MACROECONOMICS AND THE GLOBAL BUSINESS ENVIRONMENT Economics Economic

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

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

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

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

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 n Examples: n n n Woodrow Wilson China-U. S. example

2 -6 A Successful Market Economy n 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.

2 -7 Microeconomics vs. Macroeconomics n Microeconomics: the study of the behavior of individual economic agents. Microeconomics asks n how individuals allocate their time, income, and wealth among various opportunities for labor, leisure, consumption, and savings. n n 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 n Example: how sensitive is the demand for gasoline to price changes?

2 -8 Microeconomics vs. Macroeconomics n 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 n Current Issues n n Will the U. S. Federal Reserve continue to increase interest rates? What are the consequences of China’s exportdriven growth on other economies? Why has Europe’s economic growth been so weak?

2 -9 Microeconomics vs. Macroeconomics

2 -10 Microeconomics vs. Macroeconomics

2 -11 Why Study Macroeconomics? n Importance of Economic Policy Institutions and Issues n Monetary authority (usually central bank) n n n Fiscal Authority n n Controls money supply Influences interest rates and exchange rates Controls tax system Purchases goods and services Redistributes income International Policy Makers n IMF, World Trade Organization, G 7 n Significance of Firm-Specific and Aggregate Risk n Assessment of Long-Run Economic Environment n n 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?