Chapter 20

Ten Top Tips to Take Away


Digesting the most important macroeconomic ideas

Noting ten things you need to know about macroeconomics

Macroeconomics covers a massive range of subjects. In this chapter, we take on the huge task of narrowing it down to just ten core concepts.

So, if you remember nothing else from this book, ensure that you take away these important points.

Ultimately, Real Things Are What Count

Economists assume that people care about real things and not about nominal magnitudes. Here are some examples:

  • Real wage: What really matters about your wage is how much stuff you can buy with it, not its numerical value. So if your boss offers you a 5 percent pay rise when inflation is running at 10 percent, you’re getting the same raw deal as if you received no increase with inflation at 5 percent. Either way, your real purchasing power will decrease by 5 percent.
  • Real interest rate: Whether you’re borrowing or saving, the nominal rate i you’re promised is not what matters. Looking forward, it’s the real rate re that you expect to get, which corrects for expected inflation πe, i.e., re = i – πe. Looking back, it’s the real interest r that you actually earned, r = i – π, which corrects for actual inflation. Ideally, you’ll predict inflation accurately and these will be the same. (In fact, that has to happen in the long run.) The nominal interest rate tells you how you can trade dollars today for dollars tomorrow. The real rate tells you how ...

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