Go Global !Global Economic Environment :Global Economic Environment :Macroeconomic Performance & Business Performance

By

Stephen OngStephen OngEdinburgh Napier University Business School

chong@mail.tarc.edu.myVisiting Professor, College of Management, Shenzhen

University4 August 2012

Learning Objectives

To analyse the key macroeconomic indicators

To explain how the business cycle works To critically assess the relationship

between the business cycle and company performance

AgendaAgenda

1. Business Cycles & Business Performance

2. Unemployment3. Inflation

The Macroeconomics Environment

1.1 Components of the Economy

1.Firms

2.Households

3.Government

4.Banking sector

5.External (overseas) sector

The Circular Flow Model

1. 1. The Business CycleThe Business Cycle

1.1 Long term Business Cycle

1.2 Causes of Business 1.2 Causes of Business CyclesCycles

• 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 in Unexpected changes in

spendingspending

1.3 Impact of Policy1.3 Impact of Policy

1.4 Effects on Business 1.4 Effects on Business PerformancePerformance

1.Profitability

2.Share prices and Dividend Policies

3.Investment and Return on Capital Employed

4.Cash Flow

Key Business Performance Indicators Key Business Performance Indicators & Stage of Business Cycle : & Stage of Business Cycle : RecessionRecession

Indicator (Rise/Fall)

Profits

Share prices

Dividends

Investment

Return on Capital

Cash flow

Sales revenue

Costs

Bankruptcies

Key Business Performance Indicators Key Business Performance Indicators

& Stage of Business Cycle : & Stage of Business Cycle : BOOMBOOMIndicator(Rise/Fall)

Profits

Share prices

Dividends

Investment

Return on Capital

Cash flow

Sales revenue

Costs

Bankruptcies

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 unemployment Problems with the unemployment raterate• Part-time employmentPart-time employment• Discouraged workersDiscouraged workers

Unemployment RateUnemployed

Labour Force= x 100

2.1 Unemployment2.1 Unemployment

Under 16And/or

Institutionalized(71.8 Million)

2007 data

TotalPopulation

(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

2.1.1 USA Labour force 2007

2.2 Unemployment2.2 Unemployment

• Types of unemploymentTypes of unemployment• Frictional Frictional • Structural Structural • Cyclical Cyclical

• Full employment definedFull employment defined• No cyclical unemploymentNo cyclical unemployment

• Natural rate of Natural rate of unemploymentunemployment• Full employment rate Full employment rate

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 work New welfare laws and work

requirementsrequirements• Prison population has doubledPrison population has doubled

2.4 Cost of Unemployment2.4 Cost of Unemployment

• Foregone outputForegone output• Potential outputPotential output• GDP gap GDP gap • (Actual output – potential output)(Actual output – potential output)

• Okun’s LawOkun’s Law• Each 1% above NRU creates Each 1% above NRU creates

negative 2% output gapnegative 2% output gap

2.4.1 Costs of Unemployment

2.4.2 Okun's Law

2.5 Unemployment2.5 Unemployment

5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

The GDP Gap12,000

11,000

10,000

9,000

8,000

7,000

6,000

5,000GD

P (

bil

lio

ns

of

1996

do

lla

rs)

0

2

4

6

8

10

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

The Unemployment Rate10

8

6

4

2

0

Un

emp

loy

men

t(p

erce

nt

of

civi

lian

Lab

or

forc

e)

Source: Congressional Budget Office & Bureau of Economic Analysis

GDP gap(positive)

GDP gap(negative)

Potential GDP

Actual GDP

2.6 Unemployment2.6 Unemployment

• Unequal burdensUnequal burdens• OccupationOccupation• AgeAge• Race and ethnicityRace and ethnicity• GenderGender• EducationEducation• DurationDuration

• Noneconomic costsNoneconomic costs

2.7 Unemployment Rate2.7 Unemployment Rate

Source: Bureau of Labor Statistics

Unemployment Rates in Five Industrial Nations,1995-2005

2.7.1 Unemployment & Labour Markets

2.7.2 Vacancy & Unemployment Rates

2.7.3 Unemployment by Demographics

2.7.4 Duration of Unemployment

2.7.5 Unemployment Distribution

2.7.6 USA vs EU

3. Inflation3. Inflation

• Rise in general level of Rise in general level of pricesprices• Consumer price index (CPI)Consumer price index (CPI)• Market basket Market basket • 300 goods and services300 goods and services• Typical urban consumerTypical urban consumer• 2 year updates2 year updates

CPIPrice of the Most Recent Market

Basket in the Particular Year

Price estimate of the MarketBasket in 1982-1984

= x 100

3.01 Historic UK Inflation

3.02 USA CPI

3.03 Recent CPI

3.04 Hyperinflation Germany

3.1 Inflation3.1 Inflation

Annual Inflation Rates in the United States,1960-2007

0

5

10

15

1960 1970 1980 1990 2000

Infla

tion

Rat

e (p

erce

nt)

Source: Bureau of Labor Statistics

3.2 Inflation3.2 Inflation

Source: Bureau of Labor Statistics

Inflation Rates in Five Industrial Nations,1995-2005

3.3 Inflation3.3 Inflation

• Types of InflationTypes of Inflation• Demand pull Demand pull • Cost-push Cost-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. unanticipated Anticipated vs. unanticipated

inflationinflation

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 by Who is unaffected or not hurt by inflation?inflation?• Flexible-income receiversFlexible-income receivers• Cost-of-living adjustments (COLAs)Cost-of-living adjustments (COLAs)

• DebtorsDebtors

3.5 Anticipated Inflation3.5 Anticipated Inflation

• Nominal Interest Rate Nominal Interest Rate • Real Interest RateReal Interest Rate• Inflation PremiumInflation Premium

NominalInterest

Rate

RealInterest

Rate

InflationPremium

11%

5%

6%

= +

3.6 Inflation & Economic Growth

3.7 Other Inflation Issues3.7 Other Inflation Issues

• DeflationDeflation• Mixed effectsMixed effects• ArbitrarinessArbitrariness• Cost-push inflation and real Cost-push inflation and real

outputoutput• Demand-pull inflation and Demand-pull inflation and

real outputreal output• HyperinflationHyperinflation

3.7.1 Demand Pull

3.7.2 Stagflation

3.7.3 Upward Spiral of Prices & Wages

3.7.4 Phillips Curve: Inflation vs Unemployment

3.7.5 Phillip Curve Shifts

3.7.6 Unemployment & NAIRU

3.7.7 Costs of Disinflation

3.7.8 USA Inflation & Unemployment

ConclusionConclusion

“High unemployment is a central flaw in modern capitalism... Unemployment must sometimes be kept above its socially optimal level to ensure price stability, and the tension between price stability and low unemployment is one of the cruelest dilemmas of modern society.” Paul Samuelson

Core ReadingCore Reading

Juleff, L, Chalmers, A.. and Harte, P. (2008) Business Economics in a Global Juleff, L, Chalmers, A.. and Harte, P. (2008) Business Economics in a Global Environment, Napier University EdinburghEnvironment, Napier University Edinburgh

Daniels, J.D., Radebaugh, L.H. and Sullivan, D.P. (2012) International Daniels, J.D., Radebaugh, L.H. and Sullivan, D.P. (2012) International Business: Environments and Operations. 14Business: Environments and Operations. 14thth edition, Pearson edition, Pearson

Samuelson, P.A. and Nordhaus, W. D. (2010)Samuelson, P.A. and Nordhaus, W. D. (2010)“Economics”“Economics” Irwin/McGraw-Hill, 19Irwin/McGraw-Hill, 19thth Edition Edition

Porter, Michael E. (2004)Porter, Michael E. (2004)“Competitive Strategy – Techniques for Analyzing “Competitive Strategy – Techniques for Analyzing Industries and Competitors”Industries and Competitors” Free Press Free Press

Questions?Questions?