International Macroeconomics for Business and Political Leaders

John Marthinsen

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351796941
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Business allgemein

International Macroeconomics for Business and Political Leaders explains the fundamentals of international macroeconomics in a very efficient and approachable text. It explores key macro concepts such as growth, unemployment, inflation, interest, and exchange rates. Crucially, it also examines how these markets are interconnected so that readers will fully understand why economic, political, and social shocks to nations, such as the United States, China, Germany, Japan, and Brazil, must be evaluated in the context of all three macroeconomic markets: goods and services, credit, and foreign exchange.

This book is as relevant and useful to individuals who have successfully taken and passed a Principles of Economics course, or more, as it is to those who have never taken any economics in high school or college but are motivated to understand the way international economies act and react. It uses an innovative approach to teach supply and demand principles, without using graphs, so as to be understandable and accessible to any interested reader or audience. This is not a theory-for-theory's-sake textbook but a practice-oriented, common-sense approach to explaining international macroeconomics which quickly connects readers to real world events.

1 Measures of economic health

A nation’s economic health is often evaluated by its growth rate, labor ­market conditions, and inflation rate. Economic growth is measured by changes in real gross domestic product (RGDP). Labor market conditions are usually assessed by the unemployment rate, employment-to-population ratio, and labor force participation rate. Finally, inflation is measured by percentage changes in a nation’s price index. Let’s explore these economic measures, how they are calculated, and what they mean.

Gross domestic product (GDP)

Gross domestic product (GDP) measures the market value of all final goods and services (G&S) produced within a nation’s borders during a given time period, such as a year. The italicized words in this definition deserve clarification. First, GDP measures market values in order to combine disparate products, such as clothing, wheat, airplanes, and computers, into a single money value. By using market values, GDP excludes underground transactions that are usually hidden from view because they are not conducted on open markets and, therefore, are difficult (if not impossible) to measure. Second, GDP counts only the value of final products because also including intermediate G&S (i.e., ingredients or components) would be double counting. For example, think of the double counting involved if GDP included the value of an airplane plus all its parts (e.g., steel, plastic, wheels, and seats).¹ Finally, GDP includes the value of G&S produced, which means products do not need to be sold to be counted.

Four ways to view GDP

GDP can be viewed in a number of helpful ways, but regardless of the approach, each of them sums to the same total (GDP) number. Mercifully, each of these approaches has a strong element of common sense, which makes all of them easy to understand.

Price-quantity approach to explaining GDP

GDP can be calculated by multiplying the price of every final good and service by the quantity produced per period and then summing these products. If P stands for the price of final G&S and Q stands for the quantity produced each period, then GDP equals the sum of all these prices times quantities (see Figure 1.1).

Figure 1.1 GDP: price-quantity approach.

G&S demand approach to explaining GDP

The four major economic sectors that demand a nation’s final G&S are (1) domestic consumers, (2) domestic businesses, (3) domestic governments (national, state, and local), and (4) foreign consumers, businesses, and governments. Therefore, GDP can be viewed as the sum of personal consumption expenditures (C), intended business investment expenditures plus unintended changes in business inventories (I), government expenditures on final products (G),² and net export (NE) expenditures.³ See Figure 1.2.

Figure 1.2 GDP: Goods & services (G&S) demand approach.

Two important points are worthwhile remembering about I. First, in the context of GDP, businesses purchases of final G&S include products, such as machinery, tools, equipment, and inventories, as well as residential housing⁴ and business construction. This GDP component does not include the demand for financial investments in stocks, bills, notes, or bonds. Second, increases in business inventories can be intended (voluntary) or unintended (involuntary). Businesses voluntarily increase their inventories when they expect sales to rise. They involuntarily do so when they produce goods that are not sold. In either case, any increase in inventory quantity is counted as part of GDP’s investment (I) component.

Income approach to explaining GDP

Any time a good or service is produced, someone is paid for the effort. Therefore, GDP can also be viewed as the sum of incomes earned from ­producing final G&S. Economists categorize income-earners into four groups, namely labor, natural resources, real (physical) capital, and entrepreneurs. The return to physical and mental capabilities of labor is called the wage; the return to natural resources is called rent; the return to real capital (i.e., human-made aids to production) is called interest,⁵ and the return to risk-taking (entrepreneurship) is called profit. See Figure 1.3.

Figure 1.3 GDP: Income approach.

Money supply-and-velocity approach to explaining GDP

In Chapter 9: Money, banking, and central banks, we will discuss how nations measure their money supplies. For now, think of money (M) as all the coins and paper currency that individuals in a nation hold (outside banks) plus their checking accounts. In 2016, the U.S. money supply equaled approximately $3 trillion. At the same time, U.S. GDP totaled about $18 trillion. How can a nation’s GDP be so much larger than the money available to purchase it? The answer is money is spent more than once a year. In short, it has a velocity (V). Therefore, if a nation’s GDP equaled $18 trillion and money supply equaled only $3 trillion, then each dollar must have been spent (for newly produced G&S) six times during the course of the year. As a result, GDP can be viewed as the product of M times V. See Figure 1.4.

Figure 1.4 GDP: Money supply-velocity (M × V) approach.

Nominal versus real GDP

The price-quantity approach to explaining GDP, which was described in the last section, is helpful for clarifying the difference between real and nominal GDP. Nominal GDP (NGDP) equals the sum of prices times quantities for all final G&S produced per period. Therefore, it can increase if production (i.e., Q) and/or prices (i.e., P) rise. Increases in prices give the illusion of growth and prosperity but without material substance. To eliminate this illusion, nations calculate real GDP (RGDP), which removes the effects of higher prices by multiplying the quantities produced each period by the prices in a base year (see Figure 1.5). By using only base-year prices, RGDP can rise only if output (i.e., Q) per period increases. In virtually all economic discussions, RGDP is more important than NGDP.

Figure 1.5 NGDP versus RGDP.

To maintain a contemporary perspective, national statistical offices periodically change the base year used to calculate RGDP. The new one selected is determined by its stability relative to nearby years. Figure 1.6 shows the difference between RGDP and NGDP for 2000, 2009, and 2017, assuming 2009 is the base year.

Figure 1.6 RGDP versus NGDP (2009 = base year).

Calculating a nation’s economic growth rate

Economic growth is measured as a percentage change in RGDP. Just as a movement from $100 to $110 is a 10 percent change (i.e., $10/$100 = 0.10 × 100 percent = 10 percent) and a movement from $110 to $120 is a 9.1 percent change (i.e., $10/$110 = .091 × 100 percent = 9.1 percent), the percentage change in RGDP is calculated by dividing the change in RGDP by the original RGDP and then multiplying the result by 100 percent. Figure 1.7 shows the economic growth calculation between Year 1 and Year 2.

Figure 1.7 Calculating real economic growth.

Business cycles

Business cycles are “recurring, irregular, and unsystematic movements in real economic activity around a long-term trend.”⁶ Recessions are significant contractions in economic activity, which are spread broadly across an economy and last for more than a few months. Expansions (also called recoveries) are just the opposite.

In the news media, a nation is often said to be in a “recession” when its RGDP falls for two consecutive quarters, but, officially, recessions are not measured or dated this way. Rather, a spectrum of macroeconomic variables is used to gauge a nation’s economic health. For example, the National Bureau of Economic Research, a private organization, measures and dates U.S. expansions and contractions (i.e., business cycles) by using the ­employment-to-population ratio (also called the employment rate), real personal income, sales volumes for the manufacturing and trade sectors, and industrial production. These variables were chosen above others because, historically, they were shown to be the most timely, significant, reliable, consistent, and accurate reflections of U.S. economic activity. RGDP is excluded from this list because it is reported relatively infrequently (­quarterly, instead of monthly) and is often subject to considerable revisions.

Measures of labor market health

Three important measures of labor market health are the unemployment rate, employment-to-population ratio, and labor force participation rate. This section explains what they mean, their limitations, and how these measures complement each other.

Labor market composition

Figure 1.8 separates a nation’s total population into a number of helpful categories. Starting from the top, individuals are classified as being either part or not part of the civilian non-institutional population 16+ (i.e., 16 years or older). Those who are not part of the civilian non-institutional population are mainly individuals who are younger than 16 years old, in military service, or incarcerated.

Figure 1.8 Unemployment rate, employment-to-population ratio, and labor force participation rate.

The civilian non-institutional population 16+ is then separated into those individuals who are either part or not part of the civilian labor force. Individuals who are part of the civilian non-institutional population 16+ but not part of the civilian labor force are those who are not seeking work, such as retirees, ­students, and discouraged workers.

Finally, the civilian labor force is separated into those individuals who are either employed or unemployed. An employed individual worked for at least one hour during the survey period, which means part-time⁷ and ­full-time workers are counted the same. To be classified as unemployed, the person must be jobless, able to work, and actively seeking employment.

Unemployment rate

A nation’s unemployment rate equals the number of individuals who are unemploye...

Table of contents

• Cover
• Half Title
• Series Page
• Title Page
• Copyright Page
• Table of Contents
• List of figures
• Preface
• Acknowledgements
• Abbreviations
• 1 Measures of Economic Health
• 2 Two Important Keys That Unlock International Macroeconomics
• 3 Goods and Services Market
• 4 Fiscal Policy
• 5 Foreign Exchange Market
• 6 Balance of Payments
• 7 An Overview of Financial Markets
• 8 Credit Market
• 9 Money, Banking, and Central Banks
• 10 Central Bank Tools and Monetary Policy
• 11 Putting It All Together
• 12 Conclusion
• Index