

Calculating of the Rate of Unemployment
The United States regularly calculates the rate of unemployment. To calculate unemployment, the government administers a survey every month called the Current Population Survey (CPS). These may be in person or on the phone. Census Bureau interviewers look at 60,000 households in a sample to replicate the United States. They ask about employment and find the percentage that is unemployed. Unemployed is classified as people who are not working, have been searching for work in the past four weeks, and are able and available to get a job. Interviewers also look at other statistics such as the characteristics of the unemployed workers.
The rate of unemployment can give an overall view of the economy and help shape policies. Unemployment is important because, when people are unemployed, the nation does not have the products or goods the worker would have made. Also, there is lowered purchasing power, and other workers may become unemployed because of it. The government will look at the statistics surrounding unemployment to make policy decisions that affect the economy and unemployment.

Rate of Inflation
Inflation is how much goods and services increase in price as time changes. To calculate inflation, a price index such as the consumer price index may be used. This shows the prices of goods and services for an average person. The government uses this to measure how prices change over a year.

The following equation is used:

For instance, if the price index went from $100 to $110 the next year, then the equation would be
, or 10 percent inflation.

This can be negative if prices went down, which would show deflation. There are other price indices that can be used such as the commodity price index, cost of living index, and producer price index. Policymakers use the rates of inflation to make decisions. For instance, a government may change its monetary policy to influence inflation. This may involve changing interest rates or creating wage controls.

Federal Reserve System
Formed in 1913, the Federal Reserve System is the United States' central banking system. It works to keep employment up, keep prices stable, and moderate interest rates in the long term. It also works with monetary policy, oversees banks, keeps the United States financial system stable, performs research, and provides financial services. One of its primary roles is to help keep the balance between banking and government and provide aid in a time of financial crisis or panic. Essentially, the Federal Reserve is the bank of the government and of other banks. It acts as a lender of last resort, provides many payment services, and works to provide an elastic currency. Its policies and work provide many functions to the banking system.
The Federal Reserve System is the central bank in the United States, responsible for maintaining stable growth in the economy and creating monetary policy. The 'Fed,' as it is called, does not deal with individual accounts; rather, the 'Fed' is the bank of private banks and other depository institutions. The Fed also regulates and supervises banks, distributes currency to the public through the banks, facilitates the collection and transfer of checks, and implements some of the regulations of consumer credit legislation.
The Federal Reserve System consists of the Board of Governors, the Federal Open Market Committee, twelve Federal Reserve Banks around the country, various branches of these banks, advisory committees, and some member financial institutions.
The Federal Reserve System divides the United States into twelve regional Federal Reserve districts. A regional Federal Reserve Bank with nine directors administers each of these districts. The Board of Governors of the Federal Reserve Bank appoints three of these directors, and the commercial banks in each district elect the other six directors. Each regional Federal Reserve Bank has a president appointed by the directors in that district. The Board of Governors must approve the president. Regional Federal Reserve Banks are located in the following cities: San Francisco, Minneapolis, Chicago, Kansas City, Dallas, St. Louis, Cleveland, Atlanta, Richmond, Philadelphia, New York, and Boston. The Federal Reserve Bank in New York City is considered the most important of the regional banks, in part because of its proximity to the New York Stock Exchange.

Government Fiscal Policies That Can Affect the Economy
Tax policy has a big impact on the economy. There is a lot of debate on exactly how taxes affect the economy, but in some cases, a reduction in taxes may cause people to spend more, stimulating the economy. Of course, there will be less money for the government to spend, which can also affect the economy. Another factor that can affect the economy is government bond sales. Bonds make a difference because they help to determine interest rates and therefore liquidity. Interest rates affect how easily people can buy things. Sometimes governments limit the price of a good or service in an attempt to keep the items affordable. Price ceilings and price floors are two examples of these government price controls. There is debate on just how effective these are, but it is accepted that all of these factors combine to affect the economy.

Interest Rates
In general, an interest rate is the percentage of interest charged by a lender to a borrower. Essentially it is what it costs to borrow money. A fixed interest rate stays the same for the length of the loan, while a variable interest rate can vary as the market rates change. The annual percentage rate (APR) is the percentage of interest for a loan based annually. This is often used for credit cards and makes it easier to compare various credit cards to each other. The prime rate is the benchmark rate of interest, which banks often use when calculating rates for loans. This is used in the United States. A teaser rate may be a special, limited time rate that is offered to attract people.