Goethe Business School Global Economic Environment Paul Bernd Spahn.

Goethe Business SchoolGoethe Business School

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


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 firm’s 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

Sources of Corporate Uncertainty

EnvironmentEnvironment IdiosyncraticIdiosyncraticMacroeconomicMacroeconomic

- 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 firm’s 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 firm’s 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

Pound sterling 1992-94Pound sterling 1992-94

Asian crisis 1997-98Asian crisis 1997-98


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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


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

Goethe Business School Global Economic Environment Paul Bernd Spahn.

Documents

Transcript of Goethe Business School Global Economic Environment Paul Bernd Spahn.