Felipe Larraín B. - Macroeconomics

The MIT Press Essential Knowledge Series

A complete list of the titles in this series appears at the back of this book.

Felipe Larran B.

The MIT Press | Cambridge, Massachusetts | London, England

2020 Massachusetts Institute of Technology

All rights reserved. No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from the publisher.

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Library of Congress Cataloging-in-Publication Data

Names: Larran B., Felipe, author.

Title: Macroeconomics / Felipe Larran B.

Description: Cambridge, Massachusetts : The MIT Press, [2020] | Series:

The MIT Press essential knowledge series | Includes bibliographical

references and index.

Identifiers: LCCN 2019025844 | ISBN 9780262538572 (paperback)

Subjects: LCSH: Macroeconomics. | GlobalizationEconomic aspects.

Classification: LCC HB172.5 .L37 2020 | DDC 339dc23

LC record available at https://lccn.loc.gov/2019025844

10 9 8 7 6 5 4 3 2 1

This book is dedicated to my parents, Vicente and Marta, who are no longer with me; and to my wife, Francisca, and our children, Felipe, Maria Francisca, Jose Tomas, Josefina, and Agustin, with deep gratitude for all their support and affection throughout my life. They are the true inspiration for my work.

The MIT Press Essential Knowledge series offers accessible, concise, beautifully produced pocket-size books on topics of current interest. Written by leading thinkers, the books in this series deliver expert overviews of subjects that range from the cultural and the historical to the scientific and the technical.

In todays era of instant information gratification, we have ready access to opinions, rationalizations, and superficial descriptions. Much harder to come by is the foundational knowledge that informs a principled understanding of the world. Essential Knowledge books fill that need. Synthesizing specialized subject matter for nonspecialists and engaging critical topics through fundamentals, each of these compact volumes offers readers a point of access to complex ideas.

Bruce Tidor

Professor of Biological Engineering and Computer Science

Massachusetts Institute of Technology

This book is intended for those who wish to know how the economy and globalization affect us all; those who wish to understand daily economic situations, as well as medium- and long-term economic trends; and those who are simply curious and wish to become familiar with a discipline that is not their own. More generally, it is intended for all who are short on time but long on interest to learn about the fascinating subject of macroeconomics. In short, it is addressed to everyone except my fellow professional economists.

My motivation for writing this book comes from a conviction formed through more than three decades of professional experience as an economics professor, government adviser, and policymaker in my country, Chile. I have a deep belief that every educated person should have a basic knowledge of macroeconomics, mainly because it helps us understand many phenomena that have important repercussions in our lives. The economic news often uses terms such as GDP (gross domestic product), unemployment, inflation, fiscal spending, and current account deficit. Without understanding the concepts behind these terms, one is clearly at a disadvantage in making informed decisions.

Economics is a fundamental component of everyday matters: people balance their expenditures when the general price level changes and affects their budget; they evaluate whether or not to acquire debt; and they look for work from time to time. All these decisions are heavily influenced not only by personal economic conditions but also by the overall economic environment.

The world has suffered dramatic consequences from bad macroeconomic management. The Great Depression of the 1930s and the subprime crisis of 20082009 are clear examples of the dramatic consequences of bad macroeconomic policies. The Great Depression of the 1930s was felt with devastating force in the United States, Great Britain, Germany, and the major economies of the time, with dramatic effects in the developing world, and prompted several economists to give macroeconomics the foundations of a modern science. The more recent subprime crisis also had dramatic effects, leading to a global recession, with millions of people falling into unemployment and poverty within only a few months.

Business leaders are much more sensitive to the economic environment since sales plans, investment programs, and wage negotiations are all affected by it. Moreover, the most successful business strategies are designed with a clear knowledge and understanding of the economy, in addition to some degree of personal instinct.

This book offers the tools to interpret what is happening in the local and global economy based on macroeconomic analysis. Those who would like greater depth and detail in the analysis may refer to the book Macroeconomics in the Global Economy that Jeffrey Sachs and I wrote in the early 1990s, now in its third edition.

Macroeconomics incorporates the most relevant economic events and phenomena of recent times. A substantial part of the analysis is devoted to the factors that explain the development of countries, so that the reader can understand why is it that while some countries grow, others remain stagnant. In addition, we look at recent economic crises, such as the subprime crisis and the subsequent euro crisis, addressing their causes and consequences. The last chapter introduces the reader to the exciting debate over globalization, its effects on the well-being of people, and how these effects relate to the recent protectionist dynamics seen in some developed countries.

So, regardless of the reason why you have decided to enter this fascinating field, you will find macroeconomic analysis has much to offer. I truly hope that I can convey my passion for economics through this book.

Because a book is the sum of many efforts, for which I am grateful and sincerely appreciative, I would like to thank Ana Isabel Farren and Oscar Perell for efficient research assistance. I would also like to thank the staff of the MIT Press, in particular Emily Taber for her editorial help and suggestions in the preparation of this work.

Macroeconomics studies the economy of a country or region from a broad perspective without considering too many details about a specific sector or business. Macroeconomists study changes in the aggregate, collecting data on the level of production, unemployment, inflation, consumption, investment, trade, and the current account, and other aspects of national and international economic life. Policymakers depend on macroeconomists knowledge of the main elements and basic forces that govern each countrys economy and the global economy when making decisions about taxes, industry regulations, trade policies, and more. These analyses affect decisions made by individuals and businesses, especially in a globalized world.

This branch of economics attempts to answer fundamental questions such as the following:

• Why does a country become richer or poorer in a certain period? For example, what explains the sustained high growth rates of the Asian tigers (Hong Kong, Singapore, South Korea, and Taiwan) between the early 1960s and the 1990s, and Chinas high growth rates after 1978? Why was South Korea poorer than the Latin American countries in the early 1960s yet today has three times the average Latin American income? Why has the Democratic Republic of Congo, one of the poorest countries in the world, had an average annual drop of more than 3 percent in its per capita income over the last thirty years?