Macroeconomics for Managers

by Evans, Michael K.

• ISBN13: 9781405101448
• ISBN10: 140510144X
• Edition: 1st
• Format: Hardcover
• Copyright: 2003-11-07
• Publisher: Wiley-Blackwell

Summary

This text offers business school students an excellent practical explanation of the short-term linkages in the macroeconomic arena. While the underlying theoretical constructs are not ignored, emphasis is placed on the empirical underpinnings and managerial implications of macroeconomics. The text begins by introducing key concepts such as the GDP, National and Personal Income, and the various measures of inflation and unemployment. Building on this foundation it then analyzes the following aspects of macroeconomics: aggregate supply and demand, international financial markets, cyclical fluctuations, policy analysis, and forecasting. Engages the reader with detailed case studies and "Manager's Briefcase" discussions. Focuses on the short-term linkages in macroeconomics. Uses an empirically oriented approach, while also explaining underlying theoretical constructs. Includes chapter summaries, key concepts, and practice questions.

Author Biography

Michael K. Evans formerly taught at the Kellogg School at Northwestern University. Since 1981 he has headed Evans, Carroll & Associates (formerly Evans Economics), and has generated thousands of forecasts at the macroeconomic, financial, industry, and individual company level. He was awarded the Annual Blue Chip Economic Forecasting Award in 1999 for the most accurate macroeconomic forecasts over the past four years.

Table of Contents

Preface and Acknowledgments	xv
Part I: Introductory Concepts	1	(104)
Chapter 1: The Importance of Macroeconomics	3	(25)
Introduction	3	(2)
1.1 What is Macroeconomics?	5	(3)
1.2 Links Between Macroeconomics and Microeconomics	8	(2)
1.3 Current Core of Macroeconomic Theory	10	(1)
1.4 Macroeconomics - an Empirical Discipline	11	(2)
1.5 The Importance of Policy Applications	13	(1)
1.6 Positive and Normative Economics: Why Macroeconomists Disagree	14	(3)
1.7 Roadmap of this Book	17	(2)
Key Terms and Concepts	19	(1)
Summary	19	(1)
Questions and Problems	20	(2)
Appendix: Thumbnail Sketch of the Development of Macroeconomics	22	(5)
Notes	27	(1)
Chapter 2: National Income and Product Accounts (NIPA)	28	(37)
Introduction	28	(1)
2.1 How the National Income and Product Accounts are Constructed	28	(2)
2.2 Components of GDP: Final Goods and Services	30	(6)
2.3 Differences Between Final and Intermediate Goods and Services	36	(1)
2.4 Components of National Income	37	(9)
2.5 Balancing Items Linking GDP, NI, PI, and DI	46	(5)
2.6 Value Added by Stages of Production: An Example	51	(1)
2.7 Inclusions and Exclusions in the NIPA Data	52	(4)
2.8 Circular Flow Between Aggregate Demand and Production	56	(1)
Key Terms and Concepts	57	(1)
Summary	58	(1)
Questions and Problems	59	(3)
Appendix: Key Macroeconomic Identities	62	(1)
Notes	63	(2)
Chapter 3: Key Data Concepts: Inflation, Unemployment, and Labor Costs	65	(40)
Introduction	65	(1)
3.1 Measuring Inflation: Three Different Types of Indexes	65	(3)
3.2 Factors Causing the Inflation Rate to be Overstated	68	(7)
3.3 Could the Inflation Rate be Understated?	75	(3)
3.4 Different Measures of Unemployment	78	(2)
3.5 Collecting the Employment and Unemployment Data	80	(6)
3.6 The Concept of Full Employment	86	(5)
3.7 Unit Labor Costs	91	(5)
3.8 Summarizing the Economic Data: Indexes of Leading and Coincident Indicators	96	(1)
3.9 Methods and Flaws of Seasonally Adjusted Data	97	(2)
3.10 Preliminary and Revised Data	99	(1)
Key Terms and Concepts	100	(1)
Summary	100	(1)
Questions and Problems	101	(3)
Notes	104	(1)
Part II: Aggregate Demand and Joint Determination of Output and Interest Rates	105	(156)
Chapter 4: The Consumption Function	107	(44)
Introduction	107	(1)
4.1 Principal Determinants of Consumption	108	(3)
4.2 Short-Term Links Between Consumption and Disposable Income: The Marginal Propensity to Consume	111	(3)
4.3 Long-Term Links Between Consumption and Income: The Permanent Income Hypothesis	114	(1)
4.4 Consumer Spending and Changes in Tax Rates	115	(4)
4.5 Importance of Cost and Availability of Credit in the Consumption Function	119	(3)
4.6 Consumption, Housing Prices, and Mortgage Rates	122	(2)
4.7 Other Links Between Consumer Spending, the Rate of Interest, and the Rate of Return	124	(2)
4.8 Credit Availability and the Stock of Debt	126	(3)
4.9 The Role of Demographic Factors and the Life Cycle Hypothesis	129	(1)
4.10 The Relationship Between Consumption and Household Net Worth	130	(5)
4.11 The Effect of Changes in Consumer Confidence	135	(2)
4.12 Review	137	(1)
Key Terms and Concepts	138	(1)
Summary	138	(1)
Questions and Problems	139	(2)
Appendix: Historical Development of the Consumption Function	141	(8)
Notes	149	(2)
Chapter 5: Investment and Saving	151	(44)
Introduction	151	(1)
5.1 The Equivalence of Investment and Saving	151	(2)
5.2 Long-Term Determinants of Capital Spending	153	(2)
5.3 The Basic Investment Decision	155	(2)
5.4 The Cost of Capital	157	(2)
5.5 The Availability of Credit	159	(3)
5.6 The Role of Expectations	162	(1)
5.7 Lags in the Investment Function	163	(1)
5.8 The Effect of Changes in Tax Policy on Capital Spending Decisions	164	(9)
5.9 Determinants of Exports and Imports	173	(9)
5.10 The Role of Government Saving	182	(1)
5.11 Recap: Why Investment Always Equals Saving on an Ex Post Basis	183	(1)
Key Terms and Concepts	184	(1)
Summary	184	(1)
Questions and Problems	185	(2)
Appendix: The Theory of Optimal Capital Accumulation	187	(7)
Notes	194	(1)
Chapter 6: Determination of Interest Rates and Introduction to Monetary Policy	195	(39)
Introduction	195	(2)
6.1 Definitions of Key Interest Rates and Yield Spreads	197	(5)
6.2 The Role of Monetary Policy	202	(2)
6.3 The Federal Reserve System	204	(2)
6.4 Determination of the Federal Funds Rate	206	(6)
6.5 Effect of Federal Reserve Policy on the Availability of Credit	212	(1)
6.6 Determinants of Long-Term Interest Rates	213	(3)
6.7 The Difference Between Changes in Monetary Conditions and Monetary Policy	216	(1)
6.8 Factors Causing the Yield Spread to Fluctuate	217	(4)
6.9 Transmission of Monetary Policy	221	(3)
6.10 The Importance of the Yield Spread as a Predictive Tool	224	(3)
6.11 Why Targeting Interest Rates Doesn't Always Work: The Conundrum	227	(1)
Key Terms and Concepts	228	(1)
Summary	229	(1)
Questions and Problems	230	(2)
Notes	232	(2)
Chapter 7: Joint Determination of Income and Interest Rates: The IS/LM Diagram	234	(27)
Introduction	234	(1)
7.1 Review of the Effect of Changes in Interest Rates and Income on Saving and Investment	235	(2)
7.2 Equilibrium in the Goods Market	237	(1)
7.3 Derivation of the IS Curve	238	(4)
7.4 Slope of the IS Curve under Varying Economic Conditions	242	(1)
7.5 Factors that Shift the IS Curve	242	(2)
7.6 The Demand for Money: Liquidity Preference and Loanable Funds	244	(2)
7.7 Equilibrium in the Assets Market: Derivation of the LM Curve	246	(1)
7.8 Slope of the LM Curve under Varying Economic Conditions	247	(3)
7.9 The IS/LM Diagram and Introduction to Monetary and Fiscal Policy	250	(2)
7.10 The IS/ LM Diagram in Booms and Recessions	252	(1)
7.11 Factors that Shift the IS and LM Curves	253	(1)
7.12 A Numerical Example: Solving for Income and Interest Rates using the IS/LM Model	254	(8)
Key Terms and Concepts	262	(1)
Summary	262	(1)
Questions and Problems	263	(3)
Notes	266
Part III: Aggregate Supply: Inflation, Unemployment, and Productivity	261	(138)
Chapter 8: Causes of and Cures for Inflation	269	(47)
Introduction	269	(2)
8.1 In the Long Run, Inflation is a Monetary Phenomenon	271	(1)
8.2 In the Short Run, Inflation is Determined by Unit Labor Costs: The Price Markup Equation	272	(8)
8.3 Monetary Policy and the Role of Expectations	280	(4)
8.4 Determinants of Changes in Unit Labor Costs	284	(7)
8.5 Malign and Benign Supply Shocks	291	(4)
8.6 Lags in Determining Wages and Prices	295	(2)
8.7 The Beginnings and Ends of Hyperinflation	297	(3)
8.8 Summary of Why Inflation Remained Low in the 1990's - and What Might Occur in the Future	300	(4)
Key Terms and Concepts	304	(1)
Summary	304	(1)
Questions and Problems	305	(2)
Appendix: Historical Explanations of Inflation: The Rise and Fall of the Phillips Curve	307	(7)
Notes	314	(2)
Chapter 9: Why High Unemployment Persists	316	(47)
Introduction	316	(1)
9.1 The Basic Labor Market Model	317	(5)
9.2 Real Growth and Unemployment: Okun's Law	322	(2)
9.3 Why Stimulatory Monetary and Fiscal Policy Might Not Reduce Unemployment	324	(2)
9.4 Theories Based on Labor Market Imperfections: Summary	326	(3)
9.5 Sticky Prices and Nominal Wage Rates	329	(3)
9.6 Sticky Real Wage Rates: Efficiency Wages	332	(2)
9.7 Sticky Real Wage Rates: Insider/Outsider Relationships	334	(3)
9.8 Barriers to Market-Clearing Wages: The Minimum Wage	337	(11)
9.9 The Wedge Between Private and Social Costs of Labor	348	(3)
9.10 High Unemployment Rates and Hysteresis	351	(1)
9.11 The Structuralist School	352	(5)
Key Terms and Concepts	357	(1)
Summary	357	(1)
Questions and Problems	358	(3)
Notes	361	(2)
Chapter 10: Aggregate Supply, the Production Function, and the Neoclassical Growth Model	363	(36)
Introduction	363	(1)
10.1 Productivity Growth and the Standard of Living	364	(4)
10.2 The Long-Term Historical Growth Record	368	(4)
10.3 The Aggregate Production Function and Returns to Scale	372	(1)
10.4 The Cobb-Douglas Production Function	373	(1)
10.5 Why Growth Differs among Nations: The Importance of Saving and Investment	374	(2)
10.6 Other Factors Affecting Growth: The Framework of Growth Accounting	376	(2)
10.7 Causes of Growth in the US Economy	378	(3)
10.8 The Worldwide Slowdown in Productivity after 1973	381	(6)
10.9 The Neoclassical Growth Model and the Slowdown of Mature Economies	387	(1)
10.10 Endogenous Growth Theory and Convergence Models	388	(4)
10.11 Additional Importance of Saving and Investment	392	(2)
Key Terms and Concepts	394	(1)
Summary	394	(1)
Questions and Problems	395	(2)
Notes	397	(2)
Part IV: The International Economy	399	(160)
Chapter 11: Basic Determinants of Exports and Imports	403	(42)
11.1 The Balance Between Current and Capital Accounts	403	(5)
11.2 Fixed and Flexible Exchange Rates	408	(3)
11.3 US Exports and Imports: Empirical Review	411	(2)
11.4 Income and Price Elasticities of US Exports and Imports	413	(6)
11.5 The Repercussion Effect	419	(2)
11.6 How Serious is the Burgeoning Trade Deficit?	421	(7)
11.7 Recent Progress Toward Free Trade	428	(6)
11.8 Arguments For and Against a Trade Deficit	434	(3)
11.9 Foreign Purchases of US Assets: A Non-Event	437	(2)
Key Terms and Concepts	439	(1)
Summary	439	(2)
Questions and Problems	441	(1)
Appendix: The Theory of Comparative Advantage and the Modern Theory of International Trade	442	(2)
Note	444	(1)
Chapter 12: International Financial Markets and Foreign Exchange Policy	445	(42)
Introduction	445	(1)
12.1 The World Dollar Standard and Major Trends in Other Key Currencies	446	(6)
12.2 Nominal and Real Exchange Rates	452	(1)
12.3 Measuring International Labor Costs	453	(2)
12.4 The Concept of Purchasing Power Parity	455	(5)
12.5 Factors that Determine Foreign Exchange Rates	460	(10)
12.6 Why Foreign Exchange Markets Overshoot Equilibrium: The J-Curve Effect	470	(5)
12.7 Other Factors Causing Currency Rates to Diverge from Equilibrium	475	(2)
12.8 Managed Exchange Rates: Bands and Crawling Pegs	477	(4)
12.9 Optimal Trade and Foreign Exchange Rate Policy	481	(2)
Key Terms and Concepts	483	(1)
Summary	483	(1)
Questions and Problems	484	(2)
Notes	486	(1)
Chapter 13: The Mundell-Fleming Model: Joint Determination of Outlot, Interest Rates, Net Exports, and the Value of the Currency	487	(30)
13.1 Links Between Domestic and International Saving and Investment	487	(2)
13.2 The Basic Model: Joint Determination of Real Interest Rates, Output, Currency Value, and the Current Account Balance	489	(3)
13.3 The Mundell-Fleming Model for a Small Open Economy	492	(2)
13.4 The Repercussion Effect in the Mundell-Fleming Model	494	(2)
13.5 The Depreciation Effect in the Mundell-Fleming Model	496	(3)
13.6 Shifts in the NX and NFI Curves Caused by Changes in Inflation and Productivity	499	(1)
13.7 Effects of the Reagan and Clinton Fiscal and Monetary Policies	500	(4)
13.8 Economic Impact of an Exogenous Change in Net Exports	504	(3)
13.9 Short- and Long-Run Effects of an Exogenous Change in the Value of the Currency	507	(4)
Key Terms and Concepts	511	(1)
Summary	511	(2)
Questions and Problems	513	(3)
Notes	516	(1)
Chapter 14: Case Studies in International Trade	517	(42)
Introduction	517	(1)
14.1 International Trade in the European Economy	517	(10)
14.2 International Trade in the Asian Economy	527	(12)
14.3 International Trade in Latin America	539	(6)
14.4 Pros and Cons of Free Trade in an Imperfect World	545	(6)
14.5 What Factors Will Determine World Leaders of the Twenty-First Century?	551	(3)
Summary	554	(1)
Questions and Problems	555	(2)
Note	557	(2)
Part V: Cyclical Fluctuations	559	(122)
Chapter 15: Business Cycles	561	(44)
Introduction	561	(1)
15.1 The Long-Term Historical Record	562	(2)
15.2 Measuring the Business Cycle: The Indexes of Leading, Coincident, and Lagging Indicators	564	(3)
15.3 Cyclical Behavior: Recurring but Not Regular	567	(5)
15.4 The Phases of the Business Cycle	572	(5)
15.5 The Role of Exogenous Shocks in the Business Cycle	577	(5)
15.6 The Role of Technology in the Business Cycle	582	(4)
15.7 The Role of Fiscal Policy in the Business Cycle	586	(4)
15.8 The Role of Monetary Policy in the Business Cycle	590	(3)
15.9 Global Transmission of Business Cycles	593	(1)
15.10 Could the Great Depression Happen Again?	594	(4)
15.11 Recap: Are Business Cycles Endogenous or Exogenous?	598	(2)
Key Terms and Concepts	600	(1)
Summary	600	(1)
Questions and Problems	601	(1)
Notes	602	(3)
Chapter 16: Cyclical Fluctuations in Components of Aggregate Demand	605	(38)
Introduction	605	(1)
16.1 The Stock Adjustment Principle	606	(2)
16.2 Empirical Review: The Components of Capital Spending	608	(1)
16.3 The Role of Business Sentiment in Capital Spending	608	(4)
16.4 Investment in Residential Construction	612	(10)
16.5 The Role of Inventory Investment in the Business Cycle	622	(5)
16.6 Inventory Production and Control Mechanisms	627	(2)
16.7 Cyclical Patterns in Purchases of Motor Vehicles	629	(5)
16.8 Cyclical Patterns in Other Components of Consumption	634	(1)
16.9 Recap: What Determines Cyclical Fluctuations in Aggregate Demand	635	(2)
Key Terms and Concepts	637	(1)
Summary	637	(1)
Questions and Problems	638	(3)
Notes	641	(2)
Chapter 17: Financial Business Cycles	643	(38)
Introduction	643	(1)
17.1 Cyclical Patterns of Monetary and Credit Aggregates	644	(3)
17.2 Cyclical Patterns in the Yield Spread	647	(2)
17.3 Cyclical Patterns of Stock Market Prices	649	(4)
17.4 The Present Discounted Value of Stock Prices and the Equilibrium Price/Earnings Ratio	653	(2)
17.5 Determinants of the Risk Factor	655	(10)
17.6 Impact of the Budget Ratio on Bond and Stock Returns	665	(4)
17.7 Impact of Changes in the Expected Rate of Inflation on Bond and Stock Returns	669	(1)
17.8 Impact of Changes in Capital Gains Taxes on Stock Prices	670	(2)
17.9 Long-Term Performance of Stocks, Bonds, and Liquid Assets	672	(2)
17.10 Cyclical Fluctuations in Returns on Stocks, Bonds, and Liquid Assets	674	(1)
17.11 Recap: The Importance of Financial Markets and Asset Allocation	675	(1)
Key Terms and Concepts	676	(1)
Summary	676	(1)
Questions and Problems	677	(2)
Notes	679	(2)
Part VI: Policy Analysis and Forecasting	681	(107)
Chapter 18: Fiscal Policy and Its Impact on Productivity Growth	683	(36)
Introduction	683	(1)
18.1 Automatic and Discretionary Stabilizers	684	(5)
18.2 Components of the Federal Government Budget	689	(5)
18.3 Advantages and Disadvantages of Federal Budget Surpluses and Deficits	694	(5)
18.4 The Concept of the Fiscal Dividend	699	(3)
18.5 The Role of Fiscal Policy in Determining Productivity Growth	702	(3)
18.6 Simplifying the Tax Code	705	(2)
18.7 "Saving" Social Security and Medicare	707	(6)
18.8 Recap: Fiscal Policy and Productivity Growth	713	(2)
Key Terms and Concepts	715	(1)
Summary	715	(1)
Questions and Problems	716	(2)
Notes	718	(1)
Chapter 19: Monetary Policy and Its Impact on Inflation and Growth	719	(32)
Introduction	719	(1)
19.1 The Overall Goals of Monetary Policy: Insure Adequate Liquidity, Reduce Business Cycle Fluctuations, and Keep Inflation Low and Stable	720	(4)
19.2 The Negative Effects of Higher Inflation	724	(2)
19.3 The Optimal Rate of Inflation is Not Zero	726	(4)
19.4 The Role of Monetary Policy in Financial Crises	730	(3)
19.5 Demand-Side Policies: Punchbowls and Preemptive Strikes	733	(3)
19.6 Supply-Side Shocks and Sticky Prices and Wages: How the Fed Should React	736	(1)
19.7 Why Targeting Interest Rates Doesn't Always Work: The Conundrum Revisited	737	(1)
19.8 Budget Deficits and Monetary Policy	738	(2)
19.9 Monetary Policy in an Open Economy	740	(1)
19.10 Why Higher Inflation Leads to Lower Productivity	741	(2)
19.11 Recap: The Case for Active Monetary Policy and Optimal Policy Rules	743	(3)
Key Terms and Concepts	746	(1)
Summary	747	(1)
Questions and Problems	748	(2)
Notes	750	(1)
Chapter 20: Macroeconomic Forecasting: Methods and Pitfalls	751	(37)
Introduction	751	(1)
20.1 Sources of Forecasting Error in Econometric Models: Summary	751	(1)
20.2 Inadequate and Incorrect Data and the Tendency to Cluster	752	(4)
20.3 Examining Exogenous Shocks: Impulse and Propagation Revisited	756	(3)
20.4 Market Reaction to Economic Data	759	(2)
20.5 Unknown Lag Structures and the Conservatism Principle	761	(4)
20.6 Summary of Noneconometric Forecasting Methods	765	(1)
20.7 Naive Models and Consensus Surveys of Macro Forecasts	766	(5)
20.8 Using the Index of Leading Economic Indicators to Predict the Economy	771	(3)
20.9 Survey Methods for Individual Sectors	774	(7)
20.10 Recap: How Managers Should Use Forecasting Tools	781	(3)
Key Terms and Concepts	784	(1)
Summary	784	(1)
Questions and Problems	785	(2)
Notes	787	(1)
Bibliography and Further Reading	788	(2)
Index	790