Economic Environment AnalysisEconomic Environment Analysis

Instructor

Satyendra Timilsina

Course OutlineCourse Outline

• IntroductionIntroduction

• Working of macroeconomicsWorking of macroeconomics

• Macroeconomic ConceptsMacroeconomic Concepts

IntroductionIntroduction

• Managers have to deal with economic environment at two levels – micro level and macro level

• Micro level includes market structure and the strength of competitors. Firm’s decision making is mostly influenced by the activities of its rival forms. The following are some factors that affect firms decision at micro level – Level of competition– Cost of production and – Product differentiation

IntroductionIntroduction

• Macro level includes the overall system. This is something that the firm assumes to the given.

• Decision making of the firm is affected by the macroeconomic environment.

• The following macroeconomic factors have a strong effect on firm’s decision making – Overall Demand– Price Level– Rate of interest – Tax policies and – Exchange Rates

IntroductionIntroduction

• It is important for managers to know the macroeconomic policy environment because an unprecedented change in any of these factors can upset the revenue and cost of the firm, affecting the profitability and returns.

• The problem can be minimized or managed if managers know the working of an economy and thereby, judge the direction of possible changes in macroeconomic variables and policies.

• With this, they can even assess the best timing to take new investment decisions

Workings of Macroeconomics Workings of Macroeconomics

AD

AS

Equilibrium

Monetary Policy

Fiscal Policy

Other Policies

Price &

Cost Potential Output

Capital Labor Tech

Output Real GDP

Employment

Price Situation

Foreign Trade

Macroeconomic ConceptsMacroeconomic Concepts

• Supply-side concepts Supply-side concepts – – National Income AccountingNational Income Accounting

• Demand side conceptsDemand side concepts– – Consumption, Investment, Government Consumption, Investment, Government Expenditure, Foreign Trade, MultiplierExpenditure, Foreign Trade, Multiplier

National Income AccountingNational Income Accounting

• It is the accounting system used to measure nation’s total income and total expenditure on goods and services

• Through national income accounting we measure

Gross Domestic Product Gross National Product Net National Product, National Income Personal and Disposable Income

Gross Domestic Product (GDP)Gross Domestic Product (GDP)

• GDP is the monetary value of final goods and services produced in an economy in a given period of time.

• It is the total income earned domestically, including the income earned by foreign owned factors of production

• GDP can be measured through product method, expenditure method and income method

The Circular Flow of Income

Household Firm

Labor / Factor Inputs

Goods and Services

Income

Expenditure

Value of total production = Value of total expenditure = Value of total income

Circular Flow of Income 3 sector economy

Household Government Business

Factor Market

Financial Market

Product Market

Income F

rom Lab

or and

other fac

tors of P

roduction

Expense on Labor and other

factors of Production

Expense on

purchase of goods

and services

Income from

sales

of goods

and service

s

TaxesTaxes

Private

SavingsPublic

SavingsInvestment

Govt. E

xp.

GDP MeasurementGDP Measurement

Product Method• It is the sum of monetary value of quantity

produced in the given time periodIncome Method• Sum of income of all factors of production

gives the GDP from income side• GDP = Rent + Wages + Interest + ProfitsExpenditure Method• GDP = C + I + G + (X-M)

• GNP = GDP + NFI from Abroad• NNP = GNP – Depreciation• NI = NNP – Indirect Business Tax• PI = NI – Social contributions – net

interests + dividends + Govt. transfers + Personal interest income

• DI = PI – Personal tax and non tax payments

GNP and Other measuresGNP and Other measures

Key Issues while calculating GDPKey Issues while calculating GDP

• Treatment of Intermediate Goods– Value Added Method and Final Goods Method

• Treatment of Used Goods– Transfer from one hand to other

• Treatment of Inventories– Produced but not used in the same year

• Housing Services and Imputation– Uncalculated values

• gifts, barter transactions

Key terminologies relating to GDPKey terminologies relating to GDP

• Real GDP and Nominal GDP

• GDP deflator

• GDP per capita

• GDP per capital at PPP terms

Demand Side ConceptsDemand Side Concepts

• There are four types of demands in an economy

• Consumption Demand (C)• Investment Demand (I)• Government Demand (G)• External Sector Demand (X-M)

Individual AssignmentIndividual AssignmentHand writtenHand written

1.1. What do you mean by Economic Environment? What do you mean by Economic Environment? Explain its importance for managers in decision Explain its importance for managers in decision making?making?

2.2. What is Gross Domestic Product. Explain What is Gross Domestic Product. Explain different methods of GDP computation.different methods of GDP computation.

Thank YouThank You