1. When the recession expected to come, some enterprise will cut down the investment and trim inventories, while others might choose to enlarge the Capx, and acquire assets, due to low interest rate and low price.
2. For a better strategic business management, there are several key questions to address: 1) Economic expansion or recession ? 2) Interest rates ups/downs ? 3) Commodity Prices up or down 4) Direction of exchange rates (eg, dollars, yen, euro) ?
3. Recession signs: 1) Central bank increases the interest rate 2) Rise in unemployment rate 3) Fall in Consumer confidence
4. The expansionary monetary policy result in the currency depreciation which might change international trade advantage.
5. The "Demand-Pull" wage pressure + "Cost-Push" --> Inflation rises--> Interest rate rise.
1. Microeconomics
1) Demand, Supply and Equilibrium : Producer Theory, Consumer Theory.
2) Market Structure, Conduct, and Performance: Monopoly, Oligopoly, Monopolistic Competition, Perfect Competition.
3) Market Failures and Government intervention: Externalities, Public Goods, Imperfect Information
2. Macroeconomics--> Business Cycle Management Strategies---> Investors/Money Managers/Business Executives outperform rivals
1) Problems: Inflation, Unemployment, Budget Deficit, Trade Imbalance, Slow Growth.
2) Solution: Fiscal Policy, Monetary Policy, Tax Policy, Regulatory Reform
Marco-economics issue- Inflation (CPI, PPI, GDP deflator)
GDP calculation
1) Income Approach (flow of cost) : GDP=Wages (by workers)+ Rents(by Property owners) + Interest ( by Lenders) + Profits (by firms)
2) Expenditures Approach (flow of product): GDP=Consumption + Business Investments+ Government Spending + Net Export (Export-Import)
GDP forecasting Model by John Maynard Keynes
Actual GDP VS Potential GDP
Actual GDP represents what a nation is currently producing while potential GDP represents the maximum amount the economy can produce without causing inflation.
1. Actual GDP < Potential GDP --> Recessionary range of economy.
2. Actual GDP > Potential GDP --> strong risk of Demand-Pull inflation ( The aggregated demand in the economy is outpacing the aggregate supply causing prices to rise)
Nominal GDP/Actual GDP= GDP deflator
Marco-economics issue -Budget Deficit, Trade Deficit
Government Income: Income Taxes, Payroll Taxes, Consumption Taxes, Property Taxes.
Government expenditures: National Defense, Infrastructure, Social Service, Regulations
Crowing Out:
Government run a budget deficit--> Sell bonds to finance the deficit--> Increase the interest rate--> Business Investment falls--> Real GDP slows
Fiscal Policy to mitigate recession/inflation: 1) Increase/cut government spending 2) cut down/increase taxes
Ideological conservatives tend to favor tax cut as a stimulus, while ideological liberals seeking to expand the role of government
Tax policies: 1) Income taxes or consumption taxes 2) Redistribute income from rich to poor. 3) Improve competitive advantage for exports.
Monetary policies: interest rates down--> 1) increase business investment 2) weaken currency to improve the net export.
Regulatory policies
Supply-side economics==> Streamline or eliminate regulations==> reduce business costs==> stimulate the economics
Business Cycle
Just like fingerprint, no recession will be exactly alike: 1) V-shape pattern: Short & Deep 2) U-shape pattern: shallow or deep, or long and painful
Double dip recession: economy dips into second recession after short recovery
Business cycles lack periodicity ==> Non-repeatable internal pattern==> can't predict future cycles with historical data
Leading economic indicator==> Measurable economic indicator==> Changes in advance of underlying business cycle
Consumer confidence index to predict the consumption
Forecast GDP model: using the leading economic indicators to forecast the real GDP increase
GDP=C+I+G+(X-M)
Leading economic index:
GDP: 1) ECRI leading index (only in USA) 2) Stock Market 3) Yield Curve Spread
Consumption: 1) Consumer Confidence 2) Retail Sales 3) New Home Sales
Investment: 1) ISM manufacturing index 2) Official report on budget deficit
Net export: 1) Official trade report on imports and exports
Inflation must be considered for GDP forecasting, because the inflation level will incur central bank's interest rate policy which will impact both investment level and net export.