1. Economic Environment Analysis
Instructor
Satyendra Timilsina

2. Course Outline Introduction Working of macroeconomics
Macroeconomic Concepts

3. 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

4. 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

5. 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

6. 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

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

8. 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

9. 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

10. 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

11. 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

12. 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)

13. 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

14. 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

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

16. 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)

17. 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.

18. Thank You