Macroeconomics for Managers

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Macroeconomics for Managers
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What is Macroeconomics?

• The attempt to explain how and why the total
  exchanges between firms and households (the
  economy) grow (long-term) and fluctuate
  (short-term) overtime.
• Fluctuations (Business Cycle) is most relevant to
  business manager
• Why? Because Business Sales and Revenues
  Fluctuate.

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What is Macroeconomics?

• Therefore, since Wendys business is influenced
  by economic fluctuations, then its important to
  know how the economy influences Wendys and, in
  turn, how Wendys business can influence the
  economy.
• But to study fluctuations in the economy, have to
  have a way to measure them.
• The best measure of economic activity?
• Stock Market?
• Perhaps Not!

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Business Cycle Terminology

• Expansion
• Slow-Growth
• Recession
• Depression
• http//www.nber.org/cycles.html

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Measuring Macroeconomic Performance

• Real GDP
• Unemployment
• Inflation

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Real GDP Defined

• Simple Definition All New Production in the
  economy during a quarter/year
• It is the Broadest measure of economic
  performance, but not a perfect measure!
• Consider Full definition

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Real GDP Defined

• Full Definition
• The monetary value, not including the increase in
  prices, of all spending on (household
  consumption, firm investment, government
  purchases, and purchases by foreigners exports)
  or all income earned from (household wages and
  firm profits) the value added to production
  (intermediate goods or services) by people within
  a country (and not counting value added by
  foreign goods or services imports) during only
  the past (backward looking) year/quarter.

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Real GDP Components
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Real GDP FYI

• Always Remember (GDP is like the Tour de France)
• Real GDP is a flow (distance traveled in a
  stage), not a stock (total Tour distance).
• So the bike is, in essence, always traveling.
  But some days the bike travels further than
  others.
• What would GDP be if, starting on January 1,
  2006, every person in the US stopped working for
  the year?
• That is where Potential GDP comes in!
• How far you can travel given your equipment and
  skill (how much an economy could/should produce
  in a year given its population, stock of capital
  equipment, natural resources, and knowledge).
• Is it the best measure?

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Unemployment Defined

• Simple Definition Anyone who wants a job, but
  doesnt have a job

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Unemployment Defined

• For BLS Household Survey Any of 60,000 surveyed
  people NOT currently working, but has looked for
  work in the past 30 days, is 16 years of age and
  older, and is not a homemaker, in school,
  retired, disabled, incarcerated, or in the
  military.
• Unemployment Rate
• Number of Unemployed/ (Number of Employed
  Number of Unemployed)

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Unemployment Defined

• Payroll Survey Definition Any person released
  from the payroll of approximately 160,000
  companies or government agencies surveyed each
  month.

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Unemployment Types and Causes

• May 2005 (BLS Household Survey Data)
• Unemployed Persons by Reason for Unemployment
• Job Losers and Persons who completed Temporary
  Job (Structurally, Cyclically, and Seasonally
  Unemployed) 45
• Job Leavers (Frictionally Unemployed) 10
• Reentering Labor Force 35
• New entrants 10

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Unemployment Causes

• Major Causes of Job Loss
• Technological Displacement
• Employer/Employee Mismatch (youre fired/ I quit)
• Economic Downturns (only one to cause a
  net-decrease in employment - see Figure on next
  slide)
• Overseas Production
• Offshore Outsourcing
• Trade

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Unemployment FYI

• What is the ideal Rate of Unemployment?
• Zero percent?
• Full Employment or Natural Rate of Unemployment

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Unemployment Another Key Indicator

• Department of Labor Initial Weekly Jobless Claims
  
• (available at http//www.dol.gov/, weekly)

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Inflation Definition

• Change in the Average Level of Prices, not one
  price

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Inflation Measurement

• Basket Indexes
• Consumer Price Index
• Producer Price Index
• Personal Consumption Expenditure Index (Used by
  Fed)
• Number produced means nothing. Only relevant
  when compared to another basket.
• Minneapolis Fed CPI website http//minneapolisfed
  .org/research/data/us/calc/

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Inflation Impact

• It causes the purchasing power of money to
  decline.
• Can harm the economy if
• people do not expect it
• do not or can not react to it (change contracts).

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Inflation Hyperinflation

• Hyperinflation commonly price increases over
  1000 percent a year.
• Harms economy because
• People more spend time adjusting to and trying to
  forecast price changes, than engaging in economic
  activity
• Creates burdensome transactions (need wheelbarrow
  of money)
• People will buy and sell existing goods (trying
  to profit, rather than produce new good)

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Inflation FYI

• What is deflation and why is it bad?