Macroeconomics For Dummies®, uk edition Published by: John Wiley & Sons, Ltd

Janet Yellen (born 1946)

Sadly, like many areas of business and academia, macroeconomics has a dearth of women at the top. With the new generation of talented female scholars coming through, we hope that this situation will change in the years to come. Janet Yellen, however, is a woman who managed to reach the very top of macroeconomic policy making – she’s the current Chair of the Federal Reserve.

Having overall responsibility for monetary policy in the United States makes her one of the most powerful people in the world (certainly the most powerful economist): monetary policy (see Chapter 3) determines a nation’s inflation rate in the long run, and in the short run has a strong influence on unemployment and output. The US is still the largest economy by far, so the Fed’s decisions reverberate throughout the world economy.

Yellen has made fundamental contributions in explaining why firms may want to pay workers efficiency wages – wages higher than the going market rate – in order to motivate them and make them more productive. She’s also a prominent figure in New Keynesian macroeconomics. New Keynesians take the critique of the rational expectations revolution seriously, but they attempt to explain why prices and wages may still be ‘sticky’ in the short run.

Chapter 18


Ten Top Tips to Take Away


In This Chapter


Digesting the most important macroeconomic ideas Noting ten things you need to know about macroeconomics

Macroeconomics covers a massive range of subjects, but 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.

Factoring in Factors of Production

A nation’s output depends on two things: the available factors of production, and how good the country is at turning those factors of production into goods and services that people want to buy.

Factors of production are basic inputs such as land, labour and capital (the latter is things such as machines and offices, not money). Firms convert factors of production into goods and services that consumers want to purchase. How successfully they do so depends on how good their technology is. Technology is a broad term that just means the process of turning inputs into outputs.

You can see this process clearly using a production function:

In words, this equation says that a nation’s output (Y) is a function (f) of its factors of production, in this case capital (K) and labour (L). The function f(.) represents how good the technology is.

This simple observation has important implications. If an economy

wants to grow it must do one of the following:


Increase the quantity (or quality) of its factors of production, for example by having more and better machines or a more skilled workforce.


Become better at using those factors of production through technological progress.