Macroeconomy: reflects

condition overall economy

Microeconomy reflects on condition
industry, its markets and players
This chapter focuses on the macroeconomic
conditions of the business environment
• The microeconomic factors will be discussed in
the following chapter
• Next week mid test: 13-10: chapter 1,2 and the
slides in this PowerPoint presentation.
 Economic conditions
• When talking about conditions of an economy we look mainly at the
level of production and consumption
• A booming economy is an economy where there is good economic
growth, production and consumption quickly rising
• An economy in recession is an economy where production and
consumption are declining for 2 consecutive quarters
• The business cycle reflects the change in production and consumption
Business cycle
 Economic conditions
• Economic conditions can affect the revenue or
expenses of a business and therefore affect the
value of that business
• E.g. when economy is strong, demand and
therefore revenue is usu. higher, income for
firms is higher
• higher taxes can affect expenses
Macroeconomic factors that affect business
performance

Performance of firms is very much dependent on

three macroeconomic factors:

1. economic growth
2. Inflation
3. Interest rates
 Economic growth
• Economic growth is the change in the general level of
economic activity
• When production is high, incomes are high
• What is produced and sold = income for others
• When economic growth is negative for 2 consecutive
quarters, the period is referred to as a recession.
Result is a low demand for products and services and
therefore reduces revenue of firms.
 Indicators of economic growth
1. Aggregate expenditures (aggregate expenditure is the sum
of expenditures on consumption, investment, government
expenses and net exports) (measure of national income)
2. GDP = Gross domestic product
= total market value of all final products and services
produced in the U.S. (=measure of total production level)
• They are closely related and their differences will not be
discussed here (macroeconomics class)
• GDP is issued quarterly
Indicators of economic growth
 Economic growth
• % change in GDP from one quarter to another

=% change in GDP from one quarter to another

It is important for businesses to monitor changes in economic
growth
• It is important for businesses to monitor changes in economic growth.
 Indicators of economic growth
3. Unemployment level

Frictional unemployment (natural employment), max. 8 months.

Unemployment is temporary, friction between demand and supply.
Demand is not able to meet supply.
Ex. Lengthy application procedures, moving to other part of the
country, poor publication of vacancies.
People have the right type of education and there are jobs, it is just
demand and supply don’t meet. Least serious type of unemployment.
 Seasonal unemployment
• Beach restaurants in northern Europe
• Ice-cream factories
• Bicycle factories
• Ski resorts
 Cyclical unemployement
• Because of poor economic conditions
 Structural unemployment
• There are not enough jobs available (even at full capacity) because of
automatization, outsourcing of production and others

• Education doesn’t match/limited skills and/or limited education

• More employment in certain parts of a country than in others

whereas job seekers don’t move
• Cyclical unemployment level is the best indicator of economic
conditions
• A lower unemployment rate means increased economic growth
• A higher unemployment rate means reduced economic growth
• It is hard to determine how much of the unemployment rate is
cyclical
• There are many other indicators of economic growth (industrial
production index, houses built etc.), but we will stick to these 3
 Sensitivity of a firm to economic growth
• E.g. Demand for burgers of MacDonald's is not very sensitive to
economic conditions, people eat burgers all the time, even in bad
economic times

• The demand for new automobiles is much more sensitive to

economic conditions.
 Inflation
• Increase in the general level of prices of products and services over a
specified period of time
• Inflation = percentage change in CPI
• Affects operating expenses of business (cost of supplies and
materials)
• Wages are also affected by inflation
• Revenue is affected, in times of high inflation, revenue will increase to
compensate for their higher expenses
 Types of inflation
1. Cost-push inflation
E.g. oil goes up in price and increases cost of distribution

2. Demand-pull inflation
• Due to strong consumer demand. Sometimes even shortages can
arise and so producers raise prices. They are confident that they will
sell anyway
 Inflation
• Strong economic growth puts pressure on wages
as well as prices
There are less unemployed people, people may
negotiate for higher wages and this especially
works when there are no other qualified workers
available
Result: production cost rises and firms try to
increase their prices (wage-price spiral)
 Interest rates
• When interest rates go up, it is nice for your savings but not
nice when you have to borrow money, so also for businesses.
• When taking on a loan from a bank, typically the interest rate
is adjusted for the market value periodically, usu. every 6
months.
• Interest rates can significantly influence a firm’s profit
• Sometimes projects (expansion) are canceled because the
interest rate is much higher than at the time of developing
the plan (feasibility study), finance costs can not be covered
 Interest
• Not only the expenses (interest) of firms are affected by a
change in interest rate, the revenues of firms can also be
affected.

• Think of firms that houses, cars, heavy equipment. Stuff that

is usually bought on credit. Higher interest rates will cause a
drop in the purchase of these goods and so demand for
these goods is reduced.