External Influences The Macro-Economy

External Influences – The Macro- Economy 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:  Control 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%?

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 HungaryJuly x %195%15.6 hours Zimbabwe Mid-November 2008 (latest measurable) 79,600,000,000%98.0%24.7 hours YugoslaviaJanuary ,000,000%64.6%1.4 days GermanyOctober ,500%20.9%3.7 days GreeceNovember ,300%17.1%4.5 days ChinaMay 19494,210%13.4%5.6 days Source: Prof. Steve H. Hanke, February 5, 2009.

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External Influences – The Macro-Economy Balance of Payments: A record of the trade between the US and other countries  Imports – 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

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 Rates:  Effects 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 Macro- Economy 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 long- term 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