1. MACROECONOMICS AND THE GLOBAL BUSINESS ENVIRONMENT Economics: Economic Review and Macro Basics

2. 2-2 Why Economics? Economic Question Scarcity: limited resources, unlimited wants Resources (i.e. factors of production) Labor Capital Entrepreneurial Ability Time Information Scarcity=>choices => tradeoffs=>opportunity costs Opportunity Costs Value of whatever you sacrifice in order to do/be Value of next best option Subjectively valued Answer to economic question: Command Economy vs. Market Economy

3. 2-3 A Successful Market Economy Private property create incentives to wisely use resources present future store fruits of labor/ savings Rule of Law everyone plays by the same rules protects private property market system presupposes government Price Mechanism transmits information creates incentives orange story oil story Ultimately, a rationing device Can you think of other rationing devices?

4. 2-4 A Successful Market Economy Little Information Asymmetry Information dominance for one party in transaction Can sometimes be corrected by market Specialization increase productivity permits complex, large scale production expands field of knowledge Voluntary Trade only trade if benefits traders positive sum game: all parties better off trade utilizes unrecognized gains from trade tend to trade those goods/services that have the lowest opportunity costs for us

5. 2-5 A Successful Market Economy Comparative Advantage: individuals, firms, countries with the lowest opportunity costs of producing a particular good/service should produce that good and trade for the goods/service for which they have the highest opportunity cost Examples: Woodrow Wilson China-U.S. example

6. 2-6 A Successful Market Economy Question: Ellen holds the world record in speed typing. You expect Ellen (a) will never hire another person to do her typing. (b) is a professional typist. (c) still might hire someone else to do her typing. (d) has a comparative advantage in typing.

7. 2-7 Microeconomics vs. Macroeconomics Microeconomics: the study of the behavior of individual economic agents. Microeconomics asks how individuals allocate their time, income, and wealth among various opportunities for labor, leisure, consumption, and savings. Example: do I work more or less hours given a pay raise? how firms decide on output levels, prices, and the resources that will be used in the production process Example: how sensitive is the demand for gasoline to price changes?

8. 2-8 Microeconomics vs. Macroeconomics Macroeconomics: concerned with overall economic performance of the nation rather than individuals or firms An analysis of the backdrop of economic conditions against which firms and consumers make decisions Current Issues Will the U.S. Federal Reserve continue to increase interest rates? What are the consequences of China’s export- driven growth on other economies? Why has Europe’s economic growth been so weak?

9. 2-9 Microeconomics vs. Macroeconomics

10. 2-10 Microeconomics vs. Macroeconomics

11. 2-11 Why Study Macroeconomics? Importance of Economic Policy Institutions and Issues Monetary authority (usually central bank) Controls money supply Influences interest rates and exchange rates Fiscal Authority Controls tax system Purchases goods and services Redistributes income International Policy Makers IMF, World Trade Organization, G7 Significance of Firm-Specific and Aggregate Risk Assessment of Long-Run Economic Environment How will trade policy, monetary policy, fiscal policy, technological advancement, political stability affect future economic growth? Where will the economy be 10, 20, 30 years from now?