Mba1014 macro economic environment 200413

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Macroeconomics Environment

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  • 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
  • Mba1014 macro economic environment 200413

    1. 1. Go Global !Go Global !Managerial Economics :Managerial Economics :The MacroeconomicEnvironmentByStephen OngStephen OngVisiting Fellow, Birmingham City UniversityVisiting Fellow, Birmingham City UniversityVisiting Professor, College of Management,Visiting Professor, College of Management,Shenzhen UniversityShenzhen UniversityApril 2013April 2013
    2. 2. Learning Objectives• To identify the componentTo identify the componentparts of the economyparts of the economy• To explain the Circular FlowTo explain the Circular FlowModelModel• To define the fiveTo define the fivemacroeconomic objectivesmacroeconomic objectives• To explain howTo explain howmacroeconomic performancesmacroeconomic performancesare measuredare measured
    3. 3. AgendaAgenda1. Components of the Economy2. The Circular Flow Model3. Macroeconomic objectives4. Macroeconomic performancemeasures
    4. 4. 1. The Macroeconomics Environment
    5. 5. 1. Components of the Economy1.Firms2.Households3.Government4.Banking sector5.External (overseas) sector
    6. 6. 61. Economic Growth1. Economic Growth• Increase in real GDP or real GDP perIncrease in real GDP or real GDP percapita over some time periodcapita over some time period• Percentage rate of growthPercentage rate of growth• Growth as a goalGrowth as a goal• Arithmetic of growth:Arithmetic of growth: Rule of 70Rule of 70Approximatenumber of yearsrequired to doublereal GDP=70annual percentage rateof growth
    7. 7. 71.1 Economic Growth1.1 Economic Growth• Growth U.S. real GDP 1950-2005Growth U.S. real GDP 1950-2005– Increased 6 foldIncreased 6 fold– 3.5% per year3.5% per year• Growth in U.S. real GDP per capitaGrowth in U.S. real GDP per capita– Increased more than 3 foldIncreased more than 3 fold– 2.3% per year2.3% per year• QualificationsQualifications– Improved products and servicesImproved products and services– Added leisureAdded leisure– Other impactsOther impacts
    8. 8. 81.2 Modern Economic Growth1.2 Modern Economic Growth• Began with the IndustrialBegan with the IndustrialRevolution in late 1700’sRevolution in late 1700’s• Ongoing increases in livingOngoing increases in livingstandardsstandards• Time for leisureTime for leisure• Social changeSocial change• DemocracyDemocracy• Human lifespan doubledHuman lifespan doubled
    9. 9. 91.3 Modern Economic Growth1.3 Modern Economic Growth• Began in BritainBegan in Britain• Has spread slowlyHas spread slowly• Starting date main cause ofStarting date main cause ofworldwide differences in livingworldwide differences in livingstandardsstandards• Catching up is possibleCatching up is possible• Leader countries invent technologyLeader countries invent technology• Follower countries adopt technologyFollower countries adopt technology– Can grow fasterCan grow faster
    10. 10. 101.4 Real GDP Per Capita1.4 Real GDP Per CapitaReal GDPReal GDP Real GDPReal GDP AverageAverageannualannualper capita,per capita, per capita,per capita, growthgrowthrate,rate,CountryCountry 19601960 20042004 1960-20041960-2004United States $12,892 $36,098 2.3%United Kingdom 10,323 26,762 2.2France 8,531 26,168 2.5Ireland 5,294 28,957 3.9Japan 4,509 24,661 3.9Singapore 4,219 29,404 4.4Hong Kong 3,322 29,642 5.0South Korea 1,458 18,424 5.8Figures are in 1996 dollars Source: Penn World Table
    11. 11. 111.5 Modern Economic Growth1.5 Modern Economic Growth• Growth-promotingGrowth-promotinginstitutional structuresinstitutional structures– Strong property rightsStrong property rights– Patents and copyrightsPatents and copyrights– Efficient financial institutionsEfficient financial institutions– Literacy and widespread educationLiteracy and widespread education– Free tradeFree trade– Competitive market systemCompetitive market system
    12. 12. 121.6 Ingredients of Growth1.6 Ingredients of Growth• Supply factorsSupply factors– Increases in quantity andIncreases in quantity andquality of natural resourcesquality of natural resources– Increases in quality andIncreases in quality andquantity of human resourcesquantity of human resources– Increases in the supply (orIncreases in the supply (orstock) of capital goodsstock) of capital goods– Improvements in technologyImprovements in technology
    13. 13. 131.7 Ingredients of Growth1.7 Ingredients of Growth• Demand factorDemand factor– Households, businesses, andHouseholds, businesses, andgovernment must purchasegovernment must purchasethe economy’s expandingthe economy’s expandingoutputoutput• Efficiency factorEfficiency factor– Must achieve economicMust achieve economicefficiency and full employmentefficiency and full employment
    14. 14. 141.8 Production Possibilities1.8 Production PossibilitiesConsumer GoodsCapitalGoodsaEconomicGrowthbACB Dc
    15. 15. 151.9 Labour and Productivity1.9 Labour and Productivity• Size ofemployedlabour force• Averagehours ofworkLabourInputs(hours ofwork)• Quantity ofcapital• Education andtraining• Technologicaladvance• Allocativeefficiency• OtherLabourProductivity(averageoutput perhour)RealGDPReal GDP = hours of work x labour productivityx=
    16. 16. 1.10 U.S. Economic Growth1.10 U.S. Economic GrowthAnnual Averages for Five Decades0123451950-1959 1960-1969 1970-1979 1980-1989 1990-1999 2000-2005YearAverageAnnualIncrease(Percent)Real GDPReal GDP Per CapitaSource: Bureau of Economic Analysis
    17. 17. 171.11 Accounting for Growth1.11 Accounting for GrowthAccounting for Growth of U.S. Real GDP,1953-2013 (average annual percentage changes)Item1953 Q2to1973 Q41973 Q4to1995 Q21995 Q2to2001 Q12001 Q1to2007 Q32007 Q3to2013 Q4*Increases in Real GDPIncreases inQuantity of LabourIncreases inLabour Productivity3.61.12.52.81.31.53.81.42.42.6-0.12.72.80.32.5Source: Economic Report of the President, 2008*Beyond 2007 are Projections
    18. 18. 18• Factors affecting productivityFactors affecting productivitygrowthgrowth– Technological advance (40%)Technological advance (40%)– Quantity of capital (30%)Quantity of capital (30%)– Education and training (15%)Education and training (15%)– Economies of scale andEconomies of scale andresource allocation (15%)resource allocation (15%)1.12 Accounting for Growth
    19. 19. 19Average Test Scores of Eighth GradeStudents in Math and Science, Top 10Countries and the United States, 2003SingaporeSouth KoreaHong KongTaiwanJapanBelgiumNetherlandsEstoniaHungaryMalaysiaUnited States1234567891015605589586585570537536531529508504SingaporeTaiwanSouth KoreaHong KongEstoniaJapanHungaryNetherlandsUnited StatesAustralia12345678910578571558556552552543536527527Mathematics Science1.13 Accounting for Growth
    20. 20. 201.14 Productivity Growth1.14 Productivity Growth• Accelerated rate of growthAccelerated rate of growth– 1.4% per year 1973-19951.4% per year 1973-1995– 2.9% per year 1995-20052.9% per year 1995-2005• Affects real output, real income,Affects real output, real income,and real wagesand real wages• Pay higher wages withoutPay higher wages withoutlowering profitlowering profit
    21. 21. 211.15 Accelerated Productivity1.15 Accelerated ProductivityGrowthGrowth• Microchip/informationMicrochip/informationtechnologytechnology• New firms and increasingNew firms and increasingreturnsreturns• Sources of increasing returnsSources of increasing returns– More specialized inputsMore specialized inputs– Spreading of development costsSpreading of development costs– Simultaneous consumptionSimultaneous consumption– Network effectsNetwork effects– Learning by doingLearning by doing• GGlobal competitionlobal competition
    22. 22. 221.16 Economic Growth1.16 Economic Growth• Is accelerated productivity growthIs accelerated productivity growthsustainable?sustainable?• Is economic growth desirable andIs economic growth desirable andsustainable?sustainable?• The antigrowth viewThe antigrowth view– Environmental and resource issuesEnvironmental and resource issues• In defense of economic growthIn defense of economic growth– Higher standard of livingHigher standard of living– Human imagination can solveHuman imagination can solveenvironmental and resource issuesenvironmental and resource issues
    23. 23. 231.17 Economic Growth in China1.17 Economic Growth in China• Growth averages past 25 years:Growth averages past 25 years:– 9% annual growth output9% annual growth output– 8% annual growth output per capita8% annual growth output per capita• Labour more productiveLabour more productive• More international tradeMore international trade• Transition to market economyTransition to market economy• Joined WTO 2001Joined WTO 2001• Financial system remains weakFinancial system remains weak• Income inequality acrossIncome inequality acrossgeographic areasgeographic areas
    24. 24. 2. The Circular Flow Model
    25. 25. 2. Performance and Policy2. Performance and Policy• Real GDPReal GDP– Corrects for price changesCorrects for price changes• Nominal GDPNominal GDP– Uses current pricesUses current prices• UnemploymentUnemployment• InflationInflation– Increase in overall level ofIncrease in overall level ofpricesprices
    26. 26. 262.1 Economic Performance2.1 Economic Performance• Output growthOutput growth– 3.1% per year 1995-20053.1% per year 1995-2005• Unemployment rateUnemployment rate– 4.6% in 20074.6% in 2007• Inflation rateInflation rate– 2.7% in 20072.7% in 2007
    27. 27. 272.2 Economic Growth2.2 Economic Growth• Standard of living measuredStandard of living measuredby output per personby output per person• No growth in living standardsNo growth in living standardsprior to Industrial Revolutionprior to Industrial Revolution• Modern economic growthModern economic growth– Output per person risesOutput per person rises– Not experienced by allNot experienced by allcountriescountries
    28. 28. 282.3 GDP Per Person 20072.3 GDP Per Person 2007ZimbabweZimbabwe $188$188United States $45,845Canada $38,345Japan $33,576United Kingdom $35,134South Korea $24,782France $33,187Russia $14,692Saudi Arabia $23,243Burundi $371Tanzania $1,256North Korea $1,900India $2,659China $5,292Mexico $12,774U.S. dollars based on purchasing power parity (PPP)
    29. 29. 292.4 Savings and Investment2.4 Savings and Investment• SavingSaving– Tradeoff current for futureTradeoff current for futureconsumptionconsumption• InvestmentInvestment– Financial investmentFinancial investment– Economic investmentEconomic investment• Banks and financialBanks and financialinstitutionsinstitutions
    30. 30. 302.5 Shocks2.5 Shocks• Demand shocks and flexibleDemand shocks and flexiblepricesprices– Price falls if demand lowPrice falls if demand low– Sales unchangedSales unchanged• Demand shocks and stickyDemand shocks and stickypricesprices– Maintain inventoryMaintain inventory– Sales changeSales change– Business cyclesBusiness cycles
    31. 31. 312.6 Expectations2.6 Expectations• The future is uncertainThe future is uncertain• Expectations affectExpectations affectinvestmentinvestment• ShocksShocks– What happens is not what youWhat happens is not what youexpectedexpected• Demand shocksDemand shocks• Supply shocksSupply shocks
    32. 32. 322.7.1 Demand Shocks2.7.1 Demand ShocksCars per weekPriceDMDLDH900$40,000$37,000$35,000Flexible Prices
    33. 33. 332.7.2 Demand Shocks2.7.2 Demand ShocksCars per weekDMDLDH700 900 1150$37,000Fixed PricesPrice
    34. 34. How sticky isHow long ago sincethe price changed ?Months MonthsDry cleaning McDonald’sMealNewspaper Small CarHaircut MilkTaxi fare ElectricityMedical services AirfareMagazine PetrolPersonal Computer Teh tarik
    35. 35. 352.8.1 Sticky Prices2.8.1 Sticky Prices• Explain fluctuations in GDPExplain fluctuations in GDP• Average months between price changesAverage months between price changesMonths MonthsCoin-operated LaundryMachine46.4 Beer 4.3Newspaper 29.9 MicrowaveOvens3.0Haircut 25.5 Milk 2.4Taxi fare 19.7 Electricity 1.8Vet services 14.9 Airfare 1.0Magazine 11.2 Gasoline 0.6PC Software 5.5
    36. 36. 362.8.1 Sticky Prices2.8.1 Sticky Prices• Many prices sticky in shortMany prices sticky in shortrunrun– Consumers prefer stable pricesConsumers prefer stable prices– Firms want to avoid price warsFirms want to avoid price wars• All prices flexible in long runAll prices flexible in long run– Firms adjust to unexpected,Firms adjust to unexpected,but permanent changes inbut permanent changes indemanddemand
    37. 37. 372.9 Inventory Management2.9 Inventory Management• Computerized inventory trackingComputerized inventory tracking• Unexpected changes in demandUnexpected changes in demandeasier to observeeasier to observe• Firms make better output andFirms make better output andemployment decisionsemployment decisions• Less severe business cyclesLess severe business cycles• Only two mild recessions sinceOnly two mild recessions sinceadoptionadoption– Possible explanationPossible explanation
    38. 38. 3. Macroeconomics Policy3. Macroeconomics Policy
    39. 39. 3.1 Macroeconomic Policy
    40. 40. 3.1 GDP Growth Rates
    41. 41. 3.2 Actual vs Potential GDP
    42. 42. 3.3 Unemployment
    43. 43. 3.4 Inflation
    44. 44. 3.5 Aggregate Supply & Demand
    45. 45. 3.6 Impact of Increase in AD
    46. 46. 3.7 Long run Growth
    47. 47. 3.8 GDP
    48. 48. 3.8.1 Real GDP Growth
    49. 49. 3.8.2 Longrun GDPGrowth
    50. 50. 3.9 Consumption
    51. 51. 3.10 Consumption & DisposalIncome
    52. 52. 3.11 Savings
    53. 53. 3.12 USA Consumption & DI
    54. 54. 3.13 USA Consumption Function
    55. 55. 3.14 USA Savings rate
    56. 56. 3.15 Investment vs Interest Rates
    57. 57. 3.16 Investment Shifts
    58. 58. 4. Macroeconomic Performance4. Macroeconomic PerformanceMeasuresMeasuresEconomic growth – GDP vs GNI InflationUnemploymentBalance of Payments Exchange rate
    59. 59. 604.1 Gross Domestic Product4.1 Gross Domestic Product• Measure of aggregate outputMeasure of aggregate output• Monetary measureMonetary measure• Avoid multiple countingAvoid multiple counting– Market value final goodsMarket value final goods– Ignore intermediate goodsIgnore intermediate goods– Count value addedCount value added
    60. 60. 614.1 Gross Domestic Product4.1 Gross Domestic Product• Exclude financialExclude financialtransactionstransactions– Public transfer paymentsPublic transfer payments– Private transfer paymentsPrivate transfer payments– Stock (and bond) marketStock (and bond) markettransactionstransactions• Second hand salesSecond hand sales– Sell used car to a friendSell used car to a friend
    61. 61. 624.2 Two Approaches to GDP4.2 Two Approaches to GDP• Income approachIncome approach– Count income derived fromCount income derived fromproductionproduction– Wages, rental income, interestWages, rental income, interestincome, profitincome, profit• Expenditure approachExpenditure approach– Count sum of money spentCount sum of money spentbuying the final goodsbuying the final goods– Who buys the goods?Who buys the goods?
    62. 62. 4.2.1 Product vs Earnings Approach
    63. 63. 64GDP= =+Consumption byHouseholdsInvestment byBusinessesGovernmentPurchasesExpendituresBy Foreigners+++++WagesRentsInterestProfitsStatisticalAdjustments+4.3 Two Approaches to GDP
    64. 64. 654.4.1 Expenditure Approach4.4.1 Expenditure Approach• Personal consumptionPersonal consumptionexpenditures (C)expenditures (C)– Durable consumer goodsDurable consumer goods– Nondurable consumer goodsNondurable consumer goods– Consumer expenditures forConsumer expenditures forservicesservices– Domestic plus foreignDomestic plus foreignproducedproduced
    65. 65. 4.4.1.1 Share of Consumption
    66. 66. 674.4.2 Expenditure Approach4.4.2 Expenditure Approach• Gross private domesticGross private domesticinvestment (I)investment (I)– Machinery, equipment, andMachinery, equipment, andtoolstools– All constructionAll construction– Changes in inventoriesChanges in inventories• Creation of new capital assetCreation of new capital asset• Noninvestment transactionsNoninvestment transactions
    67. 67. 684.4.3 Expenditure Approach4.4.3 Expenditure ApproachJanuary 1 Year’s GDP December 31Consumption& GovernmentSpendingDepreciationNetInvestmentGrossInvestmentStock ofCapitalIncreaseStock ofCapitalGross InvestmentDepreciationNet Investment-=
    68. 68. 694.4.4 Expenditure Approach4.4.4 Expenditure Approach• Government purchases (G)Government purchases (G)– Expenditures for goods and servicesExpenditures for goods and services– Expenditures for social capitalExpenditures for social capital– Excludes transfer paymentsExcludes transfer payments• Net exports (XNet exports (Xnn))– Add exported goodsAdd exported goods– Subtract imported goodsSubtract imported goods– NX = exports - importsNX = exports - imports• GDP = C+IGDP = C+Ig+G+X+G+Xn
    69. 69. 70CompensationRentsInterestProprietor’s IncomeCorporate ProfitsTaxes on Production andImportsNational IncomeNet Foreign Factor Income (-)Statistical Discrepancy (+)Consumption of FixedCapital (+)Gross Domestic Product$ 787465603104316271009$12,22196291687$ 13,841Personal Consumption (C)Gross Private DomesticInvestment (Ig)Government Purchases (G)Net Exports (Xn)Gross Domestic Productin BillionsReceiptsExpenditures ApproachAllocationsIncome Approach$ 973421252690-708$ 13,8414.4.5 U.S. Economy 20074.4.5 U.S. Economy 2007
    70. 70. 714.4.6 C4.4.6 Comparative GDPomparative GDPSource: World BankSelected Nations GDPs, 2007United StatesJapanGermanyChinaUnited KingdomFranceItalyCanadaSpainBrazilRussiaIndiaSouth KoreaMexicoAustralia0 1 2 3 4 5 6 7 8 9 10 12 13GDP in Trillions of Dollars
    71. 71. 724.5 Components of National4.5 Components of NationalIncomeIncome• Compensation of employeesCompensation of employees• RentsRents• InterestInterest• Proprietor’s incomeProprietor’s income• Corporate profitsCorporate profits– Corporate income taxesCorporate income taxes– DividendsDividends– Undistributed corporate profitsUndistributed corporate profits• Taxes on production and importsTaxes on production and imports
    72. 72. 734.5.1 Income Approach4.5.1 Income Approach• From national income to GDPFrom national income to GDP– Net foreign factor incomeNet foreign factor income– Statistical discrepancyStatistical discrepancy– Consumption of fixed capitalConsumption of fixed capital• Other national accountsOther national accounts– Net domestic product (NDP)Net domestic product (NDP)– National income (NI)National income (NI)– Personal income (PI)Personal income (PI)– Disposable income (DI)Disposable income (DI)– DI = C + SDI = C + S
    73. 73. 744.5.2 U.S. Income Relationships4.5.2 U.S. Income Relationships20072007Gross Domestic Product (GDP)Less: Consumption of Fixed CapitalEquals: Net Domestic Product (NDP)Less: Statistical DiscrepancyPlus: Net Foreign Factor IncomeEquals: National Income (NI)Less: Taxes on Production and ImportsLess: Social Security ContributionsLess: Corporate Income TaxesLess: Undistributed Corporate ProfitsPlus: Transfer PaymentsEquals: Personal Income (PI)Less: Personal TaxesEquals: Disposable Income (DI)$ 13,8411687$ 12,1542996$ 12,22110099794673442237$ 11,6591482$ 10,177
    74. 74. 4.5.3 GDP vs DI
    75. 75. 764.6 Nominal vs. Real GDP4.6 Nominal vs. Real GDP• GDP is a dollar measure ofGDP is a dollar measure ofproductionproduction• Using dollar values createsUsing dollar values createsproblemsproblems• Nominal GDPNominal GDP– Use prevailing priceUse prevailing price• Real GDPReal GDP– Reflect changes in priceReflect changes in price– Use base year priceUse base year price
    76. 76. 4.6.1 Real vs Nominal GDP
    77. 77. 784.6.2 GDP Price Index4.6.2 GDP Price Index• Use price index to determine realUse price index to determine realGDPGDPPriceIndexIn GivenYear= x100Price of Market BasketIn Specific YearPrice of Same BasketIn Base YearRealGDP =Nominal GDPPrice Index (in hundredths)
    78. 78. 794.7 Shortcomings of GDP4.7 Shortcomings of GDP• Nonmarket activitiesNonmarket activities• LeisureLeisure• Improved product qualityImproved product quality• The underground economyThe underground economy• GDP and the environmentGDP and the environment• Composition and distribution of theComposition and distribution of theoutputoutput• Noneconomic sources of well-beingNoneconomic sources of well-being
    79. 79. 804.7.1 Und4.7.1 Underground Economyerground EconomySource: Open Assessment, E-JournalAs a percentage of GDP, SelectedNations, 2007MexicoSouth KoreaIndiaItalySpainChinaSwedenGermanyFranceUnited KingdomJapanSwitzerlandUnited States0 5 10 15 20 25 30Percentage of GDP
    80. 80. 814.8.1 Sources of Data4.8.1 Sources of Data• ConsumptionConsumption– Census Bureau’s Retail Trade SurveyCensus Bureau’s Retail Trade Survey– Census Bureau’s Survey ofCensus Bureau’s Survey ofManufacturersManufacturers– Census Bureau’s Service SurveyCensus Bureau’s Service Survey• InvestmentInvestment– All Consumption data sourcesAll Consumption data sources– Census Bureau’s Housing Starts SurveyCensus Bureau’s Housing Starts Surveyand Housing Sales Surveyand Housing Sales Survey– Retail Trade SurveyRetail Trade Survey– Wholesale Trade SurveyWholesale Trade Survey– Survey of ManufacturingSurvey of Manufacturing
    81. 81. 82• Government PurchasesGovernment Purchases– Office of Personnel ManagementOffice of Personnel Management– Construction SurveysConstruction Surveys– Census Bureau’s Survey ofCensus Bureau’s Survey ofGovernment FinanceGovernment Finance• Net ExportsNet Exports– U.S. Customs ServiceU.S. Customs Service– BEA Surveys and AnalysisBEA Surveys and Analysis4.8.2 Sources of Data
    82. 82. 5. Economic Growth Models
    83. 83. 5.1 Technology Diffusion
    84. 84. 5.2 Growth factors
    85. 85. 5.21 Four Wheels of Growth Human resources (L)Human resources (L) Natural Resources (R)Natural Resources (R) Capital (K)Capital (K)Technological change &Technological change &innovation (A)innovation (A)Output (Q) = Af (K, L, R)Output (Q) = Af (K, L, R)where f=Production functionwhere f=Production function L=(labour supply, education, skills,discipline, motivation) R=(land, minerals, fuels, environmentalquality) K=(factories, machinery, roads, IP) A=(science, engineering, management,entrepreneurship)
    86. 86. 5.3 Smith vs Malthus
    87. 87. 5.4 Growth vs Capital
    88. 88. 5.5 Technological advance
    89. 89. 5.7 Factors in GDP Growth
    90. 90. 5.8 Labour Productivity
    91. 91. 5.9 Wages & productivity
    92. 92. ConclusionConclusion“Economic growth is the single mostEconomic growth is the single mostimportant factor in the success ofimportant factor in the success ofnations in the long run. Economicnations in the long run. Economicgrowth involves the growth of potentialgrowth involves the growth of potentialoutput over the long run. The growth inoutput over the long run. The growth inoutput per capita is an importantoutput per capita is an importantobjective of government because it isobjective of government because it isassociated with rising average realassociated with rising average realincomes and rising living standardsincomes and rising living standards”Paul Samuelson
    93. 93. Questions?Questions?
    94. 94. Go Global !Go Global !Managerial Economics :Managerial Economics :The MacroeconomicEnvironment 2:The Business Cycle
    95. 95. Learning Objectives To analyse the key macroeconomicindicators To explain how the business cycle works To critically assess the relationshipbetween the business cycle and companyperformance
    96. 96. AgendaAgenda1. BusinessCycles &BusinessPerformance2. Unemployment3. Inflation
    97. 97. The Macroeconomics Environment
    98. 98. 1.1 Components of the Economy1.Firms2.Households3.Government4.Banking sector5.External (overseas) sector
    99. 99. The Circular Flow Model
    100. 100. 1.1. The Business CycleThe Business Cycle
    101. 101. 1.1 Long term Business Cycle
    102. 102. 1.2 Causes of Business1.2 Causes of BusinessCyclesCycles• Shocks and price stickinessShocks and price stickiness• Supply and productivity shocksSupply and productivity shocks• Monetary shocksMonetary shocks• Financial bursts and bubblesFinancial bursts and bubbles• Unexpected political eventsUnexpected political events• Common linkCommon link• Unexpected changes inUnexpected changes inspendingspending
    103. 103. 1.3 Impact of Policy1.3 Impact of Policy
    104. 104. 1.4 Effects on Business1.4 Effects on BusinessPerformancePerformance1.Profitability2.Share prices and Dividend Policies3.Investment and Return on CapitalEmployed4.Cash Flow
    105. 105. Key Business Performance IndicatorsKey Business Performance Indicators& Stage of Business Cycle :& Stage of Business Cycle : RecessionRecessionIndicator(Rise/Fall)ProfitsShare pricesDividendsInvestmentReturn onCapitalCash flowSales revenueCostsBankruptcies
    106. 106. Key Business Performance IndicatorsKey Business Performance Indicators& Stage of Business Cycle :& Stage of Business Cycle : BOOMBOOMIndicator(Rise/Fall)ProfitsShare pricesDividendsInvestmentReturn onCapitalCash flowSales revenueCostsBankruptcies
    107. 107. 2. Unemployment2. Unemployment• Twin problems of the business cycleTwin problems of the business cycle• UnemploymentUnemployment• InflationInflation• Measurement of unemploymentMeasurement of unemployment• Who’s in the labour forceWho’s in the labour force• Problems with the unemploymentProblems with the unemploymentraterate• Part-time employmentPart-time employment• Discouraged workersDiscouraged workersUnemployment RateUnemployedLabour Force= x 100
    108. 108. 2.1 Unemployment2.1 UnemploymentUnder 16And/orInstitutionalized(71.8 Million)2007 dataTotalPopulation(303.6 Million)Not inLabor Force(78.7 Million)Employed(146.0 Million)LaborForce(153.1 Million)Unemployed(7.1 Million) Source: Bureau of Labor Statistics
    109. 109. 2.1.1 USA Labour force 2007
    110. 110. 2.2 Unemployment2.2 Unemployment• Types of unemploymentTypes of unemployment• FrictionalFrictional• StructuralStructural• CyclicalCyclical• Full employment definedFull employment defined• No cyclical unemploymentNo cyclical unemployment• Natural rate ofNatural rate ofunemploymentunemployment• Full employment rateFull employment rate
    111. 111. 2.3 Unemployment2.3 Unemployment• Natural rate of unemploymentNatural rate of unemployment• 1980’s 6%1980’s 6%• Today 4-5%Today 4-5%• Aging labour forceAging labour force• Temp agencies and the internetTemp agencies and the internet• New welfare laws and workNew welfare laws and workrequirementsrequirements• Prison population has doubledPrison population has doubled
    112. 112. 2.4 Cost of Unemployment2.4 Cost of Unemployment• Foregone outputForegone output• Potential outputPotential output• GDP gapGDP gap• (Actual output – potential(Actual output – potentialoutput)output)• Okun’s LawOkun’s Law• Each 1% above NRU createsEach 1% above NRU createsnegative 2% output gapnegative 2% output gap
    113. 113. 2.4.1 Costs of Unemployment
    114. 114. 2.4.2 Okuns Law
    115. 115. 2.5 Unemployment2.5 Unemployment5,0006,0007,0008,0009,00010,00011,00012,0001 985 1987 1989 1991 1993 1995 1997 1999 2001 2003 20051985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005The GDP Gap12,00011,00010,0009,0008,0007,0006,0005,000GDP(billionsof1996dollars)02468101985 1987 1989 1991 1993 1995 1997 1999 2001 2003 20051985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005The Unemployment Rate1086420Unemployment(percentofcivilianLaborforce)Source: Congressional Budget Office & Bureau of Economic AnalysisGDP gap(positive)GDP gap(negative)Potential GDPActual GDP
    116. 116. 2.6 Unemployment2.6 Unemployment• Unequal burdensUnequal burdens• OccupationOccupation• AgeAge• Race and ethnicityRace and ethnicity• GenderGender• EducationEducation• DurationDuration• Noneconomic costsNoneconomic costs
    117. 117. 2.7 Unemployment Rate2.7 Unemployment RateSource: Bureau of Labor StatisticsUnemployment Rates in Five IndustrialNations,1995-2005
    118. 118. 2.7.1 Unemployment & LabourMarkets
    119. 119. 2.7.2 Vacancy & UnemploymentRates
    120. 120. 2.7.3 Unemployment by Demographics
    121. 121. 2.7.4 Duration of Unemployment
    122. 122. 2.7.5 Unemployment Distribution
    123. 123. 2.7.6 USA vs EU
    124. 124. 3. Inflation3. Inflation• Rise in general level ofRise in general level ofpricesprices• Consumer price index (CPI)Consumer price index (CPI)• Market basketMarket basket• 300 goods and services300 goods and services• Typical urban consumerTypical urban consumer• 2 year updates2 year updatesCPIPrice of the Most Recent MarketBasket in the Particular YearPrice estimate of the MarketBasket in 1982-1984= x 100
    125. 125. 3.01 Historic UK Inflation
    126. 126. 3.02 USA CPI
    127. 127. 3.03 Recent CPI
    128. 128. 3.04 Hyperinflation Germany
    129. 129. 3.1 Inflation3.1 InflationAnnual Inflation Rates in the United States,1960-20070510151960 1970 1980 1990 2000InflationRate(percent)Source: Bureau of Labor Statistics
    130. 130. 3.2 Inflation3.2 InflationSource: Bureau of Labor StatisticsInflation Rates in Five Industrial Nations,1995-2005
    131. 131. 3.3 Inflation3.3 Inflation• Types of InflationTypes of Inflation• Demand pullDemand pull• Cost-pushCost-push• Redistributive EffectsRedistributive Effects• Nominal and real incomeNominal and real income• Growth in nominal income vs.Growth in nominal income vs.inflation rateinflation rate• Anticipated vs. unanticipatedAnticipated vs. unanticipatedinflationinflation
    132. 132. 3.4 Inflation3.4 Inflation• Who is hurt by inflation?Who is hurt by inflation?• Fixed-income receiversFixed-income receivers• SaversSavers• CreditorsCreditors• Who is unaffected or not hurt byWho is unaffected or not hurt byinflation?inflation?• Flexible-income receiversFlexible-income receivers• Cost-of-living adjustments (COLAs)Cost-of-living adjustments (COLAs)• DebtorsDebtors
    133. 133. 3.5 Anticipated Inflation3.5 Anticipated Inflation• Nominal Interest RateNominal Interest Rate• Real Interest RateReal Interest Rate• Inflation PremiumInflation PremiumNominalInterestRateRealInterestRateInflationPremium11%5%6%= +
    134. 134. 3.6 Inflation & Economic Growth
    135. 135. 3.7 Other Inflation Issues3.7 Other Inflation Issues• DeflationDeflation• Mixed effectsMixed effects• ArbitrarinessArbitrariness• Cost-push inflation and realCost-push inflation and realoutputoutput• Demand-pull inflation andDemand-pull inflation andreal outputreal output• HyperinflationHyperinflation
    136. 136. 3.7.1 Demand Pull
    137. 137. 3.7.2 Stagflation
    138. 138. 3.7.3 Upward Spiral of Prices & Wages
    139. 139. 3.7.4 Phillips Curve:Inflation vs Unemployment
    140. 140. 3.7.5 Phillip Curve Shifts
    141. 141. 3.7.6 Unemployment & NAIRU
    142. 142. 3.7.7 Costs of Disinflation
    143. 143. 3.7.8 USA Inflation & Unemployment
    144. 144. ConclusionConclusion“High unemployment is a central flawin modern capitalism... Unemploymentmust sometimes be kept above itssocially optimal level to ensure pricestability, and the tension between pricestability and low unemployment is oneof the cruelest dilemmas of modernsociety.” Paul Samuelson
    145. 145. Core ReadingCore Reading• Keat, Paul G. and Young, Philip KY (2009)Managerial Economics, 6thedition, Pearson• Samuelson, William F. and Marks, Stephen G.(2010) Managerial Economics, 6thedition, JohnWiley• Pindyck, Robert S. and Rubinfeld, Daniel L.(2013)Microeconomics, 8thedition, Pearson• Samuelson, P.A. and Nordhaus, W. D.Samuelson, P.A. and Nordhaus, W. D.(2010)(2010)“Economics”“Economics” Irwin/McGraw-Hill, 19Irwin/McGraw-Hill, 19ththEditionEdition• Porter, Michael E. (2004)Porter, Michael E. (2004)“Competitive Strategy –“Competitive Strategy –Techniques for Analyzing Industries and Competitors”Techniques for Analyzing Industries and Competitors”Free PressFree Press
    146. 146. Questions?Questions?

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