Download GDP - University of Hawaii at Hilo

Chapter
8
The Impact of Economic
Forces
Macroeconomic Forces

Macroeconomics:


The study of the entire economy of a nation.
Key Macroeconomic Variables:




McGraw-Hill
Economic Growth
Inflation
Unemployment
Interest Rates
© 2004 The McGraw-Hill Companies, Inc. All rights reserved.
Gross Domestic Product (GDP)
GDP:


The market value of all final goods and services
produced in a country in a given year.

The 4 Components of GDP:
1.
2.
3.
4.
McGraw-Hill
Personal Expenditures
Gross Private Domestic Investment
Government Consumption Expenditures and Gross
Investment
Net Exports of Goods and Services (the value of exports
minus the value of imports)
© 2004 The McGraw-Hill Companies, Inc. All rights reserved.
Key Economic Factors

Economic Growth:


An increase in total spending in the economy.
Per Capita Economic Growth:

Calculated by dividing the GDP in each year by the population in
that year.

Per capita growth rate is then determined by comparing the GDP
per person in the preceding year with the GDP per person in the
current year.
McGraw-Hill
© 2004 The McGraw-Hill Companies, Inc. All rights reserved.
Key Economic Factors

Inflation:


A general increase in prices or an increase in the prices of
most goods and services.
Deflation:

McGraw-Hill
A general decrease in prices or the prices of most goods
and services.
© 2004 The McGraw-Hill Companies, Inc. All rights reserved.
Unemployment

Unemployment Rate:


The ratio of the number of people classified as
unemployed to the total labor force.
Types of Unemployment:




McGraw-Hill
Frictional Unemployment
Structural Unemployment
Seasonal Unemployment
Cyclical Unemployment
© 2004 The McGraw-Hill Companies, Inc. All rights reserved.
Interest Rates
Interest:


The price that individuals or businesses pay to
borrow money.
Effects of Interest Rates on Business:

1.
2.
3.
McGraw-Hill
Rising interest rates increase the total price customers
pay who use credit for products and services.
Higher interest rates mean higher costs of doing
business.
Interest rates impact on the rate of expansion of a
business.
© 2004 The McGraw-Hill Companies, Inc. All rights reserved.
Monetary and Fiscal Policy

Fiscal Policy:


Raising or lowering taxes of government spending in
order to influence growth.
Monetary Policy:

McGraw-Hill
Changing the money supply to change interest rates
directly, thus influencing inflation, growth, and
unemployment.
© 2004 The McGraw-Hill Companies, Inc. All rights reserved.
The Business Cycle
The Business Cycle


A somewhat regular pattern of ups and downs in
aggregate production, as measured by the fluctuations
in real GDP.
Peak
GDP
Peak
Expansion
Expansion
Recession
Trough
Year
McGraw-Hill
© 2004 The McGraw-Hill Companies, Inc. All rights reserved.
Industry Cycles
Industry Cycles:


Some industries are subject to their own cyclical
fluctuations in sales and profits.

Most likely to occur in industries where a high
percentage of the cost of production is incurred at
the time production capacity is created.



McGraw-Hill
Telephone industry
Airline industry
Electricity generation industry
© 2004 The McGraw-Hill Companies, Inc. All rights reserved.
Microeconomic Forces

Microeconomics:


The study of the behavior of individuals and firms.
Market:
 The place where buyers and sellers meet and bargain
over goods and services.
McGraw-Hill
© 2004 The McGraw-Hill Companies, Inc. All rights reserved.
Supply, Demand, and Market Price

Revenue is determined by 2 factors:
1.
The prices customers pay.
2.
The total amount of goods and services
customers purchase.
P x Q = TR
P = price, Q = quantity sold, and TR = total revenue
McGraw-Hill
© 2004 The McGraw-Hill Companies, Inc. All rights reserved.
Supply, Demand, and Market Price

Demand Curve:


Supply Curve:


A line on a graph that shows how much of a good or
service buyers will purchase at each possible price.
A line on a graph that shows the amount of a good or
service a business will offer at each possible price.
Equilibrium Point:

McGraw-Hill
The point on a graph where the demand curve intersects
the supply curve.
© 2004 The McGraw-Hill Companies, Inc. All rights reserved.
The Basic Supply and Demand Model
Price
Equilibrium
Point
Supply Curve
Demand Curve
Quantity
McGraw-Hill
© 2004 The McGraw-Hill Companies, Inc. All rights reserved.
Direct Competition Market Models

Pure Competition:


A market situation where many firms sell nearly identical
products and no one firm can raise its price without
losing most of its customers.
Monopolistic Competition:

McGraw-Hill
A market situation where there are many firms but each
firm has a slightly different product.
© 2004 The McGraw-Hill Companies, Inc. All rights reserved.
Direct Competition Market Models

Oligopoly:


A situation where a few firms, with or without
differentiated products, dominate the market.
Pure Monopoly:

McGraw-Hill
A market situation where only one firm sells a product of
service.
© 2004 The McGraw-Hill Companies, Inc. All rights reserved.
Indirect Competition

Different products or services that are perceived by
customers as acceptable alternatives or substitute
products or services.

Southwest Airlines as a substitute for the car
between Dallas, Houston, and San Antonio

The Internet as a substitute for the U. S. Postal
Service
McGraw-Hill
© 2004 The McGraw-Hill Companies, Inc. All rights reserved.
The Role of Economics in
Management Decision Making

Managers must observe and predict what will
happen in the overall economy to ensure that
their decisions match their best guesses of the
future.

Large publicly held companies in particular must
look at the economy because they know their
performance and stock price will be affected by
forces beyond their control.
McGraw-Hill
© 2004 The McGraw-Hill Companies, Inc. All rights reserved.
The Role of Economics in
Management Decision Making

Stockholders will want to see continually rising
stock prices or at least valid reasoning if stock
prices do not meet expectations.

Top managers in these large companies may
make acquisitions, sell divisions, or even sell the
company itself depending on their assessment
of the economy and how their firm can compete.
McGraw-Hill
© 2004 The McGraw-Hill Companies, Inc. All rights reserved.