Global Economic Environment

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Global Economic Environment
Paul Bernd Spahn
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Preliminaries

• Instructor
• Learning method
• Textbook
• Course content
• Assignments
• 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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Learning platform

• We are exclusively using the Fuqua Learning
  Platform for discussions, chats, bulletin board
  etc.

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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?

• Business often considers the institutional and
  economic environment for a firms 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
Idiosyncratic
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
- Market position- Quality of labor- Technology
- Energy- Productivity- Costs- Innovation -
Specific risks
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Growth and employment

• Stable growth and high employment generate a
  favorable climate for a firms 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

• 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 firms success

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Inflation

• 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
• 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

• 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

• 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

• 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

• 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?

• 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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Discussion 1Market economy its strengths and
its limits

• What are the principal advantages of a market
  economy?
• What are its principal drawbacks?
• Can the market economy be fair?

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