AM - Chapter 2. The impact of macroeconomics on business.pptx

Applied Macroeconomics School of Economics and Business Department of Economics Office 1.24B Prof. D. Manuel J. Ortega Tierra ([email protected]) Academic year 2023-24 2 – The impact of macroeconomics on business INDEX 2.1 –...

Applied Macroeconomics School of Economics and Business Department of Economics Office 1.24B Prof. D. Manuel J. Ortega Tierra ([email protected]) Academic year 2023-24 2 – The impact of macroeconomics on business INDEX 2.1 – Why do companies care about the economic environment? 2.2 – Basic macroeconomic indicators 2 2 – The impact of macroeconomics on business 2.1 Why do companies care about the economic environment? What is the environment? All factors external to the company that have a significant influence on the company's strategy and which it cannot control. General External environment that involves the company from a generic perspective, i.e. everything that affects the company derived from the socio-economic system in which it carries out its activity. Types Specific The part of the environment closest to the company's usual activity, i.e. the sector of economic activity to which it belongs. 3 2 – The impact of macroeconomics on business 2.1 Why do companies care about the economic environment? Analysis of the general environment Adequate diagnosis of the current and future situation of this environment from a global point of view, with the aim of detecting the threats and opportunities that this environment offers to the company's performance both now and in the future. Global Socio-cultural Economic area Economic Levels Dimensions Scientific and technological Country, town… Political-legal 4 2 – The impact of macroeconomics on business 2.1 Why do companies care about the economic environment? Why is it important to consider the macroeconomic environment? Scarce resources Being aware of the context Open to changes Monitoring of variables 5 2 – The impact of macroeconomics on business 2.1 Why do companies care about the economic environment? It is essential: Study the form of economic policy-making and the competencies of the different authorities Knowing the implementation of economic policy Analysing the influence of the actions of the economic authorities 6 2 – The impact of macroeconomics on business 2.1 Why do companies care about the economic environment? Three types of information: Internal (company’s) Market General 7 2 – The impact of macroeconomics on business 2.1 Why do companies care about the economic environment? In terms of time, two types of analysis can be distinguished: Structural analysis Situation analysis 8 2 – The impact of macroeconomics on business 2.1 Why do companies care about the economic environment? Situation analysis Interpretative study of the economy’s current situation, as well as its most recent evolution and future prospects. Determination of the cyclical situation of economic activity. Its ultimate aim is to provide economic agents with an appropriate tool for economic decision-making. 9 2 – The impact of macroeconomics on business 2.1 Why do companies care about the economic environment? Quantify and assess the To have adequate and current situation sufficient information Projecting the short- Use of an appropriate Goals term future Prerequisites theoretical framework Point out the causes leading to Application of appropriate the diagnosed situation data processing techniques 10 2 – The impact of macroeconomics on business 1.GDP Growth: This is the increase in the value of goods and services 2.2 Basic macroeconomic indicators produced by an economy over time. Positive GDP growth indicates an expanding economy, while negative growth indicates contraction. 2.Output Gap: The difference between actual output (GDP) and potential output (the level of GDP that an economy can sustain over the long term 1) GDP growth without leading to inflation). A positive output gap suggests an economy is over-performing and may be overheating, while a negative gap suggests 2) Output gap underperformance and idle economic resources. 3.Unemployment Rate: The percentage of the labor force that is jobless and actively seeking employment. A lower unemployment rate indicates better job 3) Unemployment rate availability, while a higher rate may indicate an economic downturn or a labor market not fully utilizing its labor resources. 4.Investment Rate: The proportion of GDP that is being invested rather than 4) Investment rate consumed. This includes investments in business capital, such as machinery and buildings, and is a sign of future economic growth potential. 5.Inflation Rate: The rate at which the general level of prices for goods and 5) Inflation rate services is rising, and, subsequently, purchasing power is falling. Central banks attempt to limit inflation, and avoid deflation, in order to keep the economy running smoothly. 6) Government debt 6.Government Debt: The total amount of money owed by a government to creditors. It can be a result of previous borrowing to cover budget deficits. High levels of debt can be a burden on an economy, affecting its credit rating and 7) Government budget the interest rates it must pay on new loans. 7.Government Budget: A financial statement presenting the government's proposed revenues and spending for a financial year. The budget balance 8) Current account balance shows the difference between all revenues and all expenditures. A surplus indicates revenues exceed expenditures, and a deficit indicates expenditures exceed revenues. 8.Current Account Balance: A measure of a country's international financial transactions, covering all trade in goods and services, net earnings on cross- 11 border investments, and net transfer payments over a period of time. A surplus 2 – The impact of macroeconomics on business 2.2 Basic macroeconomic indicators Quantitative indicators: measured in physical or monetary units, they are often referred to as objective sources of information. Qualitative indicators: qualitative assessments that can generally be summarised as whether the situation of the phenomenon is better, the same or worse than the previous situation, or whether it will tend to improve, remain the same or worsen in the future. Subjective information Origin: opinion polls, intentions and expectations of economic agents. They are highly sensitive to changes in the economic situation. It is a very valuable instrument for economic analysis (good leading indicators of economic activity). Both serve to monitor numerous economic variables in the short term 12 2 – The impact of macroeconomics on business 2.2 Basic macroeconomic indicators Examples of qualitative indicators Harmonised Business Confidence Index Indicator based on surveys that collect the opinions of managers on the general performance of the business in the previous quarter and expectations for the following quarter HBCI growth rate 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0% -25.0% -30.0% 9 T4 0 T1 0 T2 0 T3 0 T4 1 T1 1 T2 1 T3 1 T4 2 T1 2 T2 2 T3 2 T4 3 T1 2 01 2 02 2 02 2 02 2 02 2 02 2 02 2 02 2 02 2 02 2 02 2 02 2 02 2 02 Source: Own elaboration with INE data 13 2 – The impact of macroeconomics on business 2.2 Basic macroeconomic indicators Survey-based indicator that approximates Examples of qualitative indicators consumers' spending intentions by asking them about their current perceptions and future Consumer Sentiment Indicator expectations for the country's economy, the household economy and employment. CSI month-on-month rate 60.0% 40.0% 20.0% 0.0% -20.0% -40.0% -60.0% 2 2 22 2 22 2 2 2 2 2 3 o-2 o-2 il- o-2 o- -2 -2 e-2 e-2 -2 o-2 r i il o e e er ar z ab ay n ju br br br br ne r ebr m m ju em c tu em em e f i o vi ci pt di se no ÍNDICE DE CONFIANZA CONSUMIDOR ÍNDICE DE SITUACIÓN ACTUAL ÍNDICE DE EXPECTATIVAS 14 Source: CIS Source: Own elaboration with CIS 2 – The impact of macroeconomics on business 2.2 Basic macroeconomic indicators Examples of qualitative indicators Purchasing Managers’ Index (PMI) A survey-based indicator that provides an advanced benchmark of what is happening in specific sectors of an economy by tracking the evolution of variables such as production, new orders, stock levels, employment and prices. It is based on facts, not opinions Interpretation: Greater than 50  Expansion Between 42 y 50  Contraction Less than 42  Recession 15 2 – The impact of macroeconomics on business 2.2 Basic macroeconomic indicators Having data with sufficient speed and periodicity for most important macro-variables is impossible The aim is therefore to create indicators that approximate their behaviour Synthetic or composite indicators They are constructed as a (simple or weighted) average of standardised indicators. 16 2.2 Basic macroeconomic indicators 17 End of chapter