In recent decades, the correlation between U. This changing correlation accounts for roughly 30 percent of the rise in the variance of male earnings between and In this paper, we rationalize these trends in a model of joint household labor supply.
A short introduction into modern macroeconomics At a personal level macro economics can answer questions like should I switch jobs or ask for a raise, should I buy house now or wait until next year or should I get a variable or fixed rate mortgage? At a business and professional level, macroeconomics can also help answer questions like how much should I manufacture this month and how much inventory should I maintain?
Should I invest in new plant and equipment, expand into foreign markets, or downsize my firm? Macroeconomics can help answer these questions because it arms us with a new way of thinking about the world we live and work in. It helps us filter and sort and process all of the information we are bombarded with every day in the media: From the macroeconomic perspective, all of these seemingly unrelated bits of information reveal to us first patterns and trends, and ultimately courses of action.
A couple of stories about two fictional people in very real situations can demonstrate the use of macroeconomics. Jim Wells used to own a small high tech manufacturing business that made precision components for computer games. Every July, Jim had to decide how many components to produce for the upcoming holiday season, and every year he had simply doubled his production.
Since he never had any trouble moving the inventory, Jim decided to do the same thing again, even though it meant taking out a big short term loan to finance the expansion.
Unfortunately Jim's college studies in engineering never included a course in macroeconomics. So in making his decision, he missed some rather significant danger signs. For example, he had read in the Wall Street Journal that the Federal Reserve recently raised the bank discount rate, and sold bonds in the open market.
But Jim didn't see this as contractionary monetary policy that might trigger a recession. Instead he just grumbled about the higher interest rate on his business loan.
Nor did Jim see the recessionary implications of several stories on CNN reporting a fall in consumer confidence and a slight uptick in the unemployment rate. And even though Jim had noted a small blurb in Business Week about Japan's shift towards a more expansionary monetary policy, Jim didn't have a clue that this would cause the value of the yen to fall relative to the dollar.
This gave his Japanese competitors a big leg up. By October, the Japanese had taken over half of a market that was already shrinking fast from the onset of a recession.
By Thanksgiving, Jim found himself sitting on a huge inventory. By December, he was unable to repay the huge loan. By June, he was bankrupt. Today, Jim works as a consultant for one of his old Japanese competitors during the day, and studies macroeconomics in the evenings at a nearby college.
He sits in the front row of class right next to Teresa Watson. Unlike Jim, Teresa didn't go bankrupt but she came very close. Teresa is a single working mother whose big dream in life is to own her own home.
After months of looking, Teresa's choice had boiled down to either a modest two bedroom condo near her job in the city or her dream home, the more expensive single family house out in the valley.
After talking it over with a mortgage banker, Teresa decided that the only way she could afford her dream home was to take out a variable rate mortgage. It was available at a full two percentage points below the fixed rate mortgage, and her monthly mortgage payment would be several hundred dollars less, but only if interest rate stayed low.
Sure, Teresa felt a little nervous about choosing the variable rate, but the mortgage banker told her not to worry. Rates of been stable for over three years now and it shouldn't be any problem.
Teresa failed to see numerous warning signs of growing inflationary pressures. On the demand-pull side the unemployment rate had just reached an eight year low.
On the cost push side, the news was full of stories about a bad cotton crop in Brazil, a worldwide drought and possible food shortages, renewed violence in the Middle East and rising oil prices and, a fall in the value of the dollar.
Within two years, interest rates had climbed into the double digits, and Teresa could no longer afford her skyrocketing mortgage payments.
The climb in interest rates, the economy plunged into a recession taking the real estate market down with it. For six months, Teresa tried to sell her house at the original price.
The tragedy is that both Jim and Teresa could have avoided their hardships if they had only been armed with the power of macroeconomics.
Anticipating increased competition and recession, Jim could have halved this production rather than doubling it and he would still be in business today. And Teresa could have either bought that less expensive condo with a fixed rate mortgage.
Or better yet, waited until the real estate market went soft and bought her dream house at an affordable price. The power of macroeconomics can best be seen from an historical perspective. First, history gives a real world context for an otherwise abstract and difficult subject.
For our grandparents the hardships, pain, and uncertainty of the Great Depression were all too real and we as a nation don't ever want to repeat them. Nor do we want to repeat the economic stagnation of the s, the stagflation of the s, or the so-called jobless recovery of the early s.important for apple users: use firefox or chrome browser (not safari browser -- which is not compatible) please: never invite me to the evil social networks!!
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In World War I, Germany -- like other governments -- borrowed heavily to pay its war costs. This led to inflation, but not much more than in the U.S. during the same period. After the war there was a period of stability, but then the inflation resumed.
War in general causes inflation from rapid expansion of money and credit. However, part of the inflation in America was due to the military's almost unchecked expenses for food and supplies.
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