Economic Environment Analysis Instructor Satyendra Timilsina

Course Outline Introduction Working of macroeconomics Macroeconomic Concepts

Introduction Managers have to deal with economic environment at two levels – micro level and macro level Micro level includes market structure and the strength of competitors. Firm’s decision making is mostly influenced by the activities of its rival forms. The following are some factors that affect firms decision at micro level Level of competition Cost of production and Product differentiation

Introduction Macro level includes the overall system. This is something that the firm assumes to the given. Decision making of the firm is affected by the macroeconomic environment. The following macroeconomic factors have a strong effect on firm’s decision making Overall Demand Price Level Rate of interest Tax policies and Exchange Rates

Introduction It is important for managers to know the macroeconomic policy environment because an unprecedented change in any of these factors can upset the revenue and cost of the firm, affecting the profitability and returns. The problem can be minimized or managed if managers know the working of an economy and thereby, judge the direction of possible changes in macroeconomic variables and policies. With this, they can even assess the best timing to take new investment decisions

Workings of Macroeconomics Monetary Policy Fiscal Policy Other Policies Output Real GDP AD Employment Equilibrium AS Price Situation Foreign Trade Price & Cost Potential Output Capital Labor Tech

Macroeconomic Concepts Supply-side concepts – National Income Accounting Demand side concepts – Consumption, Investment, Government Expenditure, Foreign Trade, Multiplier

National Income Accounting It is the accounting system used to measure nation’s total income and total expenditure on goods and services Through national income accounting we measure Gross Domestic Product Gross National Product Net National Product, National Income Personal and Disposable Income

Gross Domestic Product (GDP) GDP is the monetary value of final goods and services produced in an economy in a given period of time. It is the total income earned domestically, including the income earned by foreign owned factors of production GDP can be measured through product method, expenditure method and income method

The Circular Flow of Income Labor / Factor Inputs Household Firm Goods and Services Expenditure Value of total production = Value of total expenditure = Value of total income

Circular Flow of Income 3 sector economy Factor Market Income From Labor and other factors of Production Expense on Labor and other factors of Production Financial Market Private Savings Public Savings Investment Taxes Household Government Business Taxes Govt. Exp. Expense on purchase of goods and services Income from sales of goods and services Product Market

GDP Measurement Product Method It is the sum of monetary value of quantity produced in the given time period Income Method Sum of income of all factors of production gives the GDP from income side GDP = Rent + Wages + Interest + Profits Expenditure Method GDP = C + I + G + (X-M)

GNP and Other measures GNP = GDP + NFI from Abroad NNP = GNP – Depreciation NI = NNP – Indirect Business Tax PI = NI – Social contributions – net interests + dividends + Govt. transfers + Personal interest income DI = PI – Personal tax and non tax payments

Key Issues while calculating GDP Treatment of Intermediate Goods Value Added Method and Final Goods Method Treatment of Used Goods Transfer from one hand to other Treatment of Inventories Produced but not used in the same year Housing Services and Imputation Uncalculated values gifts, barter transactions

Key terminologies relating to GDP Real GDP and Nominal GDP GDP deflator GDP per capita GDP per capital at PPP terms

Demand Side Concepts There are four types of demands in an economy Consumption Demand (C) Investment Demand (I) Government Demand (G) External Sector Demand (X-M)

Individual Assignment Hand written What do you mean by Economic Environment? Explain its importance for managers in decision making? What is Gross Domestic Product. Explain different methods of GDP computation.

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