1. External Influences The Macro-Economy

2. External Influences – The Macro- Economy The Macro-economy:  The production and exchange process of the whole economy as opposed to individual markets within the economy  Businesses affected by changes in the macro–economy and by government policies

3. External Influences – The Macro-Economy Government Macro-economic objectives:  Control of inflation – 2.0%  Maintain full employment – all who want a job can get one!  Control of balance of payments  Stability of exchange rate  Maintain steady economic growth -> 2-2.5%?

4. External Influences – The Macro-Economy Inflation: a general rise in the price level over a period of time Case study – Zimbabwe’s inflation problem

5. Highest Monthly Inflation Rates in History Country Month with highest inflation rate Highest monthly inflation rate Equivalent daily inflation rate Time required for prices to double HungaryJuly 19461.30 x 10 16 %195%15.6 hours Zimbabwe Mid-November 2008 (latest measurable) 79,600,000,000%98.0%24.7 hours YugoslaviaJanuary 1994313,000,000%64.6%1.4 days GermanyOctober 192329,500%20.9%3.7 days GreeceNovember 194411,300%17.1%4.5 days ChinaMay 19494,210%13.4%5.6 days Source: Prof. Steve H. Hanke, February 5, 2009.

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7. External Influences – The Macro-Economy Balance of Payments: A record of the trade between the US and other countries  Imports – visible and invisible – purchase of goods and services from other countries which result in payments being made abroad  Exports – visible and invisible – the sale of goods and services to other countries which results in payments being received from those countries

8. External Influences – The Macro-Economy Balance of Payments:  Ease with which businesses can sell products abroad  Impact on business costs from imports  Impact on competition from imports and exports

9. External Influences – The Macro-Economy Exchange Rates  The rate at which one currency can be exchanged for another  e.g. $1 = €1.72, = £ 1.68  Influences the perceived prices of imports and exports and therefore costs and competitiveness

10. External Influences – The Macro-Economy Exchange Rates:  Effects on Business: Appreciation – value of $ against other currencies rises, e.g. $1 = €1.72 to $1 = €1.75  Exports harder to sell abroad - foreign traders have to give up more of their currency to get same amount of $ - export prices appear to rise  Imports appear to be cheaper – buyer in US gets more foreign currency for every $

11. External Influences – The Macro- Economy Depreciation – value of $ against other currencies falls, e.g. $1 = £ 1.68 to $1 = £ 1.60  Exporters benefit – foreign traders get more $ for their currency – export prices appear to fall  Importers – have to give up more $ to get same amount of foreign currency – appears import prices have risen Precise effect of both depends on Price Elasticity of demand for imports and exports

12. Case Study K & Q Jeans: The impact of fluctuating exchange rates

13. External Influences – The Macro-Economy Economic Growth: Measured by Gross Domestic Product (GDP) – the value of output of goods and services in the economy over a period of a year  Measured by adding up total incomes (Y) or total expenditure (E) or total output of industry  In theory all should be the same!  Appropriate growth levels in UK too high - economy overheating, too low - economy stagnating, resources unemployed  Actual growth of 2–2.5% seen as being sustainable

14. External Influences – The Macro-Economy Economic Growth  Effects on business: Low growth – business sales low, profit margins tight, excess capacity, orders reduced, excess stock, redundancies High growth – business sales rising quickly, profits rising, skill shortages, inflationary pressure on prices, capacity squeezed, stocks running down

15. External Influences – The Macro-Economy Government Policies: Fiscal Policy – influencing economic and non-economic objectives through variations in public income and expenditure (tax revenue, borrowing and government spending) Affects all aspects of business activity – regulations, infrastructure – roads, transport, etc, health and safety, support for industry, business taxation, employment laws and taxes – income tax and national insurance contributions, pension contributions, etc.

16. External Influences – The Macro-Economy Monetary Policy: Changes in the rate of interest to help control the level of expenditure in the economy and therefore the level of inflation In hands of the Federal Reserve  Conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long- term interest rates. Significant effects on business activity:

17. External Influences – The Macro-Economy Rising Interest Rates:  Likely to depress consumer spending  Increases the cost of borrowing – impacts on investment decisions  Increases existing loan costs – the more highly geared the greater the impact  Affects exchange rate – could impact on sales abroad (exports) or cost of imported resources Falling rates have the opposite effect