1. Goethe Business School Global Economic Environment Paul Bernd Spahn

2. Goethe Business School 2 Preliminaries  Instructor  Learning method  Textbook  Course content  Assignments  Readings  Self-evaluation test  Group work 1: Discussion Board (CENTRA)  Group work 2: Project (case study)  Final exam

3. Goethe Business School 3 Honor code

4. Goethe Business School 4 Learning platform  We are exclusively using the Fuqua Learning Platform for discussions, chats, bulletin board etc.

5. Goethe Business School Chapter I: Introduction A. Motivation of the Course B. Principal topics covered

6. Goethe Business School 6 Why is macroeconomics important for businesses?  Business often considers the institutional and economic environment for a firm’s operations as “given”  But optimizing business in a deteriorating macroeconomic environment is futile  And there is competition between different economic systems at world scale  Disregarding the global macro economy is a dangerous and “myopic strategy”

7. Goethe Business School 7 Macroeconomics and the firm Sources of Corporate Uncertainty Environment Idiosyncratic Macroeconomic - Political stability - “Rule of Law” - Openness - Competition policy - Labor regulations - Taxes, social costs - Infrastructure - Human Capital - Stable growth - Income levels - Employment - Price stability - Wage rates - Interest rates - Exchange rates - Sustainable policies - Market position - Quality of labor - Technology - Energy - Productivity - Costs - Innovation - Specific risks

8. Goethe Business School 8 Growth and employment  Stable growth and high employment generate a favorable climate for a firm’s economic expansion  High employment generates broad and often high incomes  High employment means less poverty and lower social costs  Income also supports domestic demand

9. Goethe Business School 9 Financial stability  Stable price levels lower information costs and allow better planning of revenues and costs  The general price level also affects wage rates and interest rates  Stable exchange rates are particularly important for exporters and importers, but also for international direct and indirect investors  Financial volatility entails risks and hence costs  Predictable and sustainable economic policies of government are crucial for a firm’s success

10. Goethe Business School 10 Inflation  Inflation entails high information costs because it is difficult to monitor  the real value of revenues and costs, in particular capital costs; and  the real value of assets and liabilities  Inflation undermines long term planning and contracting, in particular of investment  Inflation entails risks for a firm through short term ad hoc state intervention

11. Goethe Business School 11 Exchange rate crises  Crises of the exchange rate are disruptive for international operations anchored in the crisis currency  Such crises are often caused by, or alimented by, short run speculation  Exchange rate crises also affect the local economy (declining wealth)  Exchange rate crises often trigger state intervention such as capital controls

12. Goethe Business School 12 Examples of exchange rate crises Pound sterling 1992-94 Asian crisis 1997-98

13. Goethe Business School 13 How to explain this?

14. Goethe Business School 14 Government interventions  Government policy is usually at its best if focused on a stable and sustainable economic environment for private operations  Some redistributive policies foster a stable social environment and general prosperity  But regulations and the protection of “social entitlements” may become costly for firms  State interventions can often be disruptive

15. Goethe Business School 15 Relevance of course  General macroeconomics is highly important for business decision making  The global economy will expand business opportunities beyond traditional markets  So general macroeconomics has to be placed in a global context  Global economics must take the political and institutional conditions into account

16. Goethe Business School Reading  Reading 1-7: “The fragility of perfection: When supply chains go wrong“, The Economist, May 1 st, 2008 16

17. Goethe Business School 17 What are the principal topics covered?  Growth and efficiency  Supply-side economics and demand management  International differences in wage rates  Inflation around the world  International trade flows  Global allocation of capital  Monetary policy and interest rates  International finance and exchange rates

18. Goethe Business School 18 Discussion 1: Market economy: its strengths and its limits  What are the principal advantages of a market economy?  What are its principal drawbacks?  Can the market economy be fair?