ECON 1002 University of Cincinnati The Importance of Studying Macroeconomics by Ordinary People

The Importance of Studying Macroeconomics by Ordinary People

ECON 1002 - Introduction to Macroeconomics

University of Cincinnati

April 3, 2024

Macroeconomics is a subset within the study of economics which

regards large-scale and general economic factors, and is the study of

the economy as a whole. The study of macroeconomics regards topics

such as a nation’s employment, total supply and demand, national

income, inflation/deflation, total investments and savings, interest

rates, overall consumption, and fluctuations in price levels. These

topics serve as aggregates which are studied to determine the averages

of a nation’s economy and predict future outcomes. In a sense, while

microeconomics is the study of individual fish, macroeconomics is the

study of the pond as a whole. Macroeconomics studies the character of

the pond, regardless of the organisms which compose it. Thus,

macroeconomics is important, both practically and theoretically, as it

benefits the average person through making him/her more conscious

of the economy he/she is within. Through studying macroeconomics

from a consumer, governmental, and business aspect, an individual

who knows how to effectively identify, comprehend, analyze, and

approach various market situations can be produced

Macroeconomics serves extremely useful to individual consumers,

including me, in our day-to-day lives. For example, the concept of

Gross Domestic Product (GDP) can be seen as one of the most

important topics for consumers to understand. If consumers know that

the GDP is increasing, it informs them that the economy is doing well

and they can expect side effects such as higher employment rates,

higher salaries, incomes, and wages, and higher interest rates. Thus, if

the average person is looking for a job, he/she is aware that his/her

chances are not as good when the GDP is falling as when it is rising.

Additionally, individuals can utilize the GDP level to determine if it is

a good time to spend generously, especially on luxurious and costly

goods, or spend cautiously and rather focus on saving money. Also, if

the average person did not know that interest rates increase hand-to-

hand with the GDP, we would not be able to effectively plan and

organize our finances, especially when it came to paying our loans in

time for expensive items like houses and cars, which could diminish

our financial reputation. In addition, another very important

macroeconomics concept which can help people is the unemployment

rate. If I know the unemployment rate is high, I will be aware that the

economy is moving downwards, so I will have to constantly push my

persistence and seek further in terms of employment since it will be

more difficult to find a job than if the unemployment rate was lower.

However, if the unemployment rate is low, I will know to pursue more

job offers and openings because my opportunities and chances of

becoming employed are better. Another extremely important concept

for the average consumer to be aware of is the inflation rate. If the

inflation rate is high and increasing, it gives me insight on the fact that

the prices of several goods and services are bound to increase; thus, I

can forecast that my purchasing power will fall and my standard of

living will generally decrease. The cost of gas prices, the cost of food

and beverage prices, the cost of housing, borrowing money, the real

value of savings, and treasury bonds or notes’ yields are all

susceptible to change with inflation. Although inflation is typically

associated with being bad, if I know what it is and how to interpret the

inflation rate, I can plan and reorganize my financial plan to

counteract or smoothen inflation’s high prices effect. If the average

consumer has no clue regarding inflation’s side effects, they can very

easily lose track of their spending habits and may be spending

significantly more than they think, leading to future consequences.

Since the inflation rate is not the only method of determining future

changes in the cost of living, learning topics such as the Consumer

Price Index, the Producer Price Index, and Merchandise Trade

Balance can help interpret which direction the economy is heading

towards and predict future consumer purchasing power. Collectively,

all these indicators can provide a good standpoint of whether my

standard of living will increase or decrease in the future as well as

help develop a promising financial plan. Lastly, if the average person

and I are well aware of the current stage of the business cycle, there

are several outcomes one can predict. For example, during expansion,

I know that inflation will occur and prices will rise, employment

levels will be high, stocks and bonds will yield more value, and the

currency will be depreciated. However, if I know the economy is

contracting, I can predict that prices may deflate, unemployment will

rise, stocks and bonds will yield less, and lower interest rates due to

lack of currency circulating in the economy. Through several

economic indicators and macroeconomics concept, several consumers,

like me, are well aware of how to predict and interpret the economic

market, which will always help us in the long run.

By studying and knowing macroeconomics, the average person gains

insight regarding how the government utilizes macroeconomic

indicators to approach and manage a nation’s economy. The main

issues most economies suffer through are related to output, total

income, employment level, and overall prices. Since these factors can

all be measured using statistics, it can be facilitated to analyze their

effects on the economy and create solutions for existing issues. Thus,

macroeconomics is very important for average individuals in the sense

where it allows them to know why the government creates and

imposes new economic policies. For example, if the government

recognizes a pattern of the unemployment rate increasing every time

there is a decrease in effective demand, they can impose new policies

to increase consumption, output, income, and investment, which are

all factors that increase effective demand. By establishing a mutual

connection of macroeconomics knowledge from both the government

and consumer side, policies can be imposed effectively where needed

and help indicate the current market situation to the average person.

This not only increases individuals’ standard of living and reduces the

harshness of the current market situation, but also helps reassure to

individuals that the government is effectively serving its purpose in

the market. Furthermore, macroeconomics serves of high significance

to average individuals because it allows the government to evaluate a

country’s performance based on its national income. By constructing

data figures of the national income, governments can forecast a

country’s economic activeness and better understand how income is

distributed among several groups within the economy. If an individual

knows how to interpret national income distribution data, they can

understand how wealth is distributed within their economy and further

establish a mutual understanding with the government regarding

passing progressive or regressive tax policies because a better

distribution of wealth in the economy inevitably helps society as a

whole. Also, depending on the national income’s statistics, the

Consumer Confidence Index is driven in a positive or negative

direction, which can help the average person decide whether to save or

spend money. Governments are also very concerned with economic

growth in general, so by using macroeconomics and economic data to

find the determinants of growth (high output, high income, low

unemployment rate, high GDP), the government typically makes plans

to improve on each of these determinants, primarily through new

policies. If individuals are aware of how the economy is driven, how

to interpret various forms of economic data, and the determinants of

high economic growth, they can easily identify the economy’s health

through economic indicators and further understand the logic behind

the government’s decisions as well as be more accepting of them to

improve society’s standard of living in the long run. Also, since the

fluctuation of money’s value is common through inflation and

deflation, governments can help stabilize this fluctuation through

monetary policies (increasing or decreasing money’s supply) or fiscal

policies (adjusting government spending). By understanding the

impacts of inflation and deflation, individuals, like me, can identify

what fluctuation state we are in and better envision the needs for such

policies because they help us adapt and diminish the harsh downsides

of an unstable market. As a result, the study of macroeconomics

serves an important tool because it allows the average person to

understand why the government makes certain decisions and

indirectly thrive off of the government effectively creating a budget,

deciding taxes, generating interest rates, and imposing new policies.

Any average person will also profit from studying macroeconomics

through a business standpoint because he/she sees a different

perspective on how to approach the market. By knowing

macroeconomics, average people learn that whenever a business

grows from the inside, it will always need to find a way to

accommodate that growth. For example, businesses are well aware of

the fact that when the interest rate falls, consumers will take advantage

of this and spend more money since their overall payments on large

items, such as houses and cars, will be minimized. By recognizing this

habit of consumers and the effects of a negative change in interest

rates, businesses will expand in production due to an increase in

demand and a better chance to profit. If this is the case, individuals

can predict that business will be paying its workers more and also be

looking to expand its workforce. Furthermore, price fluctuations will

continuously change businesses’ profits, causing fluctuations in

businesses’ payroll and workforce, so specific time periods will be

more beneficial to workers and unemployed people than others. Thus,

if average people are aware of certain determinants, such as interest

rates and price fluctuations, of companies’ profits, they understand

why and when businesses will increase workers’ salaries or provide

more employment opportunities. Also, understanding the

unemployment rate from a corporate level is important because it

allows the average person to better interpret the economic indicator. If

unemployment increases, consumer spending will fall and businesses

will start producing less output because there is less demand on their

current output, leading to lower profits. Thus, the average person can

better predict lower wages, higher chances of being fired, or a low

likelihood of finding employment when aware of a high

unemployment rate and vice versa if the unemployment rate is low.

Also, studying macroeconomics is important because it helps the

average person understand that when it comes to price fluctuations

(inflation and deflation), since there is a change in demand due to a

change in price, the output and production of certain items will

constantly be adjusted and different from before as businesses are

changing their economic strategies. As a result, average individuals

will not be as surprised when their usual commodities’ quantity and

general availability fluctuates from time-to-time and can predict

goods’ quantity by analyzing the inflation rate. In addition, by

understanding how businesses utilize the business cycle to come up

with good strategies, consumers gain a greater depth of knowledge

regarding how to approach the market. Each stage of the cycle impacts

businesses’ product’s demand in different ways. For example, when

the business cycle is in its expansion phase, businesses’ products have

a greater demand, so they are expected to make more profit. An

individual who knows macroeconomics would be aware that since

businesses are currently growing, they want to increase output, and

inevitably seek more employment and can afford to pay its workers

greater wages. Thus, the average person can take advantage of this

whether it be through more job applications/pursuits or predicting the

possibility of a better salary. However, if the business cycle is in its

contraction phase, consumer demand will be less, so businesses will

make less profit and will have to reduce payroll through firing

workers and decreasing production. This phase is important to know

because it allows the average person or I to predict that we may be

laid off, our salary may decrease, or the necessity of our labor is not in

great demand. In general, studying macroeconomics from a business

standpoint provides a blueprint on how businesses approach success in

a specific market and develop strategies to use in both domestic and

global markets. As a whole, macroeconomics allows average

individuals to understand the economic choices businesses make and

possibly utilize this information for their benefit in the economic

market or business-related environments.

In conclusion, how the economy is doing and its overall performance

matters to everyone, whether it be the government, businesses, the

average consumer, or me. When splitting up macroeconomics into a

business, government, and consumer perspective, an individual is no

longer gaining narrow-minded-based knowledge, but rather a full-

scope of the economy. By looking at key parts of the economy and

important macroeconomics topics such as the unemployment rate, the

inflation rate, national income, total output, and GDP from a

government, business, and consumer viewpoint, one gains knowledge

into how the economy is functioning. Macroeconomics provides

individual consumers, like me, businesses, and the government insight

into our economic markets and a chance to plan ahead, which is why

macroeconomics is so important- it allows people to interpret current

information and translate that into creating a strategy or method to

approach the future. By understanding the vast, yet beneficial study of

macroeconomics, simple individuals like me can take the appropriate

measures by construing the economy’s health and maneuvering that

into our favor to maximize our standard of living.