Enu macroecons business cycle 040812
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Go Global !Global Economic Environment :Global Economic Environment :Macroeconomic Performance & Business Performance
By
Stephen OngStephen OngEdinburgh Napier University Business School
[email protected] 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?