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Global Economic Environment
Paul Bernd Spahn
Goethe Business School
Preliminaries
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Instructor
Learning method
Textbook
Course content
Assignments
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Readings
Self-evaluation test
Group work 1: Discussion Board (CENTRA)
Group work 2: Project (case study)
Final exam
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Honor code
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Chapter I: Introduction
A. Motivation of the Course
B. Principal topics covered
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Why is macroeconomics
important for businesses?
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Business often considers the institutional and
economic environment for a firm’s operations
as “given”
But optimizing business in a deteriorating
macroeconomic environment is futile
And there is competition between different
economic systems at world scale
Disregarding the global macro economy is a
dangerous and “myopic strategy”
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Macroeconomics
and the firm
Sources of Corporate
Uncertainty
Environment
Macroeconomic
- Political stability
- “Rule of Law”
- Openness
- Competition policy
- Labor regulations
- Taxes, social costs
- Infrastructure
- Human Capital
- Stable growth
- Income levels
- Employment
- Price stability
- Wage rates
- Interest rates
- Exchange rates
- Sustainable policies
Idiosyncratic
- Market position
- Quality of labor
- Technology
- Energy
- Productivity
- Costs
- Innovation
- Specific risks
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Growth and employment
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Stable growth and high employment generate
a favorable climate for a firm’s economic
expansion
High employment generates broad
and often high incomes
High employment means
less poverty and lower social costs
Income also supports domestic demand
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Financial stability
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Stable price levels lower information costs and
allow better planning of revenues and costs
The general price level also affects wage rates
and interest rates
Stable exchange rates are particularly important
for exporters and importers, but also for
international direct and indirect investors
Financial volatility entails risks and hence costs
Predictable and sustainable economic policies of
government are crucial for a firm’s success
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Inflation
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Inflation entails high information costs
because it is difficult to monitor
 the real value of revenues and costs,
in particular capital costs; and
 the real value of assets and liabilities
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Inflation undermines long term planning
and contracting, in particular of investment
Inflation entails risks for a firm through
short term ad hoc state intervention
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Exchange rate crises
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Crises of the exchange rate are disruptive
for international operations anchored
in the crisis currency
Such crises are often caused by, or
alimented by, short run speculation
Exchange rate crises also affect the local
economy (declining wealth)
Exchange rate crises often trigger state
intervention such as capital controls
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Examples
of exchange rate crises
Asian crisis 1997-98
Pound sterling 1992-94
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How to explain this?
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Government interventions
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Government policy is usually at its best
if focused on a stable and sustainable
economic environment for private operations
Some redistributive policies foster a stable
social environment and general prosperity
But regulations and the protection of “social
entitlements” may become costly for firms
State interventions can often be disruptive
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Relevance of course
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General macroeconomics is highly
important for business decision making
The global economy will expand business
opportunities beyond traditional markets
So general macroeconomics has to be
placed in a global context
Global economics must take the political
and institutional conditions into account
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Reading
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Reading 1-7: “The fragility of perfection:
When supply chains go wrong“, The
Economist, May 1st, 2008
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What are the
principal topics covered?
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Growth and efficiency
Supply-side economics
and demand management
International differences in wage rates
Inflation around the world
International trade flows
Global allocation of capital
Monetary policy and interest rates
International finance and exchange rates
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