Enu macroecon environment 040812
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This document provides an overview of the global macroeconomic environment. It discusses the key components of the economy including households, firms, government, banking, and the external sector. It also explains macroeconomic objectives such as economic growth, unemployment, and inflation. Various metrics for measuring macroeconomic performance are presented such as GDP, GDP per capita, unemployment rates, and inflation rates.
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Enu macroecon environment 040812
- 1. Go Global ! Global Economic Environment : The Macroeconomic Environment By Stephen Ong Edinburgh Napier University Business School chong@mail.tarc.edu.my Visiting Professor, College of Management, Shenzhen University 4 August 2012
- 2. Learning Objectives To identify the component parts of the economy To explain the Circular Flow Model To define the five macroeconomic objectives To explain how macroeconomic performances are measured
- 3. Agenda 1. Components of the Economy 2. The Circular Flow Model 3. Macroeconomic objectives 4. Macroeconomic performance measures
- 4. 1. The Macroeconomics Environment
- 5. 1. Components of the Economy 1.Firms 2.Households 3.Government 4.Banking sector 5.External (overseas) sector
- 6. 1. Economic Growth • Increase in real GDP or real GDP per capita over some time period • Percentage rate of growth • Growth as a goal • Arithmetic of growth: Rule of 70 Approximate 70 number of years required to double = annual percentage rate real GDP of growth 6
- 7. 1.1 Economic Growth • Growth U.S. real GDP 1950-2005 – Increased 6 fold – 3.5% per year • Growth in U.S. real GDP per capita – Increased more than 3 fold – 2.3% per year • Qualifications – Improved products and services – Added leisure 7 – Other impacts
- 8. 1.2 Modern Economic Growth • Began with the Industrial Revolution in late 1700’s • Ongoing increases in living standards • Time for leisure • Social change • Democracy 8 • Human lifespan doubled
- 9. 1.3 Modern Economic Growth • Began in Britain • Has spread slowly • Starting date main cause of worldwide differences in living standards • Catching up is possible • Leader countries invent technology • Follower countries adopt technology 9 – Can grow faster
- 10. 1.4 Real GDP Per Capita Real GDP Real GDP Average annual per capita, per capita, growth rate, Country States United 1960 $12,892 2004 $36,098 1960-2004 2.3% United Kingdom 10,323 26,762 2.2 France 8,531 26,168 2.5 Ireland 5,294 28,957 3.9 Japan 4,509 24,661 3.9 Singapore 4,219 29,404 4.4 Hong Kong 3,322 29,642 5.0 South Korea 1,458 18,424 5.8 10 Figures are in 1996 dollars Source: Penn World Table
- 11. 1.5 Modern Economic Growth • Growth-promoting institutional structures – Strong property rights – Patents and copyrights – Efficient financial institutions – Literacy and widespread education – Free trade – Competitive market system 11
- 12. 1.6 Ingredients of Growth • Supply factors – Increases in quantity and quality of natural resources – Increases in quality and quantity of human resources – Increases in the supply (or stock) of capital goods – Improvements in technology 12
- 13. 1.7 Ingredients of Growth • Demand factor – Households, businesses, and government must purchase the economy’s expanding output • Efficiency factor – Must achieve economic efficiency and full employment 13
- 14. 1.8 Production Possibilities C A Economic Capital Goods Growth c b a 14 B D Consumer Goods
- 15. 1.9 Labour and Productivity Real GDP = hours of work x labour productivity • Size of employed Labour labour force Inputs • Average (hours of hours of work) work x Real • Quantity of = GDP capital • Education and Labour training Productivity • Technological (average advance output per • Allocative hour) efficiency 15 • Other
- 16. 1.10 U.S. Economic Growth Annual Averages for Five Decades 5 Real GDP Average Annual Increase (Percent) Real GDP Per Capita 4 3 2 1 0 16 1950-1959 1960-1969 1970-1979 1980-1989 1990-1999 2000-2005 Year Source: Bureau of Economic Analysis
- 17. 1.11 Accounting for Growth Accounting for Growth of U.S. Real GDP, 1953-2013 (average annual percentage changes) 1953 Q2 1973 Q4 1995 Q2 2001 Q1 2007 Q3 to to to to to Item 1973 Q4 1995 Q2 2001 Q1 2007 Q3 2013 Q4* Increases in Real GDP 3.6 2.8 3.8 2.6 2.8 Increases in Quantity of Labor 1.1 1.3 1.4 -0.1 0.3 Increases in Labor Productivity 2.5 1.5 2.4 2.7 2.5 *Beyond 2007 are Projections Source: Economic Report of the President, 2008 17
- 18. 1.12 Accounting for Growth • Factors affecting productivity growth – Technological advance (40%) – Quantity of capital (30%) – Education and training (15%) – Economies of scale and resource allocation (15%) 18
- 19. 1.13 Accounting for Growth Average Test Scores of Eighth Grade Students in Math and Science, Top 10 Countries and the United States, 2003 Mathematics Science 1 Singapore 605 1 Singapore 578 2 South Korea 589 2 Taiwan 571 3 Hong Kong 586 3 South Korea 558 4 Taiwan 585 4 Hong Kong 556 5 Japan 570 5 Estonia 552 6 Belgium 537 6 Japan 552 7 Netherlands 536 7 Hungary 543 8 Estonia 531 8 Netherlands 536 9 Hungary 529 9 United States 527 10 Malaysia 508 10 Australia 527 19 15 United States 504
- 20. 1.14 Productivity Growth • Accelerated rate of growth – 1.4% per year 1973-1995 – 2.9% per year 1995-2005 • Affects real output, real income, and real wages • Pay higher wages without lowering profit 20
- 21. 1.15 Accelerated Productivity Growth • Microchip/information technology • New firms and increasing returns • Sources of increasing returns – More specialized inputs – Spreading of development costs – Simultaneous consumption – Network effects – 21 Learning by doing • Global competition
- 22. 1.16 Economic Growth • Is accelerated productivity growth sustainable? • Is economic growth desirable and sustainable? • The antigrowth view – Environmental and resource issues • In defense of economic growth – Higher standard of living – Human imagination can solve 22 environmental and resource issues
- 23. 1.17 Economic Growth in China • Growth averages past 25 years: – 9% annual growth output – 8% annual growth output per capita • Labour more productive • More international trade • Transition to market economy • Joined WTO 2001 • Financial system remains weak •23Income inequality across geographic areas
- 24. 2. The Circular Flow Model
- 25. 2. Performance and Policy • Real GDP – Corrects for price changes • Nominal GDP – Uses current prices • Unemployment • Inflation – Increase in overall level of 25 prices
- 26. 2.1 Economic Performance •Output growth – 3.1% per year 1995-2005 •Unemployment rate – 4.6% in 2007 •Inflation rate – 2.7% in 2007 26
- 27. 2.2 Economic Growth • Standard of living measured by output per person • No growth in living standards prior to Industrial Revolution • Modern economic growth – Output per person rises 27 – Not experienced by all countries
- 28. 2.3 GDP Per Person 2007 U.S. dollars based on purchasing power parity (PPP) United States $45,845 Canada $38,345 United Kingdom $35,134 Japan $33,576 France $33,187 South Korea $24,782 Saudi Arabia $23,243 Russia $14,692 Mexico $12,774 China $5,292 India $2,659 North Korea $1,900 Tanzania $1,256 28 Burundi $371 Zimbabwe $188
- 29. 2.4 Savings and Investment • Saving – Tradeoff current for future consumption • Investment – Financial investment – Economic investment 29 • Banks and financial institutions
- 30. 2.5 Shocks • Demand shocks and flexible prices – Price falls if demand low – Sales unchanged • Demand shocks and sticky prices – Maintain inventory – Sales change 30 – Business cycles
- 31. 2.6 Expectations • The future is uncertain • Expectations affect investment • Shocks – What happens is not what you expected • Demand shocks 31 • Supply shocks
- 32. 2.7.1 Demand Shocks Flexible Prices $40,000 Price $37,000 $35,000 DH DM DL 32 900 Cars per week
- 33. 2.7.2 Demand Shocks Fixed Prices Price $37,000 DH DM DL 33 700 900 1150 Cars per week
- 34. How sticky is How long ago since Months Months the price changed ? Dry cleaning McDonald’s Meal Newspaper Small Car Haircut Milk Taxi fare Electricity Medical services Airfare Magazine Petrol Personal Computer Teh tarik
- 35. 2.8.1 Sticky Prices • Explain fluctuations in GDP • Average months between price changes Months Months Coin-operated Laundry 46.4 Beer 4.3 Machine Newspaper 29.9 Microwave 3.0 Ovens Haircut 25.5 Milk 2.4 Taxi fare 19.7 Electricity 1.8 Vet services 14.9 Airfare 1.0 Magazine 11.2 Gasoline 0.6 PC Software 5.5 35
- 36. 2.8.1 Sticky Prices • Many prices sticky in short run – Consumers prefer stable prices – Firms want to avoid price wars • All prices flexible in long run – Firms adjust to unexpected, but permanent changes in 36 demand
- 37. 2.9 Inventory Management • Computerized inventory tracking • Unexpected changes in demand easier to observe • Firms make better output and employment decisions • Less severe business cycles • Only two mild recessions since 37 adoption – Possible explanation
- 40. 3.1 GDP Growth Rates
- 41. 3.2 Actual vs Potential GDP
- 42. 3.3 Unemployment
- 43. 3.4 Inflation
- 45. 3.5 Aggregate Supply & Demand
- 46. 3.6 Impact of Increase in AD
- 47. 3.7 Long run Growth
- 48. 3.8 GDP
- 49. 3.8.1 Real GDP Growth
- 51. 3.9 Consumption
- 52. 3.10 Consumption & Disposal Income
- 53. 3.11 Savings
- 54. 3.12 USA Consumption & DI
- 55. 3.13 USA Consumption Function
- 56. 3.14 USA Savings rate
- 57. 3.15 Investment vs Interest Rates
- 59. 4. Macroeconomic Performance Measures Economic growth – GDP vs GNI Inflation Unemployment Balance of Payments Exchange rate
- 60. 4.1 Gross Domestic Product • Measure of aggregate output • Monetary measure • Avoid multiple counting – Market value final goods – Ignore intermediate goods – Count value added 60
- 61. 4.1 Gross Domestic Product • Exclude financial transactions – Public transfer payments – Private transfer payments – Stock (and bond) market transactions • Second hand sales 61 – Sell used car to a friend
- 62. 4.2 Two Approaches to GDP • Income approach – Count income derived from production – Wages, rental income, interest income, profit • Expenditure approach – Count sum of money spent buying the final goods 62 – Who buys the goods?
- 63. 4.2.1 Product vs Earnings Approach
- 64. 4.3 Two Approaches to GDP Consumption by Wages + Households + Investment by Rents Businesses G + + = D= Interest Government Purchases P + Profits + Expenditures + Statistical 64 Adjustments By Foreigners
- 65. 4.4.1 Expenditure Approach • Personal consumption expenditures (C) – Durable consumer goods – Nondurable consumer goods – Consumer expenditures for services – Domestic plus foreign 65 produced
- 66. 4.4.1.1 Share of Consumption
- 67. 4.4.2 Expenditure Approach • Gross private domestic investment (I) – Machinery, equipment, and tools – All construction – Changes in inventories • Creation of new capital asset 67 • Noninvestment transactions
- 68. 4.4.3 Expenditure Approach Gross Investment - Depreciation = Net Investment Net Investment Gross Investment Depreciation Increase Consumption Stock of & Government Stock of Capital Spending Capital 68 January 1 Year’s GDP December 31
- 69. 4.4.4 Expenditure Approach • Government purchases (G) – Expenditures for goods and services – Expenditures for social capital – Excludes transfer payments • Net exports (Xn) – Add exported goods – Subtract imported goods 69 NX = exports - imports – • GDP = C+Ig+G+Xn
- 70. 4.4.5 U.S. Economy 2007 in Billions Receipts Allocations Expenditures Approach Income Approach Personal Consumption (C) $ 9734 Compensation $ 7874 Gross Private Domestic Rents 65 Investment (Ig) 2125 Interest 603 Government Purchases (G) 2690 Proprietor’s Income 1043 Net Exports (Xn) -708 Corporate Profits 1627 Taxes on Production and Imports 1009 National Income $12,221 Net Foreign Factor Income (-) 96 Statistical Discrepancy (+) 29 Consumption of Fixed Capital (+) 1687 70 Gross Domestic Product $ 13,841 Gross Domestic Product $ 13,841
- 71. 4.4.6 Comparative GDP Selected Nations GDPs, 2007 GDP in Trillions of Dollars 0 1 2 3 4 5 6 7 8 9 10 12 13 United States Japan Germany China United Kingdom France Italy Canada Spain Brazil Russia India South Korea Mexico 71 Australia Source: World Bank
- 72. 4.5 Components of National Income • Compensation of employees • Rents • Interest • Proprietor’s income • Corporate profits – Corporate income taxes – Dividends – Undistributed corporate profits 72 • Taxes on production and imports
- 73. 4.5.1 Income Approach • From national income to GDP – Net foreign factor income – Statistical discrepancy – Consumption of fixed capital • Other national accounts – Net domestic product (NDP) – National income (NI) – Personal income (PI) 73 – Disposable income (DI) – DI = C + S
- 74. 4.5.2 U.S. Income Relationships 2007 Gross Domestic Product (GDP) $ 13,841 Less: Consumption of Fixed Capital 1687 Equals: Net Domestic Product (NDP) $ 12,154 Less: Statistical Discrepancy 29 Plus: Net Foreign Factor Income 96 Equals: National Income (NI) $ 12,221 Less: Taxes on Production and Imports 1009 Less: Social Security Contributions 979 Less: Corporate Income Taxes 467 Less: Undistributed Corporate Profits 344 Plus: Transfer Payments 2237 Equals: Personal Income (PI) $ 11,659 74 Less: Personal Taxes 1482 Equals: Disposable Income (DI) $ 10,177
- 75. 4.5.3 GDP vs DI
- 76. 4.6 Nominal vs. Real GDP • GDP is a dollar measure of production • Using dollar values creates problems • Nominal GDP – Use prevailing price • Real GDP – Reflect changes in price 76 – Use base year price
- 77. 4.6.1 Real vs Nominal GDP
- 78. 4.6.2 GDP Price Index • Use price index to determine real GDP Price Price of Market Basket Index In Specific Year In Given Year = Price of Same Basket x 100 In Base Year Nominal GDP Real GDP = Price Index (in hundredths) 78
- 79. 4.7 Shortcomings of GDP • Nonmarket activities • Leisure • Improved product quality • The underground economy • GDP and the environment • Composition and distribution of the output • Noneconomic sources of well-being 79
- 80. 4.7.1 Underground Economy As a percentage of GDP, Selected Nations, 2007 Percentage of GDP 0 5 10 15 20 25 30 Mexico South Korea India Italy Spain China Sweden Germany France United Kingdom Japan 80 Switzerland United States Source: Open Assessment, E-Journal
- 81. 4.8.1 Sources of Data • Consumption – Census Bureau’s Retail Trade Survey – Census Bureau’s Survey of Manufacturers – Census Bureau’s Service Survey • Investment – All Consumption data sources – Census Bureau’s Housing Starts Survey and Housing Sales Survey – Retail Trade Survey 81 – Wholesale Trade Survey – Survey of Manufacturing
- 82. 4.8.2 Sources of Data • Government Purchases – Office of Personnel Management – Construction Surveys – Census Bureau’s Survey of Government Finance • Net Exports – U.S. Customs Service – BEA Surveys and Analysis 82
- 83. 5. Economic Growth Models
- 86. 5.21 Four Wheels of Growth L=(labour supply, education, skills, Human resources (L) discipline, motivation) Natural Resources (R) R=(land, minerals, fuels, environmental quality) Capital (K) K=(factories, machinery, roads, IP) Technological change & A=(science, engineering, management, innovation (A) entrepreneurship) Output (Q) = Af (K, L, R) where f=Production function
- 87. 5.3 Smith vs Malthus
- 88. 5.4 Growth vs Capital
- 91. 5.7 Factors in GDP Growth
- 93. 5.9 Wages & productivity
- 94. Conclusion “Economic growth is the single most important factor in the success of nations in the long run. Economic growth involves the growth of potential output over the long run. The growth in output per capita is an important objective of government because it is associated with rising average real incomes and rising living standards” standards Paul Samuelson
- 95. Core Reading Juleff, L, Chalmers, A.. and Harte, P. (2008) Business Economics in a Global Environment, Napier University Edinburgh Daniels, J.D., Radebaugh, L.H. and Sullivan, D.P. (2012) International Business: Environments and Operations. 14th edition, Pearson Samuelson, P.A. and Nordhaus, W. D. (2010)“Economics” Irwin/McGraw-Hill, 19th Edition Porter, Michael E. (2004)“Competitive Strategy – Techniques for Analyzing Industries and Competitors” Free Press
- 96. Questions?
Editor's Notes
- The Learning Objectives for Chapter 1 are To define globalization and international business and show how they affect each other To understand why companies engage in international business and why international business growth has accelerated To discuss globalization’s future and the major criticisms of globalization To become familiar with different ways in which a company can accomplish its global objectives To apply social science disciplines to understanding the differences between international and domestic business