Macro Economics - Macro Economics and Industrial Analysis - Presentation, Study notes of Economics

Download Macro Economics - Macro Economics and Industrial Analysis - Presentation and more Study notes Economics in PDF only on Docsity! MACROECONOMIC AND INDUSTRY ANALYSIS OUTLINE • The Economy-Industry-Company (E-I-C) Framework • The Global Economy • Central Government Policy • Macroeconomic Analysis • Industry Analysis The Global Economy WHILE MONITORING THE GLOBAL ECONOMY BEAR IN MIND THE FOLLOWING: • ALTHOUGH THE ECONOMIES OF MOST COUNTRIES ARE LINKED, ECONOMIC PERFORMANCE VARIES WIDELY ACROSS COUNTRIES AT ANY TIME. • FROM TIME TO TIME COUNTRIES MAY EXPERIENCE TURMOIL DUE TO A COMPLEX INTERPLAY BETWEEN POLITICAL AND ECONOMIC FACTORS. • THE EXCHANGE RATE IS A KEY FACTOR AFFECTING THE INTERNATIONAL COMPETITIVENESS OF A COUNTRY’S INDUSTRIES. Changing Global Economic Order The US economy has been the principal engine of the world economy in the 1980s and 1990s, thanks to its huge size and robust growth. At its peak in the late 1990s it accounted for nearly one-half of the incremental growth in the global economy. This dominance continued in the initial years of the first decade of this millennium. To be sure, it still dominates the world economic scene and hence developments in the US like employment figures, housing starts, interest rates, and current account deficits, are keenly watched by economists, businessmen, and investment analysts all over the world. However, in recent years a new world economic order has been emerging. At present, China’s contribution to the incremental growth in the global economy matches or even slightly outpaces the contribution of the US. Although the Chinese economy with a GDP of nearly $3 trillion is about one-quarter the size of the US economy whose GDP is about $12 trillion, its growth rate is four times that of the US growth rate. contd… Another force eroding the dominance of the US economy is the revival of Europe led by Germany. It appears that Europe is breaking out of the US ball-and-chain. With China and Europe now accounting for a larger share of the global GDP, the US is no longer the only major force driving the world economy. The emergence of these alternative locomotives of growth are shaping a more balanced global economy. Monetary Policy MONETARY POLICY IS CONCERNED WITH THE MANIPULATION OF MONEY SUPPLY IN THE ECONOMY. MONETARY POLICY AFFECTS THE ECONOMY MAINLY THROUGH ITS IMPACT ON INTEREST RATES. THE MAIN TOOLS OF MONETARY POLICY ARE: • OPEN MARKET OPERATION • BANK RATE • RESERVE REQUIREMENTS • DIRECT CREDIT CONTROLS Macroeconomic Analysis THE MACROECONOMY IS THE OVERALL ECONOMIC ENVIRONMENT IN WHICH ALL FIRMS OPERATE. THE KEY VARIABLES COMMONLY USED TO DESCRIBE THE STATE OF THE MACROECONOMY ARE :  GROWTH RATE OF GROSS DOMESTIC PRODUCT  INDUSTRIAL GROWTH RATE  AGRICULTURE AND MONSOONS  SAVINGS AND INVESTMENTS  GOVERNMENT BUDGET AND DEFICIT  PRICE LEVEL AND INFLATION  INTEREST RATES  BALANCE OF PAYMENT, FOREX RESERVES, AND EXCHANGE RATE  INFRASTRUCTURAL FACILITIES AND ARRANGEMENTS  SENTIMENTS A Flow Diagram Of Stock Price Determination EXOGENOUS VARIABLES ENDOGENOUS VARIABLES Corporate tax rate tx Changes in government spending Δ G Changes in nominal money Δ M Potential output Y* Changes in total spending Δ Y Changes in price level Δ P Changes in real money Δ M* Nominal corporate earnings E Real corporate earnings E* Expected corporate earnings E*e Changes in real output Δ X Interest rate R Stock price SP Source : Michael W.Keran, “Expectations, Money, and the Stock Market, “Review Jan. 1971 • From 2004-05 onward, the RBI has been issuing Market Stabilisation Bonds to sterilise the effects of its intervention in the foreign exchange market. • Inflationary pressures which were building up since the latter part of 2005 have eased by the end of 2007. • Interest rates have more or less followed the path of inflation. • Thanks to robust credit demand and large capital inflows that ended up substantially as the reserve assets of RBI, money supply growth rate over the past several years has been fairly strong. Sensitivity to the Business Cycle Once you have a forecast of the state of the macroeconomy, you can examine its implications for different industries. Industries vary in their sensitivity to the business cycle. For example, the automobile industry is more responsive to the business cycle. During expansionary periods, the demand for automobiles tends to rise sharply and during recessionary periods the demand for automobiles tends to fall sharply. By contrast, the cigarette industry is more or less independent of the business cycle. The demand for cigarettes is hardly affected by the state of the macroeconomy. This is not surprising because cigarette consumption is largely a matter of habit and hence is not responsive to the business cycle. The sensitivity of a firm’s earnings to the business cycle is determined by three factors: the sensitivity of the firm’s sales to business conditions, the operating leverage, and the financial leverage. Industry Analysis  INDUSTRY LIFE CYCLE ANALYSIS • PIONEERING STAGE • RAPID GROWTH STAGE • MATURITY & STABILIZ’N STAGE • DECLINE STAGE  PROFIT POTENTIAL OF INDUSTRIES • FORCES DRIVING COMPETITION PORTER MODEL POTENTIAL ENTRANTS TREAT OF NEW ENTRANTS BARGAINING INDUSTRY BARGAINING SUPPLIERS RIVALRY BUYERS POWER OF AMONG POWER OF SUPPLIERS FIRMS BUYERS THREAT OF SUBSTITUTE PRODUCTS SUBSTITUTES