MACROECONOMICS AND THE GLOBAL BUSINESS ENVIRONMENT

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

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. 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. 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. 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. 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. 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. 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. Microeconomics vs. Macroeconomics

10. Microeconomics vs. Macroeconomics

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?