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A Concise Guide to Macroeconomics: What Managers, Executives, and Students Need to Know PDF

224 Pages·2014·5.32 MB·english
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ECONOMICS MOSS US$35.00 / CAN$40.50 Praise for Second Edition UNDERSTANDING A CONCISE GUIDE TO MACROECONOMICS THE GROUND RULES FOR VA Second THE GLOBAL ECONOMY E E Edition S LI E A CONCISE GUIDE TO A ENI “An incredibly clear and sophisticated introduction to macroeconomics.” In this revised and updated edition of A EVG —RICHARD VIETOR, M Concise Guide to Macroeconomics, David A. Moss M A C R O DAVID A. MOSS is the John G. McLean Senator John Heinz Professor of the Environment at Harvard Business School; draws on his years of teaching at Harvard A Professor of Business Administration at author of How Countries Compete Business School to explain important macro Harvard Business School. He is the author concepts using clear and engaging language. C of Socializing Security: Progressive-Era Economists This guidebook covers the essentials of A and the Origins of American Social Policy and R E C O N O M I C S macroeconomics and examines, in a simple When All Else Fails: Government as the Ultimate Risk “Any critical observer of current debates about the state of the macro economy needs C and intuitive way, the core ideas of output, Manager, and is the founder of the Tobin a clear understanding of a half-dozen basic concepts, how they are measured, and how OO money, and expectations. Early chapters leave Project, a nonprofit research organization. they are connected. David Moss’s short, jargon-free book provides just that. It does not N you with an understanding of everything tell you what should be done, but how to begin thinking about what should be done.” EC from fiscal policy and central banking to I business cycles and international trade. Later —ROBERT SOLOW, CS Institute Professor Emeritus at the Massachusetts Institute of Technology; E chapters provide a brief monetary history Nobel Laureate in Economics O G What Managers, Executives, and Students Need to Know of the United States as well as the basics of macroeconomic accounting. You’ll learn why U N countries trade, why exchange rates move, I D and what makes an economy grow. OE Moss’s detailed examples will arm you with “An extraordinary pedagogical achievement. The tight focus on the macroeconomics that are essential for understanding the business environment and the lucidity of the T a clear picture of how the economy works and MO how key variables impact business and will writing make this an ideal text for business students and executives.” D AV I D A . M O S S equip you to anticipate and respond to major —JULIO ROTEMBERG, I macroeconomic events, such as a sudden William Ziegler Professor of Business Administration, Harvard Business School C depreciation of the real exchange rate or a steep hike in the federal funds rate. S Read this book from start to finish for a complete overview of macroeconomics, or use it as a reference when you’re confronted with specific challenges, like the need to make sense of monetary policy or to read a balance of payments statement. Either way, you’ll come away with a broad understanding of the subject and its key pieces, and you’ll be empowered to make smarter business ISBN-13: 978-1-62527-196-9 90000 decisions. STAY INFORMED. JOIN THE DISCUSSION. VISIT HBR.ORG/BOOKS FOLLOW @HARVARDBIZ ON TWITTER FIND US ON FACEBOOK, LINKEDIN, YOUTUBE, AND GOOGLE+ HBR.ORG/BOOKS 9 781625 271969 HARVARD BUSINESS REVIEW PRESS A CONCISE GUIDE TO Macroeconomics 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 A CO N C I S E G U I D E TO Macroeconomics What Managers, Executives, and Students Need to Know Second Edition David A. Moss Harvard Business Review Press Boston, Massachusetts 1 2 3 4 5 6 7 8 HBR Press Quantity Sales Discounts 9 Harvard Business Review Press titles are available at significant quantity 10 discounts when purchased in bulk for client gifts, sales promotions, and 11 premiums. Special editions, including books with corporate logos, cus- 12 tomized covers, and letters from the company or CEO printed in the front matter, as well as excerpts of existing books, can also be created in large 13 quantities for special needs. 14 For details and discount information for both print and ebook formats, 15 contact [email protected], tel. 800-988-0886, or www.hbr. 16 org/bulksales. 17 Copyright 2014 David A. Moss 18 All rights reserved 19 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 20 21 No part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form, or by any means (electronic, 22 mechanical, photocopying, recording, or otherwise), without the prior permis- 23 sion of the publisher. Requests for permission should be directed to permissions 24 @hbsp.harvard.edu, or mailed to Permissions, Harvard Business School Publishing, 60 Harvard Way, Boston, Massachusetts 02163. 25 The web addresses referenced in this book were live and correct at the time of the 26 book’s publication but may be subject to change. 27 Cataloging-in-Publication data forthcoming. 28 29 eISBN: 9781625271976 30 The paper used in this publication meets the minimum requirements of the 31 American National Standard for Permanence of Paper for Publications and 32 Documents in Libraries and Archives Z39.48-1992. For my students 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 CONTENTS Acknowledgements ix Introduction 1 Part I Understanding the Macro Economy 1 Output 7 Measuring National Output 8 Exchange of Output across Countries 11 What Makes Output Go Up and Down? 18 Isn’t Wealth More Important Than Output? 27 2 Money 33 Money and Its Effect on Interest Rates, Exchange Rates, and Inflation 34 Nominal versus Real 39 Money and Banking 55 The Art and Science of Central Banking 58 3 Expectations 67 Expectations and Inflation 68 Expectations and Output 73 Expectations and Other Macro Variables 83 Part II Selected Topics—Background and Mechanics 4 A Short History of Money and Monetary Policy in the United States 89 Contents 1 Defining the Unit of Account and the Price of Money 90 2 The Gold Standard: A Self-Regulating Mechanism? 91 The Creation of the Federal Reserve 93 3 Finding the Right Monetary Rule under a Floating 4 Exchange Rate 95 5 The Transformation of American Monetary Policy 98 6 5 The Fundamentals of GDP Accounting 101 7 Three Measurement Approaches 102 8 The Nuts and Bolts of the Expenditure Method 103 9 Depreciation 106 10 GDP versus GNP 107 Historical and Cross-Country Comparisons 108 11 Investment, Savings, and Foreign Borrowing 111 12 6 Reading a Balance of Payments Statement 117 13 A Typical Balance of Payments Statement 118 14 Understanding Credits and Debits 120 15 The Power and Pitfalls of BOP Accounting 124 16 7 Understanding Exchange Rates 131 17 The Current Account Balance 131 18 Inflation and Purchasing Power Parity 133 19 Interest Rates 134 20 Making Sense of Exchange Rates 135 21 Conclusion 139 22 Output 139 23 Money 140 24 Expectations 143 25 Uses and Misuses of Macroeconomics 146 26 27 Epilogue 149 28 Glossary 159 29 Notes 183 30 Index 191 31 About the Author 211 32 viii ACKNOWLEDGMENTS This volume began as a note on macroeconomics for my students, and I am deeply indebted to them and to my colleagues in the Business, Government, and the International Economy (BGIE) unit at Harvard Business School for encouraging me to turn the note into a book. I am particularly grateful to Julio Rotemberg, Dick Vietor, and Lou Wells for reading and com- menting on the entire manuscript, and to Alex Dyck, Walter Friedman, Lakshmi Iyer, Andrew Novo, Huw Pill, Mitch Weiss, and Jim Wooten for providing vital feedback along the way, and to all my BGIE colleagues over the years, from whom I have learned so much about macroeconomics and how to teach it. Jeff Kehoe, my editor at Harvard Business Review Press, was extraordinarily supportive at every stage, and offered superb advice on how to recast the original note for a broader audience. Chapter 5, on GDP accounting, draws heavily on a Harvard Business School case entitled “National Economic Accounting: Past, Present, and Future,” which I coauthored with Sarah Brennan. Most of what I know about the intricacies of GDP accounting I learned working with Sarah, and I remain exceed- ingly grateful to her for her commitment to that project and for being such a terrific researcher, coauthor, and friend. In preparing this second edition, Jonathan Schlefer played a tremendous role, particularly in helping to update data through- out the volume and in clarifying the IMF’s new approach to bal- ance of payments accounting. He did a masterful job, and I am ix

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