Transcript L01_IntroNIPA - Duke University`s Fuqua School of Business

MGRECON301
Global Economic Environment
of the Firm
Professor John Coleman
Duke University
Fuqua School of Business
October 2009
Rethinking the Boundaries of Business School
Course Motivation
• Why are some countries poor and others rich?
• Why do countries undergo financial crises?
• Why should a business manager understand
his/her global economic environment?
Sustained Growth and Country-Level Income Inequality is a Modern Phenomenon
World-Wide Per-Capita GDP
Most of the World is Poor
The 21st Century may be the
Century of Convergence
2007 population
• 6.7 billion - World
• 1.3 billion - China
• 1.1 billion - India
China and India represent 36
percent of the world’s population
Many Poor Countries
are Still Being Left Behind
exchange rates
national currency per dollar
Financial Crises in the 90’s
Mexico
Thailand
Russia
Argentina
Jan90 Dec90 Dec91 Dec92Dec93 Dec94Dec95 Dec96Dec97 Dec98 Dec99Dec00 Dec01
Dec02
months
Time series of recent collapse
U.S. Financial Crisis in 2008
Dow Jones Industrial Average
The Treasury secretary, Henry M.
Paulson Jr., and the Federal Reserve
chairman, Ben S. Bernanke, testifying
on Capitol Hill regarding the $700
billion bailout of financial firms.
Year
The U.S. financial crises has spread around the world: contagion.
Macroeconomics and the Firm
Financial Crises
Corporate Profits
are Very Pro-Cyclical
U.S. Real GDP
Note the Great Moderation beginning in the mid 1980s.
Oil Price
Nominal
Real
Outsourcing and Wages Around the World
Labor costs in the manufacturing sector, $/hour (1993)
0.0
Germany
Holland
Japan
United States
France
Italy
Australia
Britain
Spain
Taiw an
Singapore
South Korea
Hong Kong
Brasil
Mexico
Hungary
Malaysia
Poland
Thailand
China
India
Russia
Indonesia
5.0
10.0
15.0
20.0
25.0
U.S. Current Account
Monetary Policy
Monetary Policy
The Federal Funds Rate and the Taylor Rule
Monetary Policy
During the 2008/09 Financial Crises
Inflation around the World
World
Developed Countries
Developed Countries: Inflation(year-over-year)
(1/01/1990 - 09/24/2008)
Frequency: Quarterly
Magnitude: Percent
Source: Cleveland Federal Reserve Bank
World: Inflation(year-over-year)
(1/01/1990 - 09/24/2008)
Frequency: Quarterly
Magnitude: Percent
Exchange Rates
Yen has moved from 350 to about 100, why?
The Yield Spread and Economic Growth
The slope of the yield curve predicts recessions
(5-year Treasury bond - 3-month Treasury bill)
Annual GDP Growth
or Yield Curve
% Real annual GDP growth
9
7
5
3
1
-1
-3
-5
-7
Yield spread
Recession
Correct
Recession
Correct
Recession
Correct
2 Recessions
Correct
Yield curve accurate
in recent forecast
U.S.Treasury Yield Curve
October 13, 2009
National Income and Product Accounts
(NIPA)
Accounting system by which we organize
our thinking to measure economic activity
for a country.
Gross Domestic Product (GDP)
• Market value of final goods and services newly produced
within a nation during a fixed period of time
– Market value
– Newly produced final goods and services
• Per capita GDP is an economy’s GDP divided by its
population
The Income Expenditure Identity
Y=C+I+G+NX
–
–
–
–
–
Y=GDP (Income)
C=consumption
I=investment
G=government purchases
NX=net exports
• What is produced is spent somewhere.
The Income Expenditure Identity
Expenditures in 1996
Billions of dollars
Personal Consumption Expenditures (C)
5151
Gross private domestic investment (I)
1117
Government purchases of goods and services (G)
1406
Net exports (NX)
-99
Exports
855
Imports
954
Total (equals GDP) (Y)
7576
Percent of GDP
68.0
14.7
18.6
-1.3
11.3
12.6
100.0
GDP is same as National Income
GDP =
National Income
+ Indirect taxes
+Depreciation
- NFP
• The income approach says that what is
produced is income to someone
National Income
Income in 1996
Compensation of employees
Proprietors' income
Rental income of persons
Corporate profits
Net interest
Total (equals National Income)
Billions of dollars
4449
518
127
654
403
6151
Percent of GDP
58.7
6.8
1.7
8.6
5.3
81.2
National Saving
S=Y+NFP-(C+G)
Current Account
• This implies
S=(C+I+G+NX)+NFP- C - G
S=I+(NX+NFP)
• CA = current account balance
S=I+CA
• CA=0 if closed economy (Cuba)
Budget Deficit
Sg = (T-TR-INT)-G
•
•
•
•
•
T = Tax Receipts
TR = Transfers to private sector
INT = interest on national debt
G = Government purchases
Sg=Budget surplus if positive. If negative, then a
budget deficit
Some Fundamental Prices
The General Price Level
Y = nominal GDP
Y= P*y
• P = GDP deflator or simply market price
• y = real GDP or quantity of goods produced
The General Price Level
• Price growth = inflation:
 Pt 1 
 t 1  
 1 100
 Pt

• Real GDP growth:
 yt 1 
g t 1  
 1 100
 yt

Consumer Price Inflation
Interest Rates
• The (short-term) interest rate is the risk-free rate of return
that can be earned in the market.
• R ≡ Dollar interest rate
• Invest $1 today at the rate R
• Receive $(1+R) in one year. How much would you pay to
receive $1 in one year?
Real and Nominal Interest Rates
• The real interest rate, r, is the rate of
return in units of goods.
r=R-
• (Ex post) real interest rate is nominal
interest rate minus inflation.
Expected Inflation and Interest Rates
• The inflation rate is typically not known
• Expected (ex ante) real interest rate = nominal interest
rate - expected inflation
re = R -  e
• The expected real interest rate is the nominal interest
rate less expected inflation – the Fisher equation
Inflation and Nominal Interest Rate in the United States
R
Nominal
Interest Rate
Inflation
Bond Price and Interest Rate
• How much would you pay to receive $1 in one year?
• If you paid Q, then your return would be
(1-Q)/Q
• The return on the bond and the interest rate must be the
same:
Q = 1/(1+R)
• Bond prices and interest rates move in opposite directions
Glossary of Terms
GDP
NFP
GNP
C
I
G
X
M
NX
S
T
TR
INT

Pt
R
r
Gross Domestic Product (also Y)
Net Factor Payments
Gross National Product = GDP + NFP
National Consumption
National Investment
Government Expenditure
Exports
Imports
Net exports = X - M
National Saving = Spvt + Sgovt
Total taxes
Transfer payments
Interest payments
Inflation
General price level at time t
Nominal interest rate
Real interest rate