Applied Managerial Economics - Essay Example

Applied managerial Economics Introduction The macro economic factors of a country are some of the majorfactors that investors or management of Multi National Corporation evaluate before they can establish their manufacturing units in a foreign country. This is due to the fact that these factors have a very significant influence on the investment climate of the country and thus tend to determine the performance of foreign firms that invest in the country (Krugman and Obstfeld, 2003). The management of AutoEdge, a leading car dealer in the US are concerned with the macro economic factors in South Korea and in the US as they want to use them to make the decision on where to move their manufacturing units as the current situation is not optimal and they have been incurring problems. This essay will therefore analyse the economic climate in both the USA and in South Korea in a view to select the country where the company’s investments will bring in more value to the company in terms of future performance and growth. The essay will focus on the Gross Domestic Product (GDP) of both countries, interest rates, inflation rates and the level of unemployment in both countries. This report is intended to be used by the management of the company to make critical investment decisions and will be presented in the form of an essay. These macro-economic factors are critical in the decision making process since they influence the investment climate to a great extent and determine whether a company’s operations will succeed or not (Krugman and Obstfeld, 2003). Overview of the Economy of the US Gross Domestic Product The economy of the United States of America is considered to be the single largest national economy in the world. In the last quarter of 2013, (end of December 2013), the nominal Gross Domestic Product (GDP) of the country was estimated to be $17.1 trillion and this is estimated to be approximately a quarter of the global normal GDP. The GDP of the country in terms of purchasing power parity (PPP) is also estimated to be the largest of any single economy in the world and is approximated to be a fifth of the global GDP in terms of PPP. The country practices a mixed economy and over the years, it has been able to maintain moderate performance in terms of the level of unemployment, a stable GDP growth rate as well as high levels of capital investments and research and development activities. Since 1973 to date, the economy of the country has recorded an average growth rate of 2.7 percent (CIA, 2014a). Unemployment Rate The current civilian labour force of the United States is approximately 155 million people out of a total population of approximately 315 million people. In the first quarter of 2013, the country recorded an unemployment rate of 7.7% which is approximately 12 million people. The government also calculates another employment rate referred to as the U-6 unemployment rate which also includes those who are part time unemployed and this was approximated at 14.3% or approximately 22.2 million people(CIA, 2014). Although by the end of 2013 the unemployment rate had been contained to below 8%, the proportion of the long term unemployed continued to have a negative effect on household income and this has continued to paint a negative picture on the recovery of the country’s economy. This rate had been affected by effects of the Great Recession of 2008 which led to long term employment levels to rise to record levels in the following years (CIA, 2014a). Interest Rate The United States Interest rate is normally synonymous with the Federal Funds rate and it is the interest rate that banks in the country charge each other for overnight borrowing. It is important to note that this interest rate is normally set by the market and not the Federal bank of America. However, the bank normally determines the short term interest rates in the country. In the year 2013, the short term interest rates have remained low and this trend is expected to continue throughout 2014 (CIA, 2014a). The current interest rate is 15 basis points and it is expected that the Federal Bank will leave the interest rate at its current level in the foreseeable future. The long term interest rates on the other hand are determined by market factors such as the global demand for credit. This rate has been kept low by the Federal Bank’s Monetary policy which involves buying a lot of long term assets and Treasury Bonds. It is therefore expected that the long term interest rates will remain below 5 percent in the Long term (CIA, 2014a). Inflation Rate In the period of the last 12 months from January 2013 to January 2014, the average annual inflation rate of the United States was recorded at 1.6%. The inflation rates dropped sharply in the first quarter of 2012 from a high of 3% in 2011. The drop has continued to be felt with an average rate of 1.7 being recorded in 2012 and 1.5% in 2013. The current rate of 1.6% means that there has been a slight increase of 0.1% and this trend may be experienced in the coming months as a result of rising food prices, gas prices and oil prices. The US sets the upper limit of the inflation rate at 3% and therefore the current rate is well within the set limits and is good for the growth of the economy (CIA, 2014a). Overview of the Economy of the Republic of South Korea Gross Domestic Product (GDP) The economy of South Korea is ranked as the 15th largest in the world in terms of the nominal Gross Domestic Product (GDP) and the 12th largest in the world in terms of Purchasing Power parity (PPP). The economy of the country is also ranked as one of the fastest growing economies and the country is a member of the OECD. The economy of the country was affected by the Asian financial crisis which was experienced in 1997 to 1998 the weaknesses of the economy, such as the high debt to equity ratio and the huge foreign short term borrowings (CIA, 2014b). The GDP of the country therefore fell by a massive 6.9% in 1998 but later recovered by 9% from 1999 to 2000. The GDP of the country grew by 6.3% in 2010 after the global financial crisis. The economy of the country is therefore on a positive growth trend and it is expected that in future, this trend will be maintained. The government also ratified a Free Trade Area agreement with the US in 2011 and this is expected to stimulate the growth of the economy. The country is however faced by issues such as an aging work force, heavy reliance on exports and an inflexible labour market (CIA, 2014b). Unemployment Rate The unemployment rate in South Korea has been fluctuating over the years and in 1999, it reached an all time high of 7.1 percent while a record low of 2.9 percent was recorded in November 2013. From 1999 to 2014, the unemployment rate in the country has averaged 3.64 percent. The unemployment rate in South Korea is seasonally adjusted and measures the number of people who are actively looking for employment relative to the total labour force of the country. The unemployment rate in the country is seen to have increased to 3.2 percent in January 2014 from 3.1 in the last quarter of 2013 (CIA, 2014b). The actual number of the unemployed persons in the country was 891,000 in January which was an increase of 44,000 people an increase of 5.2 percent year on year. The period between December 2013 and January 2014 saw more jobs being created in some sectors such as manufacturing, mining, accommodation and hospitality and wholesale and retail trade. In contrast, sectors such as business services, construction and agriculture saw job losses being experienced. It is however critical to note that compared to the same period last year, the level of unemployment had decreased significantly in all sectors (CIA, 2014b). Interest rate The interest rates in South Korea have recorded an average of 3.7 percent for the period between 1999 and 2014. The interest rates attained a 5.3 percent rate in September 2008 which is the highest rate ever recorded in the country and also attained a 2.0 percent rate in January 2009 which is the lowest rate ever recorded in the country. It is important to note that the official interest rates in South Africa are determined by the Monetary Policy Committee of the Bank of Korea (BOK). In this regard, the official interest rate in the country is therefore the Bank of Korea’s base rate. This base rate was changed in March 2008 from the rate of overnight interbank borrowing. The current interest rate is 2.5 percent and this has been stable for the past 9 consecutive months up to February this year. It is therefore clear that the interest rates in the country are stable and favourable for investments (CIA, 2014b). Inflation Rate For the period beginning 1966 and ending 2014, the inflation rate of South Korea has recorded an average of 7.93 percent. In October 1980, the country recorded its highest inflation rate at 32.51 percent while in February 1999, it recorded the lowest inflation rate of 0.17 percent. The current inflation rate, January 2014, is 1.1 percent. The inflation rate in the country is derived from the consumer price index (CPI) where the most important constituents are food, non alcoholic beverages, water, gas and other fuels, electricity and housing. The country has therefore been able to maintain a low inflation rate in the recent past which is conducive for investment and business in general (CIA, 2014b). Conclusion It is clear that both the United States of America and South Korea can provide a good investment climate for the management of AutoEdge Automobile Company. In terms of growth in GDP, the US averaged 2.7 percent while South Korea is much higher at a rate which is higher than 5 percent. This means that South Korea provides better chances of growth for the company. In terms of unemployment, the US recorded 7.7 percent in 2013 while South Korea recorded 3.1 percent. This means that the company can capitalise on employing the unemployed in the US at lower wages. In terms of the interest rates the US has lower overall interest rates 0.5 percent as compared to South Korea which has an average of 2.5 percent. This therefore means that the cost of borrowing is cheaper in the US than in South Korea. Finally, in terms of the inflation rate, the US recorded 1.6 percent in January 2014 while South Korea recorded 1.1 percent in the same period. Again, South Korea is a more favourable investment destination than the US. From the discussion above, it is therefore clear that the management of AutoEdge should consider moving their manufacturing operations to South Korea instead of the US (Caves, 2007). References Caves, R.E. (2007). Multinational Enterprise and Economic Analysis. 3rd Edition. Cambridge, MA: Cambridge University Press. CIA (2014a). The World Fact Book: United States of America Economy Overview, retrieved on 22 February 2014 from https://www.cia.gov/library/publications/the-world-factbook/geos/us.html CIA (2014b). The World Fact Book: South Korea Economy Overview, retrieved on 22 February 2014 from https://www.cia.gov/library/publications/the-world-factbook/geos/ks.html Krugman, P.R. and Obstfeld, M. (2003). International Economics: Theory and Policy (6th edition). MA, USA: Pearson Education, Inc., Read More