20 The economic environment © Malcolm Surridge and Andrew Gillespie 2016

The Governments Economic Objectives Sustainable growth- the value of the economy's entire production of goods and services should increase over time. A steady and low rate of inflation – every country will have a target rate of inflation. That means the government wants the price of goods to go up a certain percent each year. Low levels of unemployment Stable exchange rates Redistributing income and wealth to reduce relative poverty

The Governments Economic Objectives Low levels of unemployment – it is not possible to eliminate unemployment. Thailand still has some unemployment although it is very low compared to the rest of the world. Stable exchange rates – significant fluctuations in exchange rates pose problems for businesses. They can effect profits and sales quickly. Redistributing income and wealth to reduce relative poverty

Objective Definition Reason Economic Growth How fast national income grows over a period of time. High growth adds to national income, which leads to higher incomes and a better standard of living for the population. Full Employment When those who are actively looking for employment can find employment More workers have incomes to spend, less money spent on benefits. Stable Prices This does not mean that no prices change at all, but that the average level of prices is stable (rises or fall very little) To avoid Inflation (a rise in the general level of prices). Inflation means that each unit of currency buys fewer goods and services. Balance of Payments Value of exports is equal to imports. If the value of imports is higher than the value of exports, then more money will be leaving the country than is flowing in – and this will mean savings are spent, or more borrowing is needed by the government, to finance these higher imports.

Balance of Payments A statement that summarizes an economy’s transactions with the rest of the world for a specified time period. (Accounting for countries) The balance of payments, also known as balance of international payments, encompasses all transactions between a country’s residents and its nonresidents involving goods, services and income; financial claims on and liabilities to the rest of the world; and transfers such as gifts. 

Balance of Payment (Current Accounts) A current account deficit means the value of imports of goods / services / investment incomes is greater than the value of exports. It is sometimes referred to as a trade deficit. Though a trade deficit (goods) is only part of the current account. A current account surplus indicates that a nation is a net lender (giving more) to the rest of the world, in contrast to a current account deficit, which indicates that it is a net borrower. So that country exports more than it imports.

Economic Environment and Business Strategy A business should have a long term plan through which it seeks to obtain. Businesses need to think about the government's objectives and align the governments goals as well as they can with their own. Example: if a company needs a lot of labor for their business they might want to look at doing business in a country that has a high level of unemployment. The government also might help this company if lowering unemployment is an objective of the government.

20.2 © Malcolm Surridge and Andrew Gillespie 2016

Micro vs. Macro Microeconomics: The study of personal, or small finances. Individuals, families or businesses within the economy Macroeconomics: The study of economic systems on a large scale National or Global economies Economic Growth is an increase in the value of goods and services produced by a nations economy. A slump takes place when production is at its lowest, unemployment is high and there are many business failures.

Gross Domestic Product Def. The total value, in dollars, of all final goods and services produced within the nation each year Abbreviated as the GDP Economic growth is usually measured by GDP http://www.tradingeconomics.com/thailand/gdp

What does the GDP tell us? If the GDP is larger than last year the economy is expanding (getting bigger) If the GDP is smaller, the economy is shrinking (getting smaller)

GDP, Life Expectancy, and Literacy

Business Cycle The Business Cycle allows people to understand the direction the economy (GDP) is going (growing or shrinking) and plan accordingly. The economy follows the Business Cycle regularly.

Expansion (Upswing/Recovery) During a period of expansion: Wages increase Low unemployment People are optimistic and spending money High demand for goods Businesses start Easy to get a bank loan Businesses make profits and stock prices increase

Peak (Boom) When the economic cycle peaks: The economy stops growing (reached the top) GDP reaches maximum Businesses can’t produce any more or hire more people Cycle begins to contract

Contraction (Recession) During a period of contraction: Businesses cut back production and layoff people Unemployment increases Number of jobs decline People are pessimistic (negative) and stop spending money Banks stop lending money

Recession/Depression A prolonged contraction is called a recession (contraction for over 6 months) A recession of more than one year is called a depression

Trough (slump) When the economic cycle reaches a trough: Economy “bottoms-out” (reaches lowest point) High unemployment and low spending Stock prices drop But, when we hit bottom, no where to go but up! UNLESS….

Business Cycle Peak Peak Contraction Expansion Contraction Expansion Trough

What does the government do? Weapons for Gov. A 'countercyclical' fiscal policy refers to the opposite approach: reducing spending and raising taxes during a boom period, and increasing spending/cutting taxes during a recession. Pro-cyclical is a term used in economics to describe how an economic quantity is related to economic fluctuations. It is the opposite of countercyclical… In business cycle theory and finance, any economic quantity that is positively correlated with the overall state of the economy is said to be pro-cyclical.

What keeps the Business Cycle Going? 4 variables cause changes in the Business Cycle: Business Investment When the economy is expanding, sales and profit keep rising, so companies invest in new plants and equipment, creating new jobs and more expansion. In contraction, the opposite is true

What Keeps the Business Cycle Going? Interest Rates and Credit Low interest rates, companies make new investments (money is cheap), adding jobs. When interest rates climb, investment dries up and less job growth Governments usually lower interest rates when the economy is going down to try to increase people to spend money. Consumer Expectations Forecasts of an expanding economy fuels more spending, while fear of a recession decreases consumer spending

What keeps the Business Cycle Going? External Shocks External Shocks, such as disruptions of the oil supply, wars, or natural disasters greatly influence the output of the economy Ex. 1992-2000 was the longest period of expansion in U.S. history. Early in 2001, signs of contraction appeared, though the Bush administration denied it. The Sept. 11th 2001 terrorist attacks quickly caused the business cycle to shift into a contraction.

Who Cares????? Why should you care about the business cycle and economy? Lots of reasons!

“Don’t quit that job!” If the economy is going into a contraction, jobs will become more scarce. If you quit, you may not find another job! But, if the economy is in a period of expansion, jobs are readily available. It may be a good time to switch careers.

“Should I make a big purchase?” Only if you know that you won’t lose your job in a contraction. So, buy your house during an expansion. HOWEVER, When the economy starts to slow down (contraction), interest rates will decrease. Wait to buy a house until the rates drop to a low point, if you are sure you won’t lose your job.

Quick Review! What phase of the business cycle do wages go up? Expansion What phase of the business cycle do wages go down? Contraction

Review cont. When are wages at their highest? Peak When are wages at their lowest? Trough

More Review When will borrowing decrease? Contraction When will borrowing increase? Expansion When will borrowing be at it’s lowest? Trough

Even More Review! When will unemployment be at its lowest? Peak When will business profits be the highest? When should you look for a new job? Expansion