MACROECONOMICS
AND THE GLOBAL BUSINESS ENVIRONMENT
Economics: Economic Review and Macro Basics
2-2
Why Economics?
Economic Question
 Scarcity: limited resources, unlimited wants



Resources (i.e. factors of production)
 Labor
 Capital
 Entrepreneurial Ability
 Time
 Information
Scarcity=>choices => tradeoffs=>opportunity costs
Opportunity Costs
 Value of whatever you sacrifice in order to do/be
 Value of next best option
 Subjectively valued
Answer to economic question:
Command Economy
vs.
Market Economy
2-3
A Successful Market Economy
 Private property

create incentives to wisely use resources


present
future
store fruits of labor/ savings
 Rule of Law
 everyone plays by the same rules
 protects private property
 market system presupposes government
 Price Mechanism
 transmits information
 creates incentives




orange story
oil story
Ultimately, a rationing device

Can you think of other rationing devices?
2-4
A Successful Market Economy
 Little Information Asymmetry
 Information dominance for one party in transaction
 Can sometimes be corrected by market
 Specialization
 increase productivity
 permits complex, large scale production
 expands field of knowledge
 Voluntary Trade
 only trade if benefits traders
 positive sum game: all parties better off
 trade utilizes unrecognized gains from trade
 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
Examples:


Woodrow Wilson
China-U.S. example
2-6
A Successful Market Economy
 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
 Microeconomics: the study of the behavior of
individual economic agents. Microeconomics
asks

how individuals allocate their time, income,
and wealth among various opportunities for
labor, leisure, consumption, and savings.


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

Example: how sensitive is the demand for
gasoline to price changes?
2-8
Microeconomics vs. Macroeconomics
 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
Current Issues



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?
350
300
250
Billions of 1972 Dollars
2-9
Microeconomics vs. Macroeconomics
The U.S. Great Depression
500
450
400
200
150
100
2
94
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M 932
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Linear (1922-1929 Trend)
Real GDP
2-10
Microeconomics vs. Macroeconomics
Current Dollar Value of the Economy
25
300
Argentina ($ billion)
20
250
15
200
150
10
100
5
50
0
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Argentina
Dominican Republic
Dominican Republic ($ billion)
350
2-11
Why Study Macroeconomics?
 Importance of Economic Policy Institutions and Issues

Monetary authority (usually central bank)



Fiscal Authority




Controls money supply
Influences interest rates and exchange rates
Controls tax system
Purchases goods and services
Redistributes income
International Policy Makers

IMF, World Trade Organization, G7
 Significance of Firm-Specific and Aggregate Risk
 Assessment of Long-Run Economic Environment


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?