MacroNotes is for Business School Students

MacroNotes was developed as a reader for business school courses in macroeconomics. It has been used in the Core MBA and Kelley Direct Programs at the Indiana University Kelley School of Business, the German International Graduate School of Management and Administration in Hannover Germany, the Helsinki School of Economics, and Sungkyunkwan University MBA Program in Seoul, Korea.

MacroNotes is a different kind of macroeconomics textbook. It was written for MBA students and as such it focuses on their special needs to interpret and apply macroeconomic analysis and tools. It uses very little mathematics and it shuns the model-building general equilibrium approach taken in most textbooks. Rather the book is organized around topics – those topics that are written about daily in the business press like inflation, government deficits, international trade imbalances, exchange rates, and more.

As such, this website is less about modeling technique and more about understanding the real world. Thus, for those used to the traditional textbook approach, they will find no formal modeling in terms of mathematical equations and there will be no IS-LM curves and no explicit labor market curves. It is, however, impossible to teach a good course in macroeconomics without modeling aggregate supply (AS) and aggregate demand (AD). As such much time is spent in developing AS and AD curves and teaching students how they interact with one another to explain changes in employment, unemployment, inflation, and national output. A Phillips Curve analysis completes the macroeconomic model building.

The business executive is essentially a planner or decision maker who integrates a wide set of information into the decision process. Some of that information is economic while some of it is not. Some of it is essentially firm-specific or microeconomic while some of it relates to country, regional, or world economic growth and change. It is sometimes explained that managers deal with internal (to the firm or industry) and external factors. The national and global macroeconomic picture forms the external environment in which firms operate and managers make decisions.

MBA students come to business school to learn marketing, finance, accounting, supply chain and other specialties that will advance their business careers. And while we would never downplay the importance of learning these specialties, it is also clear that the better a business executive understands how to anticipate and react to changes in the external environment, the better they will be at making marketing, finance, and other decisions. When the local or global economy takes a marked turn, say towards slower growth, everything else the same, managers that have a better appreciation for the real world of macroeconomics may make better decisions than those who do not.

Business executives are continually bombarded with many kinds of macroeconomic information and analysis. Very few weeks or months go by when some analyst is not predicting a change in central bank policy or consumer confidence that could bring with it a major change in the financial and economic environment. MacroNotes emphasizes how non-policy macroeconomic shocks and trends impact the external environment – and how monetary, fiscal, and exchange rate policy changes add to the general uncertainty about the future courses of spending, prices, and interest rates.

MacroNotes emphasizes applications. Students should expect to see a lot of macroeconomic data in MacroNotes. The emphasis is as much on helping students learn where to find data as it is in learning how to interpret it. It is one thing to be able to say that “the model predicts higher inflation” it is another thing to know where to find inflation data and to know what the latest inflation report means. A second aspect of application is to know what professional economists and other experts are saying about domestic and global macroeconomic changes. All chapters have numerous sections devoted to current events interpretations.

MacroNotes is also very international. While much of the book is US-centered, each chapter has one or more sections that extend the general ideas to other countries. Two chapters, 6 and 7, are devoted to international trade, exchange rates, and free trade & protectionism. A model of exchange rate determination is introduced in Chapter 6.

MacroNotes is also fun. While the author is now in his seventies, he has never quite fully grown-up and considers humorist Dave Barry and cartoon character Fred Flintsone as his most revered role models. Even the most serious learners need a little break from the action. If the truth was uttered out loud, we would know how many times an economics textbook has advanced and contributed to a student’s good night sleep. We hope you enjoy the little wisecracks and that the trivia questions give you a little break from the serious work and a chance to learn some fun facts as you move along. We secretly hope too that they will make you want to stay up, keep working, and learn a lot more Macro!

At the end of each year, journalists and economists can’t restrain themselves from writing about the coming year. Perhaps this insanity comes from too much enjoyment of the holidays but whatever is the cause, most of us are at least intrigued by what they have to say. The lead article on the editorial page (page 8) of the Financial Times on December 30, 2006 was titled “A good year ahead for the global economy: the rest of the world should survive a modest US slowdown.” In this short article, the writers discount the possibility of a strong retrenchment in spending in the US, despite evidence of a “recession in housing” and high household debt loads. The authors are optimistic because of such things as “modest inflation, strong profitability, easy monetary policy, buoyant financial markets and dynamism in the biggest emerging economies.”

On the following page the FT writers discussed 17 trends that will impact the external environment in 2007. Among the 17 factors business executives should be able to “digest” are the following questions posed:
Will Africa become a province of China?
Will there be a breakthrough in Doha (World Trade Organization) negotiations?
Will the dollar collapse?
Will Japan’s recovery peter out?
Will oil fall below $50 a barrel?
Will petrodollars become petroeuros?

These are some very interesting assertions and questions about 2007. But 2007 was a long time ago. A lot has happened since 2007 that shows why economists and forecasters should be humble. For example, the concerns and worries of a few prognosticators came true. The US housing bubble burst leading to a national and global recession. We continue to be affected by the wake of this economic disaster. For one thing this shows that we should never fully discount small probability events. All business and personal plans for the future are made using the best current information. The latter includes agreed probabilistic outcomes as well as small probability risk factors. Business planners must include contingencies or back-up plans as soon as they learn that small probability risks all of a sudden have higher probability. We do not share the view that this forecast failure reveals the downfall of capitalism or the end of macroeconomics. We do believe that both, that capitalism can be improved and that macro can be used more intelligently. We hope your experience with MacroNotes helps you to do exactly that.

MacroNotes was greatly influenced by Paul Krugman’s The Age of Diminished Expectations (The MIT Press, Cambridge Mass.1990). While we revere the useful approach and great knowledge of Paul Krugman, we do not much agree with some of his policy recommendations. We also are happy to report that the Age of Diminished Expectations was largely replaced by the Age of Irrational Exuberance. Who would have “thunk” it in 1990.