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Macroeconomics: What It Is and Why It Matters

Macroeconomics: What It Is and Why It Matters

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Macroeconomics: What It Is and Why It Matters

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Lançado em:
Dec 23, 2011


What is Macroeconomics? It's money. It's credit. It's the market. It's rising and falling prices. It effects each of us every day, and understanding it is vital to every American, whether student or layperson. Now, at last, there is a book explaining it in easy-to-read everyday language without jargon, in terms anyone can understand. Isn't it about time?

The author, Moses Sanchez, MBA, is an economics instructor.

Lançado em:
Dec 23, 2011

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Macroeconomics - Moses Sanchez

Macroeconomics: What It Is and Why It Matters

Copyright ©2012 Moses Sanchez, MBA

Smashwords Edition

Smashwords Edition License Notes

This ebook is licensed for your personal enjoyment only. This ebook may not be re-sold or given away to other people. If you would like to share this book with another person, please purchase an additional copy for each person you share it with. If you're reading this book and did not purchase it, or it was not purchased for your use only, then you should return to Smashwords.com and purchase your own copy. Thank you for respecting the hard work of this author.

For Maria and your words of affirmation


My goal in writing this book was to introduce economics, specifically macroeconomics, to those interested in it. I find that in my courses, students find the topic frustrating for a number of reasons. The main reasons come down to the terminology and the instructors. I can’t fix the instructors, unless of course you take my course, but I may be able to help with the terminology.

I developed a series of power point slides for my courses and used them as a guideline for this book. I left out a few formulas and graphs because I felt the most difficult concepts were not the ability to read graphs but the terminology and concepts themselves. I focus the majority of the book on breaking down these concepts and terms into what I would call layman’s terms. This book could easily be a supplement to the economics book you already own for a course or just for one interested in a broader knowledge of economics. I hope you enjoy it.

What is Economics and why does it matter?

When most of us hear the term Economics we think of an extremely boring course in high school or college. Economics is defined as a social science concerned chiefly with the description and analysis of the production, distribution, and consumption of goods and services. That is the dictionary’s definition of Economics but what does this mean in layman’s terms?

Examples of social sciences include: Psychology, Sociology, Education, Geography, History, Political Science, Anthropology, Law, and Economics. The fields of study that are concerned with society and analyze human behavior are considered social sciences.

Economics itself is the study of how people allocate their limited resources to satisfy their unlimited wants. Economics is also the study of how people make choices and can further be broke down into two major categories: Macroeconomics and Microeconomics.

Microeconomics deals with the analysis on a smaller scale such as the individual, household, or firm. This book is going to deal with macroeconomics, where the unit of analysis is larger such as an economy as a whole. We will examine macroeconomics regarding the economies of nations, states, and cities.

Many Americans tune out when it comes to economics because a number of reasons. The terminology, for one, can seem overwhelming and many of those who teach economics tend to be as stimulating as the terms they use. There is also not a strong emphasis put on the importance of economics. Most Americans don’t take an economics course until their senior year in high school. Children take basic science classes in their K-8 school years and once they come into high school they take the typical science classes but it isn’t until their final year in high school that they are obligated to take one semester of economics.

As I write this there are throngs of young people in Italy, Greece, and other parts of Europe protesting and rioting the economic plans pushed forward by their governments. This is why economics matters. Governments make economic choices every day that affect the future of all Americans. Will there be social security in 2015? Can we sustain current unemployment benefits? Will I be able to find a job with a high unemployment rate? Will Medicare be around when I retire? Will I have to pay half of my check in taxes in order to fund my retirement that may not exist when I retire? Will I have to work until I’m 75 years old because I can’t afford to retire?

These are just some of the questions that can be answered with a basic knowledge of economics. The answers to these questions are some of the reasons why economics matters and why you should care.

Chapter 1: Macroeconomics

The term Macroeconomics comes from a number of Greek terms (Makros-large, oikos-house, nomos-customs or law). Macroeconomics is one of two general fields within economics. Macro deals with aggregate indicators such as GDP, Unemployment, and General Price Levels. It’s important to understand what aggregate means regarding these indicators.

Aggregate is an adjective that means a collection or a total number of units. Economists use a collection of data and make forecasts based off those numbers. Data such as the overall price level, inflation rate, GDP, and unemployment are all aggregate indicators.

Adam Smith

Adam Smith is often regarded as the father of economics. His writings have been enormously influential. The exact date of Smith’s birth is unknown but it was approximately 1720 to Margaret Douglas in Kirkcaldy, Fife, Scotland. His father, also named Adam Smith, was a lawyer, civil servant, and widower after Margaret Douglas died in 1720.

The impressive young man entered the University of Glasgow at the age of 14 and studied moral philosophy while developing a passion for liberty, reason, and free speech.

The Invisible Hand

In economics the term, the invisible hand, is a metaphor first used by Smith a total of three times in his writings. His essay On the Wealth of Nations (1776) is often cited as his greatest work. He first introduces the concept of the invisible hand in The Theory of Moral Sentiments, written in 1759, and the market does not come into his discussion in that work. The concept itself meant that the market would self-regulate itself. That society’s needs would be met even if some ambitious folks had no benevolent intentions.

Smith’s original discussion dealt with primarily domestic versus foreign trade but the concept of the invisible hand has nearly always been generalized beyond this.

By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.

Smith was very religious and saw the invisible hand as a method which God created where human happiness could be maximized. In his writings he stated that before the invisible hand could work efficiently, society needed a considerable amount of structure. For example, property rights must be strong, and there must be a universal adherence to moral norms, such as the prevention of theft and misrepresentation.

A common misinterpretation of the invisible hand theory is to assume that it means a lack of government intervention. This was not what Smith envisioned. Here is a description of the way Smith imagined the universe operating:

There is a benevolent deity who administers the world in such a way as to maximise human happiness.

"In order to do this he has created humans with a nature that leads them to act

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