The Impact of Economics on My Life as a Business - Article Example

The Impact of Economics in My Life as a Businessman Table of Contents I. Introduction ………………………………………………………… 3 II. The Basics of Microeconomics …………………………………….. 4 a. The Economic Performance of the Country ……………… 4 b. Income-Leisure Choice Theory …………………………… 5 c. The Law of Supply and Demand on Prices of Goods ……. 7 III. The Principles of Macroeconomics ………………………………… 8 a. GDP Trend in the United States …………………………… 9 b. US Consumer Expenditure ………………………………… 11 c. Main Function of the US Monetary and Fiscal Policy……. 12 IV. Conclusion ………………………………………………………….. 12 References …………………………………………………………………… 14 Introduction Today’s world of business has changed a lot due to globalization. Globalization including the most recent changes in technology as well as in a country’s internal distribution of income particularly on the skilled workers and the unskilled workers has a lot of significant effects on the traditional business management and the world trade market.1 Particularly the increase in global competition has resulted from the improvement of new technology. This is one major factor that widens the gap between the employed skill and unskilled workers. As a result of globalization, a lot of developing countries have been experiencing a very high unemployment rate since most of the significantly large manufacturing companies have started sourcing out some of their major products from the developing countries. The use of technological improvements such as computers and information system also contributes to the reduction in the demand for skilled labor. In order for business people to become successful in today’s global business, each businessman should be knowledgeable in study of microeconomics and macroeconomics. For the purpose of this study, the importance of the basic principles of microeconomics such as the supply and demand of labor and products2 and how individuals, households, and firms make decisions with regards to allocating their limited resources in markets where the trading of goods and services occurs3; and the macroeconomics which focuses particularly on the external factors that could affect the variables such as the Gross Domestic Product (GDP), unemployment rate, inflation rate, and exchange rate4 will discussed in order to enable the businessmen to understand and apply the useful economic theories in their future business decision making. The Basics of Microeconomics The Economic Performance of the Country Businessmen should be aware that there is a significant correlation between the increase in demand for goods and services as well as with the demand for labor. In case the economy of a country is booming, the domestic demand for finished products increases. The increase in the demand for products contributes to the increase in demand for human resources (workforce). Basically, this allows the talented men and women to have the demand for a higher salary or have an option to take double jobs and longer working hours. (See Figure I – A Good Economy below) On the other hand, in case the country is experiencing economic downturn or recession such as the Asian crisis in 1997 or a tragic event such as the September 11 terrorist attack in the United States, the demand for human resources decreases since a lot of local businesses were directly affected and eventually had to declare bankruptcy or impose a mass lay-offs in order for them to be able to sustain the business financially. The decrease in the demand for workers is associated with mass layoffs and a decline in bargaining power of the workers to demand for higher salary or wage. (See Figure II – A Bad Economy below) In case of a bad economy, the government could easily create a short-term economic solution by increase the government spending. The government could use a portion of the collected taxes on certain domestic projects in order to create more job opportunities for the local citizens as well as business opportunities for businessmen. For instance, the local government could decide on approving some infrastructure projects as a way of creating demand to the construction industry, implement a local business project to support some of the small and medium enterprises (SME), etc. This way, the public can earn more money which could be used to increase the public spending. Thus, boosting the economy of the country. Income-Leisure Choice Theory The choices made my a worker regarding the time allocation between activities related to work and household (leisure) is one of the most important decisions one has to make.5 It is difficult to allocate time between these two activities because of the fixed amount of time available each day. Deciding on how much work to perform highly depends on the factors such as the salary a person is expecting per hour, the amount of income taxes that is expected to be deducted from the salary, and the expected weekly or monthly expenses that could occur within each household. There is a wide leisure gap between the high-skilled and low-skilled workers.6 Over time, the leisure gap is growing bigger than before. Back in 1960s when there is less competition in the market, the leisure time between people who belong to the same age bracket, sex and family size are almost the same. Socioeconomic status was never a factor that contributes to the gap on time for leisure and sources of income. Today, unemployment is the major cause of widening the gap between the income distribution and the available leisure time. Also, the increase in the standard of living is causing many people to work over time just to cover their daily expenses. For those who are working, they tend to spend more time at work than relaxing, doing household chores, spending time with kids, going to parities / bars, reading the newspaper, surfing the web, or even visiting friends. Demographic changes also affect the income-leisure of each individual. The more children married couple has, the more time they spend working in order to sustain their daily expenses. Educational attainment is also a factor. The more educated a person is, the higher the chances that he/she is going to get a job. Because of the competition in the market, those who are less educated are the ones who are left behind in terms of job searching. Businessmen should take note of the importance in balancing income and with leisure in order for an individual to have a healthy and productive life. Considering that employees has the option to spend more time working in times when the US economy is doing well, businessmen or the employers has to be aware that there is a possible trade-offs when allowing the employees to work more than the usual working hours in terms of the quality performance of the employees. To be able to clearly understand this concept, businessmen have to be familiar with the income-leisure choice theory. (See Figure III – Income and Leisure below) For skilled workers, the curve above shows that as wage increases, the number of hours spent on working eventually decreases. This gives an individual more time spent on leisure. Each individual works according to the expected amount the employee will be getting in each job. Given the expected salary, as an employee, the person has the option to choose whether to spend more time at work or in leisure. In case of tight financial needs, an individual especially the single parents will be left with no choice but to sacrifice most of his/her time on double jobs rather than staying at home or go somewhere else for his/her personal activities. The Law of Supply and Demand on Prices of Goods In a perfectly competitive market, the law of supply and demand normally dictates the prices of commodities. Basically, when the supply is more than the demand for goods and services, prices are expected to go down. On the hand, when demand for goods and services are more than the supply available in the market, there is a bigger chance that prices would increase. The price where the supply and demand curve meets is at equilibrium. Businessmen could maximize the use of this theory when making decisions related to sales and marketing. Since there is a very tight competition within the current domestic and global marketplace, it is important for sales and marketing managers to be aware of the factors that dictate the price movement. Basically, when the demand for goods and services is bigger than the demand, there is a possibility that the prices of these goods and services would increase. On the other hand, when the demand for these goods started to decrease, the prices of goods also decrease in order to attract the domestic and foreign consumers to purchase these products. (See Figure IV – The Law of Supply and Demand below) The Principles of Macroeconomics The study of macroeconomics analyses the movement of a country’s economic growth and recession, the causes of inflation and deflation, and the unemployment. It also discusses the effects of government intervention through fiscal policy. Normally, fiscal and monetary policy is used to control economic inflation and high unemployment rate. GDP Trend in the United States Based on the graph on below, the US is aiming to reach a zero output gap by year 2008.7 Since the year 2001 onwards up to 2006, the US has experienced having a negative output gap. The worst recent output gap of US was back in 2003 when they have reached negative 1.1. Source: International Monetary Fund – World Economic Outlook 2006 Businessmen should be aware that the negative output gap is most likely to be the after effect of globalization whereby many of the US businessmen started to cut on their operational costs by subcontracting most of their needed services from the skilled workers from developing countries. Considering that most of the US businessmen are downsizing their businesses during the early twentieth century, many of the US local citizens were affected by mass lay-offs. Some companies even had to declare bankruptcy because of the tight competition coming from the global markets. The increase in the unemployment rate affects the consumer spending in the long-run. This is the main reason why the real domestic output of the US has been constantly declining since 1999. (See Table 1- Advanced Economies: Real GDP and Total Domestic Demand and Graph on page 10) Table 1 - Advanced Economies: Real GDP and Total Domestic Demand United States     2007 2006 2005 2004 2003 2002 2001 2000 1999 1998   Real GDP 2.9 3.4 3.2 3.9 2.5 1.6 0.8 3.7 4.4 4.2   Real Total Domestic Demand 2.9 3.4 3.3 4.4 2.8 2.2 0.9 4.4 5.3 5.3 Source: International Monetary Fund – World Economic Outlook 2006 The graph above indicates that the US has experienced having the lowest real GDP output in year 2001. Even the total domestic demand at that time has reached its lowest point. Businessmen should know that when there is insufficient money circulating in the US, the country would experience a very low GDP. This very low annual GDP report serves as a signal that the economic activity in the country is not satisfactory and has to be aware not to over produce their products in order to avoid having excess stocks on hand. US Consumer Expenditure Usually when the real GDP of US is low, the consumer expenditure is also low. Based on the table below, the private consumer expenditure in 2001 has slide down into half as compared to the 1998 consumer expenditure report. This data clearly shows that the US local citizens are holding tight on their cash rather than purchasing and investing it in businesses. At this point, businessmen should control over their production output in order to manage their current financial assets efficiently. (See Table 2 – US Private Consumer Expenditures and Public Consumption and graph below) Table 2 - US Private Consumer Expenditures & Public Consumption United States     2007 2006 2005 2004 2003 2002 2001 2000 1999 1998   Private Consumer Expenditure 2.6 3.0 3.5 3.9 2.8 2.7 2.5 4.7 5.1 5.0   Public Consumption 2.2 1.6 0.9 2.1 2.5 4.3 3.1 1.7 3.1 1.6 Source: International Monetary Fund – World Economic Outlook 2006 Main Function of the US Monetary and Fiscal Policy The fiscal and monetary policy is normally used in controlling the country’s economic inflation and high unemployment rate. For this reason, it is advisable for businessmen to pay close attention to the most recent development in the US monetary and fiscal policy. Businessmen should be aware of possible high inflation rate within the country since it could result to a sudden disruption in the prices of local goods and services. Having a very unstable and high inflation rate could badly affect the normal functioning of the local business activities. On the contrary, business people should also take into consideration and be warned of a very high unemployment rate since it could mean that a bigger percentage of local citizens are not earning money to buy or purchase some basic commodities. Therefore, it means that the total expected sales of the business people would generally decrease in case of high unemployment rate. When the US economy is stable, there is a possibility for the exchange rate to be more stable as well. It is more beneficial for the US businessmen to know that the US exchange rate is stable. When the US exchange rate significantly changes over time, there is a possibility that either the US importation or exportation of goods will also be affected along the way. Conclusion Globalization has a huge effect on the distribution of income. Prior to globalization, those unskilled workers or the less educated ones could get more power to demand or negotiate for an increase in wages through a labor union.1 Today, due to a more competitive global market, this cannot be possible since it could only kill local business in the long run. For this reason, employers or business people need to fully understand the internal and external economic factors that may affect their business performance. In line with this matter, businessmen should develop new business strategies based on the current business status. The study of economics has a great impact in my life as a businessman. I believe that it is one of the most important subjects that contribute to the success of a business. Economics basically offers and creates a solid foundation to businessmen in terms of understanding the factors that could affect the success of the business. Businessmen should be knowledgeable in microeconomics and macroeconomic theories to enable them to make a very good and sound business decision making for the company. Local business people like me should concentrate more on the study of microeconomics since it focuses on the basic law of supply and demand which is most applicable in the management of business activities related to production, management of human resources as well as in developing an effective sales and marketing strategies. Microeconomics provides the businessmen not only the basic idea on when to produce and when not to produce a specific product but also when to hire and when to stop hiring new employees. On the other hand, some businessmen who are directly involved in international trading activities such as the importation and exportation of goods and services should focus more on the study of macroeconomics. Macroeconomics enables the business people to understand the bigger picture on how the business economy works as a whole. Macroeconomics is more beneficial to foreign stock, services, foreign currencies, or commodity traders since the study includes all the variables that could influence the increase or decrease in the value of the current exchange rate. *** End *** References 1 Jones R. (2003) ‘Globalization and the Distribution of Income: The Economic Arguments’ Inaugural Article Economic Sciences. Volume 100,No.19:11158 - 11162. Retrieved: August 1, 2007 < http://www.pnas.org/ > 2 Harberger, A.C. (2002) ‘Microeconomics’ The Library of Economics and Liberty. Retrieved: August 1, 2007 < http://www.econlib.org/ > 3 Marchant, M. and Snell, W. (2007) ‘Macroeconomic and International Policy Terms’ University of Kentucky. Online Publication. Retrieved: July 30, 2007 < http://www.ca.uky.edu/ > 4 Waller, S. (2007) ‘The Basics of Fundamental Analysis’ Retrieved: August 2, 2007 < http://www.bizfun.cc/articles/tbofa.html > 5 Kuhn, P. (2000) ‘Income-Leisure Choice Theory’ Economics 150 Lecture Notes: Peter Kuhn, Spring 2000 Retrieved: July 30, 2007 < http://www.econ.ucsb.edu/ > 6 Landsburg, S. (2007) ‘The Theory of the Leisure Class – An Economic Mystery: Why Do the Poor seem to have More Free Time than the Rich?’ Posted: March 9, 2007 on slate. Retrieved: August 1, 2007 < http://www.slate.com/ > 7 IMF (2007) ‘Statistical Appendix’ Retrieved: August 2, 2007 < http://www.imf.org/ > Read More