The Macroeconomic

Environment of Businesses
Texila American University, MBA Presentation
May 25, 2019

By: Joel Bhagwandin, MSc.

Learning Objectives

 Define the four macroeconomic objectives – economic growth,

unemployment, inflation, balance of payments and exchange rate.
 Assess the factors that determine the level of economic activity
 Explain the causes of unemployment, inflation, balance of payments
disequilibria
 Analyze the main macroeconomic indicators and their impact on
businesses
 Macroeconomics and
microeconomics
 Microeconomics is the study of economic behaviour of individual aspects of an
economy, e.g. people, firms or households. It studies the interrelationships
between these aspects in determining patterns of production and distribution of
goods and services.

 Macroeconomics is the study of economic aggregates (grand totals). An example

of this would be the overall level of output, prices and employment in the economy.
 The economic environment

 Scarcity and choice - Scarcity can be defined as the excess of human wants over
what can be produced. Because of this various choices have to be made between
available alternatives. We therefore have to make choices.

 Supply and demand - Demand is related to wants. Price is one area that will
affect demand. Other areas that affect demand are taste, the number and price of
complementary goods, the number and price of substitute goods, income,
distribution of income and expectations of future price rises.
 Supply is related to resources and is limited. The amount that firms can supply
depends on technology and resources available
 Compare different economic systems

Centrally planned economies - A centrally planned economy, also known

as a command economy, is an economy where all economic decisions are
taken by central authorities.

Market economies - A market economy, also known as a free market

economy, is an economy where the economic decisions and pricing of
goods and services are guided solely by the interactions of a country’s
businesses and citizens.
Mixed economies - A mixed economy is an economy where economic
decisions are made partly by the government and partly through the market.
Explain the potential impact of governments on
business and business environments

 Governments usually have four main economic aims:

 Low inflation
 Economic growth
 Low unemployment
 Balance of payments stability
Macroeconomic policies

 Monetary policy - Monetary policy involves influencing the interest rate (cost of
money) and/or altering the supply of money in the economy.

 Fiscal policy - Fiscal policy involves changing the level of government

expenditure and/or the levels of taxation.
 Understanding the components of the
macro environment and its impact on
businesses
 Political factors

Political
Political beliefs involvement in
Political stability of a government Political lobbying
wars, terrorism
and conflicts

The event of
elections and Relationships How politicians
political public with other are viewed
opinion countries
 Understanding the components of the
macro environment and its impact on
businesses
 Economic factors

The level of
economic
recession or Unemployment Inflation Economic growth
relative
prosperity

Consumer Imports and

Taxation Exchange rates
confidence exports
 Understanding the components of the
macro environment and its impact on
businesses
 Social factors

External
Media perception of an
Demographic Age distribution
perspectives organisations’
trends
brand and values

Consumer
Advertising and
Lifestyle trends attitudes, tastes Major events
brand awareness
and values
 Understanding the components of the
macro environment and its impact on
businesses
 Environmental factors

The reduction of
Environmental an
organisation’s Sustainability
regulations
carbon footprint
The impact of foreign currency exchange
and interest rates risk on the economy and
businesses
Trading in currencies
 Currencies can be bought and sold like any product. Buying a currency with
another currency means the currencies are being traded for one another. But how
do we know what our buying and selling currencies are worth relative to each
other?

 Most industrialised countries allow the value of their currency to fluctuate. Setting
exchange rates for these currencies is the function of banks that create exchange
rates by trading currencies between each other.
The impact of foreign currency exchange
and interest rates risk on the economy and
businesses
 Exchange rates and risk
 Foreign exchange markets and rates are relevant to all businesses that buy, sell or
invest in more than one currency.

 Simply buying goods that come from another country with a different currency
involves the risk that the price you pay could rise due to a change in the rate of
exchange. If you are buying goods in one currency and selling them in another,
you face exchange risk
The impact of foreign currency exchange
and interest rates risk on the economy and
businesses
 Businesses face exchange risk
Financial Managers have to be concerned with exchange risk even if they do not do
business internationally. Exchange rate changes could change the price of any
imported raw materials or other inputs the business uses, and increased costs spell
reduced profits.
Exchange risk is even more of a problem if a business is doing business across
borders and buying, selling or investing or borrowing money in more than one
currency.
Balance of payments

 The Balance of Payments (BOP) is a record of transactions that take place

between the people, organisations and government of one country and the people,
organisations and governments of all other countries.

 Double entry bookkeeping is used so for all value that flows out as a payment
some corresponding value flows in as a receipt. So there cannot be a deficit.
 Macroeconomic case analysis
 The foreign currency fiasco: is there really a shortage (April 2017 articles)
 NET INTERNATIONAL RESERVES AND FOREIGN ASSETS (US$ Million)

Bank of Guyana Bank of Guyana Commercial Banking System Commercial

Year International Net Foreign Banks Net Foreign Net Foreign Banks
Reserves Assets Assets Assets Investments
abroad

2014 652.2 648.7 296.4 945.2 198

2015 594.7 591.2 273.7 864.9 204.3

2016 615.7 612.2 278.1 890.3 247.9

 Bank of Guyana Foreign Exchange
Intervention
US$ Million

2013 2014 2015 2016 2017 2018

Net Purchases/Sales (34) (1.35) (1.18) (26.6) 37.62 178.2

International Reserves & Foreign Assets for
Jan – Dec, 2018
US$ Million
Banking System Net Commercial Banks Bank of Guyana
Foreign Assets Net Foreign Assets International Reserves

Jan 856. 307.5 552.8

Feb 815.7 300.6 518.5
March 814.4 319.4 498.5
April 769.9 293.5 506.8
May 771.7 289.8 485.3
June 758.2 288.2 473.4
July 746 295 454.4
August 737.5 293.5 447.7
September 726.3 277.1 452.6
October 755 277.5 480.9
November 761.3 276.8 488
December 800.4 281.3 522.6
International Reserves & Foreign Assets for
Jan – Dec, 2018

US$M.

900
800
700
600
500
400
300
200
100
0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
(1st Qtr
Figures)
Macroeconomic case analysis

2014 2015 2016 2017 2018

Balance of payments (93) (58.1) 12.1 (46) (139.8)

Exports from major

commodities:

Sugar 34.4 30.4 20.8 19.8 10.3

Rice 95.6 125.7 88.3 77.2 111.1

Bauxite 67 53.3 46.3 50.7 65.6

Timber 21.3 23.5 19.4 17.4 17.6

Gold 226 188 390.6 388.8 369.7

Balance of Payment overall balances
US$ Millions

Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

BOP 234.5 116.5 (15) 32.9 (119.5) (116.4) (107.7) (53.3) (69) (132)

Imports (1179.4) (1419.1) (1770.5) (1996.7) (1874.9) (1791.3) (1491.6) (1465) (1644) (1825)

Exports 768.2 885 (1129.1) 1415.5 1375.2 1167.2 1151.3 1434 1437 1374

Trade (411.2) (534.1) (641.4) (581.3) (499.7) (624.1) (340.3) (30.76) (206) (451)
Balance
Macroeconomic case analysis

Year Internatio Imports Import cover Variance (+/-) Actual

nal benchmark cover in
(US$) (US$)
Reserve reserves
(US$)
(US$)
(months)

2000 305 585 146 159 6.3

2001 287 584 146 141 6
2002 284 563 140 144 6
2003 276 572 143 133 5.7
2004 232 647 162 70 4.3
2005 252 784 196 56 3.8
2006 280 885 221 59 3.7
2007 313 1063 266 47 3.5
2008 356 1324 331 25 3.2
2009 631 1179 295 336 6.4
2017 584 1632 408 176 4
2018 528.4 1,825 456.25 71.75 3.47
 Dissecting the 4.1 % growth of the economy
last year

 The Finance Minister posited that there is nothing to suggest that the economy has
been stalled as a result of the political situation following the December 21, 2018, no
confidence motion. He then went on to state that the good news is that the economy
grew by 4.1 percent, way above the 3.4% that was projected, and that inflation was
projected at 2% but actual inflation was 1.6%. Now, on this note with inflation, one
must understand that macroeconomic policies have two branches – that is, fiscal
policy and monetary policy.
 Fiscal policies are administered by the central government which means this comes
under the direct portfolio of the Minister of Finance, while monetary policies and price
stability which has to do with the management of the inflation rate – comes under the
primary function of the Central Bank, which functions autonomously. It must therefore
be understood that the outcome of inflation rate which is quite stable and below 2% is
a direct accomplishment of the central bank and not the Finance Minister directly.
 Dissecting the 4.1 % growth of the economy
last year

 To this end, it is imperative to firstly establish an understanding of what GDP is and

how it is computed. So, GDP or Gross Domestic Product, is the market value of all final
goods and services produced in a country in a given time period. GDP measures the
value of production, which also equals total expenditure or final goods and total
income. The equality of income and output shows the link between productivity and
living standards. The equation for GDP is C + I + G + (X-M), where; C, is Consumption
(total expenditure by households), I is Investments, G is government
spending/expenditure, and (X-M) is exports minus imports which is net exports.
 From this equation one would observe that the government cannot directly influence
and/or control the outcomes of three components from the equation to achieve a
higher or improved level of GDP growth rate – that is, Consumption (household
expenditure), Investments (I) in the economy and, net exports (X-M). But,
governments can very well influence its own component from the equation which is
Government expenditure (G).
 Dissecting the 4.1 % growth of the economy
last year
 That said, from looking at total government expenditure for the last three half years period,
for the period January – June, 2016 total government expenditure was recorded at $89.6
billion, January – June 2017, $97.2 billion, and January – June 2018, $111.8 billion. This gave
rise to increases in the levels of Government expenditure for the half year (HY) period 2016
– 2017 of $7.6 billion, and from 2017 (HY) to 2018 (HY), a difference or increase of $14.6
billion, thus doubling the level of increase of government spending for the January – June
2017 and 2018 period when compared to the January – June 2016 and 2017 half year
periods. What this means is that the 4.1% growth for 2018 was attained largely because of
the dramatic increase in government expenditure in comparison to the corresponding
period for 2017.
 It is important to note that while in theory – increases in government expenditure are
usually intended to stimulate growth in the economy – the key understanding that ought to
be established in this regard is –where these expenditure are allocated. If the expenditure
are largely concentrated on unproductive activities such as national events, dietary, other
operating expenses, local travel and subsistence, vehicle spare parts and service, and
rental of buildings and things like that, then increases in government spending like these
will simply not translate to real developmental growth.
GDP is no longer an accurate measure of
economic progress

 According the World Economic Forum contended that “it is critically

important we monitor societal progress and design responsive policies to
21s- century challenges, such as climate change, the marginalization of
more than a billion people, resource depletion and emerging pollution-
driven health crises.”
 As such, this necessitates the need for reliable metrics to know how we are
performing on the yardsticks of our economy, sustainability and social
harmony. Unfortunately, the radar used to track progress is far from
satisfactory to the extent where countries still use a 20th-century metric to
measure wellbeing that Gross Domestic Product, or GDP.
 GDP is no longer an accurate measure of
economic progress
 Rather, these will just be a burden on the national treasury and therefore, the allocation
of government spending is what is really important to achieve the desired outcomes of
real developmental growth and not just manipulating one component of the GDP
equation, inter alia, mathematical simulation to make the numbers appear to look good.
As such, in the context of this argument it is implied that this level of GDP growth rate does
not necessarily reflect the true economic status of the economy with respect to real
growth in terms of an expansion of the economy in developmental terms. For example,
this cannot be the case when the rate of unemployment remain relatively high. The last
survey that was carried out showed that Guyana’s unemployment rate is 12 percent.
 However, in a previous article it was argued therein that if we were to adjust that figure to
account for the 9,000 plus unemployed sugar workers in 2018, then real unemployment
rate would be anywhere in the region of 20 – 25 percent. The unemployment rate of a
country is a key indicator that tells of the economic health of an economy and therefore,
with a rate of unemployment hovering over 20 percent – that is certainly not a good
indicator and does not tell a good story in terms of the economic growth direction of a
country. Moreover, for there to be real substantive growth of an economy and not just
artificial growth, there needs to be expansions in consumption spending, investments and
net exports and not just government expenditure that are largely unproductive.
 GDP is no longer an accurate measure of
economic progress
 It is understandable that growing international interest in a tool that still captures financial
and produced capital, but also the skills in our workforce (human capital), the cohesion
in our society (social capital) and the value of our environment (natural capital) given
that GDP functions as a good measurements of output, income and expenditure. These
are needed to understand and devise fiscal and monetary policies. But this measure flatly
fails when it comes to wellbeing. Its founder, Simon Kuznets, cautioned half a century ago
that it is useful mainly in tracking income.
 More recently, other economists suggest knowing change in per capita wealth of all
types is key to monitoring sustainability. Work has advanced on some of these elements.
The UN Environment Programme-led Inclusive Wealth Index shows the aggregation
through accounting and shadow pricing of produced capital, natural capital and
human capital for 140 countries. The global growth rate of wealth tracked by this index is
much lower than growth in GDP. In fact, the 2018 data suggests natural capital declined
for 140 countries for the period of 1992 to 2014 (World Economic Forum).
 GDP is no longer an accurate measure of
economic progress

 Interestingly, many countries record GDP growth while they lose natural capital. One
can see the trade-off among various types of capital, but the report clearly conveys
that mixing income with wealth is bad economics and dangerous for sustainability
measurement. The Index’s findings include strong recommendations to help reach
global sustainability targets, including the UN Sustainable Development Goals.
 Closely tracking countries’ productive bases is key, as a declining asset base implies a
non-sustainable trajectory. Many of the assets critical for maintaining productive bases
are either not priced or are priced at much lower levels than they should be. This is
especially true for natural capital and human capital assets. Natural capital assets such
as forests and water bodies have only been valued for the products they provide for the
market, such as timber and fish. However, these ecosystems offer a much larger suite of
services, such as water purification, water regulation and habitat provisioning for
species, among many others. (World Economic Forum).
 GDP is no longer an accurate measure of
economic progress

 With the introduction of the Inclusive Wealth Index helps policy-makers prepare to
negotiate for reductions in greenhouse gases as well as for compensations accruing
from climate change. Further, past reports have shown conclusively how countries
can become unsustainable in absolute terms when population growth is factored
into the computation. Understanding the impact population growth has on
productive bases is a critical variable that leaders should factor into policy-making.
 Hence, analytic progress has been made, but there is still a need to bring all five
elements of prosperity – financial produced, natural, human and social capital –
into one framework (World Economic Forum)
 GDP is no longer an accurate measure of
economic progress
A new Canadian report does this.
 Canada's Comprehensive Wealth project adds one number for evaluation and policy-
making on top of GDP: a per capita sum of the five elements of prosperity. It draws on data
from Statistics Canada – one of the finest statistical organizations in the world – which
measures many elements of prosperity separately, to varying degrees of depth. The report
raises several red flags most notably that Canadians’ comprehensive wealth only grew at
an annual average rate of 0.2% from 1980 to 2015. In contrast, GDP grew at an annual
average rate of 1.31% over the same period. Put differently, the good GDP results of
Canadians don’t have a strong foundation reflecting growth in earning potential,
sustainable natural stocks, and diversified financial and produced capital.
 There’s room for this study to grow in depth and breadth. Other Countries and policymakers
should direct their Statistics agency to regularly report the country’s comprehensive wealth
score. An accurate sense of how well economies are performing is paramount, with a view
to long-term sustainability. GDP has and always will have valuable short-term insights, but to
respond to 21st-century pressures there is a strong need for a modern economic measure.
Canada can lead the world as the first nation to adopt comprehensive wealth, making a
commitment to the knowledge that empowers meaningful action. (Modified from World
Economic Forum).