Transcript The Macro

External
Influences
The Macro-Economy
External Influences – The MacroEconomy
 The Macro-economy:
 The
production and exchange process of the
whole economy as opposed
to individual markets within
the economy
 Businesses affected by changes
in the macro–economy and
by government policies
External Influences – The Macro-Economy

Government Macro-economic
objectives:
of inflation – 2.0%
 Maintain full employment –
all who want a job can get one!
 Control of balance of payments
 Stability of exchange rate
 Maintain steady economic growth -> 2-2.5%?
 Control
External Influences – The Macro-Economy

Inflation: a general rise in the price
level over a period of time

Case study – Zimbabwe’s inflation
problem
Highest Monthly Inflation Rates
in History
Country
Month with
highest
inflation rate
Highest monthly
inflation rate
Equivalent daily
inflation rate
Time required for
prices to
double
Hungary
July 1946
1.30 x 1016%
195%
15.6 hours
Zimbabwe
Mid-November
2008 (latest
measurable)
79,600,000,000%
98.0%
24.7 hours
Yugoslavia
January 1994
313,000,000%
64.6%
1.4 days
Germany
October 1923
29,500%
20.9%
3.7 days
Greece
November 1944
11,300%
17.1%
4.5 days
China
May 1949
4,210%
13.4%
5.6 days

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External Influences – The Macro-Economy


Balance of Payments:
A record of the trade between the US and other
countries
– visible and invisible – purchase
of goods and services from other countries which
result in payments
being made abroad
 Exports – visible and invisible – the sale
of goods and services to other countries
which results in payments being received from those
countries
 Imports
External Influences – The Macro-Economy

Balance of Payments:
 Ease
with which businesses
can sell products abroad
 Impact on business costs
from imports
 Impact on competition
from imports and exports
External Influences – The Macro-Economy

Exchange Rates
 The
rate at which one currency
can be exchanged for another
 e.g. $1 = €1.72, = £ 1.68
 Influences the perceived prices
of imports and exports and therefore costs
and competitiveness
External Influences – The Macro-Economy
 Exchange
 Effects

Rates:
on Business:
Appreciation – value of $ against other
currencies rises, e.g. $1 = €1.72 to $1 = €1.75
 Exports
harder to sell abroad - foreign traders have to
give up more of their currency to get same amount of
$ - export prices appear to rise
 Imports appear to be cheaper – buyer in US gets
more foreign currency for every $
External Influences – The MacroEconomy



Depreciation – value of $ against other currencies falls,
e.g. $1 = £ 1.68 to
$1 = £ 1.60
 Exporters benefit – foreign traders
get more $ for their currency –
export prices appear to fall
 Importers – have to give up more $
to get same amount of foreign currency – appears
import prices have risen
Precise effect of both depends on Price Elasticity of
demand for imports and exports
Case Study

K & Q Jeans: The impact of fluctuating
exchange rates
External Influences – The Macro-Economy

Economic Growth:

Measured by Gross Domestic Product (GDP) – the value
of output of goods and services
in the economy over a period of a year




Measured by adding up total incomes (Y)
or total expenditure (E) or total output of industry
In theory all should be the same!
Appropriate growth levels in UK
too high - economy overheating,
too low - economy stagnating, resources unemployed
Actual growth of 2–2.5% seen as being sustainable
External Influences – The Macro-Economy

Economic Growth
 Effects

on business:
Low growth – business sales low,
profit margins tight, excess capacity, orders reduced,
excess stock, redundancies

High growth – business sales rising quickly, profits
rising, skill shortages, inflationary pressure on prices,
capacity squeezed, stocks running down
External Influences – The Macro-Economy

Government Policies:

Fiscal Policy – influencing economic and non-economic
objectives through variations in public income and
expenditure (tax revenue, borrowing and government
spending)
Affects all aspects of business activity – regulations,
infrastructure – roads, transport, etc, health and safety,
support for industry, business taxation, employment laws
and taxes – income tax and national insurance
contributions, pension contributions, etc.

External Influences – The Macro-Economy

Monetary Policy:

Changes in the rate
of interest to help control the level of expenditure in
the economy
and therefore the level
of inflation
In hands of the Federal Reserve



Conducting the nation's monetary policy by influencing the
monetary and credit conditions in the economy in pursuit of
maximum employment, stable prices, and moderate longterm interest rates.
Significant effects
on business activity:
External Influences – The Macro-Economy

Rising Interest Rates:
 Likely
to depress consumer spending
 Increases the cost of borrowing –
impacts on investment decisions
 Increases existing loan costs – the more highly
geared the greater the impact
 Affects exchange rate – could impact
on sales abroad (exports)
or cost of imported resources

Falling rates have the opposite effect