How a Manager Use Macroeconomics for Decision Making
Importance of Decision Making in Business
Decision making can be an important job of corporate managers. They have to take decisions about the employment of land, labor, and capital in such a manner that output may be maximized at least possible cost. Hence, they are really always in search of optimum mixture of resources which would maximize corporate profit.
Appropriate decision making is the effectiveness of business. Success running a business depends on proper and correct decision making. Location, scale of operation, quantum of resources to be used, marketing etc are a few of the key problems calling for decisions running a business where macroeconomics may be applied for better results.
Macro Economic Analysis
Macroeconomics is concerned with the analysis of aggregate economic variables. It is concerned with the complete economy and studies the level and the growth of national income, the levels of employment, the amount of private and government spending, the balance of payments, the consumption & the investment, saving functions and oscillations running a business cycles. The aim of macroeconomics is to keep macro equilibrium of the economy. According to Edwin Mansfield, 'Macro economics handles the behavior of aggregates like gross national product and the level of employment. A. koutsoyiannis says, 'the aggregate econometric models are relevant for the analysis and prediction of aggregate magnitudes, such as total output of any economy, total employment, consumption, investment etc.
In all the economies of the world whether free or controlled, business and macroeconomics have become same. Available decisions, tracking of macroeconomic variables is becoming an important element. (Macroeconomics, 2002) Managers face difficulty in decision making, understanding of macroeconomics helps CEO's in running the business enterprise. Overall financial activity, financial policies (industrial policy, trade policy, monetary policy, fiscal policy), inflation impacts the business enterprise. Decisions of CEO's or managers are affected by this aggregate making up the entire environment of business. Future demand and investment depends upon the growth and the state of the economy.
Role of Macroeconomic Analysis in formulation of Business Policies
1. Macro monetary policy
Macro economics helps in formulation of economic policy. The subjects of the monetary policy are monetary policy, fiscal policy, incomes policies and policy on balance of payment. Economic policy should be so that it promotes the business environment and provides impetus to business activities. (Mathur, 2002)
2. Economic planning
A serious attempt towards self sustained growth of business is only possible by efficient planning. Planning is currently a days synonymous with growth and development. Identification of priority areas, estimation of resources and coordination among various sectors of economy can be done through proper planning. Planning directs the growth in desirable corners.
3. Solving macro paradoxes
Macro economics assists with solving macro paradoxes like paradox of thrift related to savings, paradox of assumption by commercial banks that depositors wouldn't normally withdraw their money on any particular day and their to withdrawal.
4. Tracing effect of government policy on business
Macro economics helps in tracing the implications of government policy changes on existing business activity.
5. Help in solving problem of general unemployment
Effective demand is the center point of macro economics. Reduction in effective demand brings financial depression and thereby general unemployment. Hence, the level of effective demand should be increased to be able to improve the level of employment. (Mathur, 2002)
6. Analysis of trade cycles
Macro economics tries to know about the behavior and occurrence of booms and slumps and their implication on business activity. This analysis is very helpful for a free of charge enterprise economy. Business cycles are bound to occur. Macro economics helps the business enterprise in facing booms and slumps so that negative impact is minimized.
7. Macro analysis helps in development of micro analysis
In the deductive method process of logic goes from general to particular. We go on deducting to draw specific conclusions. A lot of micro economical conclusions are outcome of macro conclusion. The assumption that consumer is rational has been decided only after knowing about the behavior of a group. A medico is allowed to specialize in some part of body from surgical view point only when he has understood the anatomy and physiology of body.
8. Inability of micro economics to study some areas
Micro economics is not able to study monetary problems, fiscal problems, financial sector problems, foreign exchange regulation problems and inflationary and recessionary situations problems. Business must be protected from these ticklish problems and therefore, needs the assistance of macro economics.
9. Macro financial models
Macro economics helps in building or constructing macro monetary models. The major objective function of the macro monetary model is to keep up the macro equilibrium in the united states at the full employment level. The role of government through its monetary and fiscal functions becomes important as independent variables i. e. these policies are used to clarify the dependent variable i. e. maintaining macro equilibrium.
Macroeconomic Variables and Business Decisions are highly linked
Business will depend on the growth rate, when economical growth decreases; the overall financial environment becomes unfavorable to business. In an interval of slow growth, the aggregate demand is very much indeed reduced and the business enterprise has no choice but to curtail its operations. (Misra & Puri, 2007) Business is determined by the inflation rate. Inflation of your mild sort increase aggregate demand which, in turn, opens up fresh opportunities for business growth. In this environment, not only the demand for existing goods increases however the business can also introduce new items that demand may be created through dynamic marketing. Savings and investment in a country determine its business potential. Investment can be undertaken in directly productive activities or in infrastructure.
Excessive current account deficit in a country's balance of payments is not desirable for business activity. Such a situation brings about a shortage of forex, which in turn forces restriction on imports. (Misra & Puri, 2007)This might have serious implications for the efficiency in production. In the interest of business the existing account position should be comfortable.
In addition, the web inflows from external assistance and direct foreign investment should be fairly large, but this will not be permitted to result in an overvalued exchange rate.
In case the problem is otherwise, the country's exports will fall and the business organizations will feel seriously constrained account of computer.
Phase of economy is highly significant for the business enterprise. From the idea of view of business, the prosperity phase of business cycle is ideal. In this particular phase, the economy expands in response to growing aggregate demand and the business firm has many options. There may be expectation of rise in prices which induces managers to expand the scope of the activities. A corporation can introduce new products in this era and markets can be designed for these products.
Forces of recession get strengthened during recession. The recession usually gets reflected in the form of stock market crash and some fall in prices. The aggregate demand slowly but surely declines and so incentive for investment is killed. (Misra & Puri, 2007) At the moment managers abandon new projects, resulting in a sharp reduction in demand for capital equipment.
Since, finance is a simple requirement of business, the amount of development of the financial system is of crucial importance for business. The basic function of financial markets - both money and capital market is the assortment of savings and their transfer to business enterprises for investment purposes and thereby stimulating capital formation which accelerates and process of business growth. The effective channel of domestic savings and obtaining finance from abroad will be the important activities in the transfer process. Inside the transfer process, the principal activity is allocation of funds from the savings surplus to the savings deficit units. Financial markets, if they are well toned, allocate financial resources efficiently among the various businesses. (Misra & Puri, 2007)
- Misra, S. K. & Puri, V. K. (2007) Economic Environment of Business. New Delhi:Himalaya Publishing House.
- Mathur, N. D. (2002) Business Economics. Jaipur: Shivam Book House Pvt ltd.
- Macroeconomics Theory and Policy. New Delhi: S. Chand & Company ltd.
- Macdonald, N. D. (1999) Macroeconomics and Business: An Interactive Approach.
- Macroeconomics. (2002). Retrieved March 6, 2008, from http://www. iciciresearchcentre. org/user/research/theme_7. asp?level2ID=t7
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