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Dynamic Economic Decision Making: Strategies for Financial Risk, Capital Markets, and Monetary Policy by JOHN E. SILVIA

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Chapter 2

Measuring Economic Benchmarks

Theory and statistics compose most of the graduate curriculum in economics for many master's degree programs in business as well as economics. This is a shortcoming that has immediate costs, since most students will soon enter the private sector and not stay in academia. The popular approach fails to provide a rudimentary exposure to the actual data these professionals have to examine and compare to the benchmarks of performance for the economy against their companies’ own performance. In this section we focus not on the standards of abstract theory or statistics but rather on the basics for understanding and analyzing economic time series that students most often will encounter after graduation.

In the early post–World War II period, many policy makers and economists, as well as businesspeople such as Montgomery Ward, were concerned that the country would again enter another Great Depression. Montgomery Ward built his company's strategy around the weak, recession-prone forecast for the post–World War II period. He was wrong, and his company's performance suffered. Fear of another depression was based on the then popular framework of the consumption function as described by the famed British economist John Maynard Keynes. Keynes argued that as incomes grew, a household's average consumption rate fell (the Absolute Income Hypothesis). Keynes also reasoned that as incomes grew so would the propensity to save, and therefore the economy would ...

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