Tuesday, June 03, 2008

What do you learn in a macro-economics class?

June 2008 - This last semester I finished up with my first, and probably last, macro economics course. The professor was a bit absentminded and self-absorbed, but I learned some interesting information. In case you don't have plans to take a graduate macro course, which I can understand, let's see if I can give you a quick run down. It might save you money and time.

The course started off with a review of the Federal Reserve System. All you need to remember here is that there are 12 members of the Federal Open Market Committee. Eight of them are permanent, while the other four rotate. Ben S. Bernanke is the Chairman. If you wish to sound knowledgeable at cocktail hour, he's the only one you need to remember.

The goals of the Fed are simple. They want to keep unemployment low (less than 5% works), keep inflation low (around 2%) and keep moderate short-term interest rates. How do they do this? The current approach is to expand or contract the money supply. The Fed controls the money supply by setting the Fed Funds rate, which is the interest rate banks charge other banks for borrowing money. Or setting the Discount rate, which is the interest rate the Fed charges banks for borrowing money. After learning what the U.S. Fed does, you may study the Bank of Japan and European Central Bank. The operate similarly, with slightly more emphasis on inflation (i.e. price stability).

Next on the syllabus is growth. That is, why and how do countries grow. It's become common thought that growth is good. And for the most part, macro economic data show that a people's quality of life increases as they become wealthier. Date show money does buy happiness.

Growth is complicated, so any good macro class will simplify it. We studied labor policies, inflation and fiscal policy. Think of labor policies as how hard it is to hire and fire people. The data show that on average, gross domestic product (GDP) grows faster if companies can fire people without too much hassle. A harsh reality, but true. Inflation is pretty straight forward. Countries with hyper-inflation (e.g. Argentina) have difficulty growing because inflation strains the economy. The exchange of currency becomes inefficient. Lastly is fiscal policy, which may be the most important aspect of responsible government. If a country wants to growth their GDP, they can't spend, spend, spend. Countries need a stable balance sheet to be successful. That's why the pundits are concerned about the U.S. right now. We've got a lot of debt and seem to be increasing it.

After growth is business cycles. What's more important, aggregate demand or aggregate supply? They are both equally important. Aggregate demand is the total demand for all goods and services. As a country grows, demand increases. Aggregate supply is the total supply of all goods and services. Aggregate demand and supply balance each other in a sense. If the demand curve increases, prices will increase until the supply curve adjusts back to the steady state. If that is confusing, which it may be, here is an example. If everyone started drinking Summit beer (a reasonable presumption), the demand of Summit would increase. In the short-term the price of Summit would increase. But eventually the smart suites at Summit will increase supply, thus pushing the price back to the steady state. And if they don’t, brewers like Surly will increase supply to fill the void.

The last major macro subject we studied was exchange rates. If you've never dealt with exchange rates, get ready to be royally confused. Just kidding. Once you get a handle on them, they are not so intimidating. Just think of exchange rates as this; given one U.S. dollar, how many Euros would you be given today? As of this writing, you'd get 65 cents. Last year you'd get 75 cents. The dollar has depreciated against the Euro by 10 cents (13.5% if you're wondering). Help on exchange rates can be found at www.x-rates.com. Punch in some random numbers against the dollar and see how far it has fallen in recent years. This is why your foreign funds have been doing so well!

A macro class will go into greater detail than I have in this short write-up. However, these are the basic subjects you'll cover and I'm not charging you $900 dollars a credit.