This course weds business strategy with the principles of macroeconomics. It offers valuable a powerful toolbox together with cases and lessons across all major functions of business, management, from finance, operations management, and marketing to human resource management, organizational behavior, statistics, and, of course, business strategy.
Macroeconomics in Your Business and Personal Lives
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From the course by University of California, Irvine
Strategic Business Management - Macroeconomics
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From the lesson
An Overview of Modern Macroeconomics
Meet the Instructors
Dr. Peter NavarroProfessor
Paul Merage School of Business
[MUSIC]
Hello, my name is Juan Ortega.
>> I am very pleased to meet you, my name is Teresa Watson.
>> So why are you taking this class in macroeconomics, Teresa?
>> Well, Juan, I lost my health and I lost most of my money, how about you Juan?
>> Well, Teresa, I lost my company, and for a while I lost most of my pride.
>> Well, that's a sad story.
Do you think this course in macroeconomics will help change our fortunes?
>> Since business school is costing us fortune, I sure hope so.
>> At this very early stage in this course,
I've tried to motivate your interest in macroeconomics.
By painting in broad strokes a big picture canvas of how this subject
can help improve the profitability of both companies and money managers.
To close the deal on such motivation, I now want to offer you a couple of my
favorite case studies of two fictional people in very real world situations.
Juan Ortega's story of a failed entrepreneur will further underscore
how important an understanding macroeconomics can be
when it comes to profitably managing a company.
Theresa Watson's story will then illustrate how macroeconomics can
also help you make important decisions in your personal life.
[MUSIC]
Juan Ortega used to own a small high tech manufacturing business that made
precision component for the auto parts industry.
Every year since setting that company a few years ago,
Juan had simply doubled his production.
Since he never had any trouble moving the inventory, and
never did any economic forecasting, Juan decided to do the same thing again.
Even though it meant taking out a big loan to finance the expansion.
[SOUND] Unfortunately, Juan's college studies in
engineering never included a course in macroeconomics.
So in making his production decision,
he missed some rather significant danger signs.
[MUSIC]
For example, Juan knew from regularly reading The Wall Street Journal and
Financial Times, that both the United States Federal Reserve and
European Central Bank had begun to raise interest rates months ago.
However, Juan didn't see this as contractionary monetary policy that
might help trigger a global recession.
Instead, he just grumbled about the higher interest rates he had begin having to pay
on his business loan.
Nor did Juan see the recessionary implications
of several stories on CNBC and Bloomberg TV.
Reporting a fall in consumer confidence, and
a slight uptick in the US unemployment rate.
And even though Juan had noted a small blurb in the Economist magazine
about Japan's shift towards a more expansionary monetary policy,
Juan didn't have a clue that this would cause the value of the Japanese Yen
to fall relative to the US dollar.
And give his Japanese competitors a big advantage
selling into Juan's major US markets.
At least in this case, macroeconomics ignorance was hardly bliss for Juan.
Instead, by October, the Japanese had taken over half of the auto parts
market that was already shrinking fast from the onset of a recession.
By November,
Juan found himself sitting on a huge inventory that he couldn't give away.
By December, he wasn't able to pay a huge loan that wouldn't go away.
By the following June, his beloved company was bankrupt.
Today, Juan works as an engineering 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.
[MUSIC]
Teresa Watson is a single working mother whose big dream in life was to
own her own home.
As the marketing director for a major corporation, Theresa earned a good salary,
and had saved $50,000 for a house down payment.
After months of looking, Theresa's choice has boiled down to either a modest
two bedroom condo near her job in the city, or her dream home.
A much more expensive single family house out in the valley.
After running the numbers with a real estate broker,
Teresa knew that the only way she could afford her more
expensive dream home was to take out an adjustable rate mortgage.
That adjustable rate mortgage was available
in a full 2 percentage points below fixed rate mortgage.
And her monthly mortgage payment would be significantly lower.
However, if the inflation rate rose, her adjustable interest rate
mortgage would rise with it, and she could quickly get into financial trouble.
So what did Theresa do?
Well, after talking it over with a friend, Theresa went with the dream home and
adjustable rate mortgage, rather than the condo and fixed rate mortgage.
Sure, she felt a little nervous about the decision, but
her realtor, no doubt eager for the bigger sale, had told her not to worry.
Both inflation and mortgage rates had been stable for over three years now,
and it shouldn't be any problem.
What both Theresa and her realtor failed to see, however,
were numerous warning signs of growing inflationary pressures.
On the demand-pull inflation side, the unemployment rate has
just reached an eight year low on a strength of a rapidly expanding economy.
This was creating upward inflationary pressures on wages,
even as worker productivity was falling off.
Now on the cost-push inflation side,
the news was full of stories about a worldwide drought,
bad wheat harvests in Russia, Canada and the US,
possible food shortages and rising food prices.
In addition, in reaction to renewed violence in the Middle East,
oil prices were spiking along with gas prices at the pump.
These inflationary pressures in turn began to drive up interest rates
along with the rate on Teresa's adjustable rate mortgage.
And soon Theresa could no longer afford her skyrocketing mortgage payments.
Moreover, with this climb in interests rates, the economy plunged into
a recession, taking the real estate market down with it.
For six months, Theresa tried to sell her dream home at the original price.
But finally facing the humiliation of foreclosure,
she unloaded what had become a nightmare for $50,000 less than she bought it for.
Losing every cent of her down payment and original equity.
[MUSIC]
The underlying tragedy of the stories of Juan Ortega and Theresa Watson is this.
Both could have avoided their hardships
if they had only been armed with the power of macroeconomics.
Anticipating the global recession and
increased competition from Japanese firms benefiting from a weaker Japanese Yen,
Juan could have halved his company's production rather than doubling it.
And he'd still be in business today.
As for Teresa,
she could have bought that less expensive condo with a fixed rate mortgage.
Or better yet, she could have waited until the real estate market went soft, and
bought her dream house at a much more affordable price.
And it is precisely because of such real world stories
that I know you will find this course in macro economics
to be an invaluable part of your business education.
So in the rest of this lesson, let's get down to the business and
laying out in more detail some of the key principles of macroeconomics.
Starting in the next module with a formal definition of just what
macroeconomics encompasses.
[MUSIC]
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