Fluent Essays

Lester Scholls administrative assistant calls you on Monday afternoon to set up a conference call between you and the chairman tomorrow morning to discuss the boards reaction to your list and to discuss your next task. You call the number she gave you, and Lester joins the call shortly after.Im pleased with your work, he says. The board was impressed with your list of factors. Your ranking made sense because your explanations were well-written. I suspect they read everything you sent because it was concise and clear. Good job.Thanks, you say, and you feel relieved that your first assignment was well-received. Your list provided the basis for a good conversation about the manufacturing operations, he says. We want to know more about the economy of both countries to further inform our decision-making process. That makes sense, you say. The United States and South Korea hold many distinct economic factors that may affect AutoEdge’s long-term financial performance. Right, he says. Your research on the two economies will give the board enough information so we can advise the new, incoming CEO. What should my research include? you ask.In your research, you must take into consideration several macroeconomic factors, he says. We want to see information about the gross domestic product (GDP), unemployment, interest rates, and inflation for both the United States and South Korea. Make sure your research is current; that is, no more than 6 months old. Ill get started right away, you say.Very good, he says. Let me know if you have any questions, and Ill put you in touch with some of the other members of the board if I cant provide the answers you need.Great, you say. Thank you.Deliverable Length: 1,000-1,200 words, including research in essay format, APA format wealth_creation___inflation_.pdf macroeconomics_and_business_.pdf supply_and_demand_equilibrium_.pdf economic_growth_and_employment_.pdf everaging_macroeconomic_trends_.pdf Unformatted Attachment Preview Wealth Creation & Inflation Wealth Creation The term wealth maximization is used in finance and investments for both individuals and corporations. In the corporate finance area, wealth refers to shareholder value or net worth on a market value basis. That is, total assets less total liabilities equals net worth or shareholder wealth. The corporation conducts its business to maximize shareholder value or shareholder wealth. It does this through its investing, financing, and operating activities. In the same regard, an individual creates an investment plan to increase net worth over a period of time. The wealth is measured on a market value basis as the difference between assets minus liabilities. Assets (market value) – Liabilities = Net worth or Total Wealth Individuals invest in assets that earn returns through income and appreciation. Wealth is accumulated through a process of systematically investing and reinvesting the earned income and net gains. Individuals will invest in various asset classes that earn different rates of returns and have different risk profiles. In general, a higher level of desired wealth will require a higher rate of return, which in turn, requires greater risk, so individuals must consider both the risk and return on their investment. Individual can get in trouble when only expected returns are considered. Investment planning should consider both return and risk. The term risk adverse explains that, given the same return for different investment alternatives, investors seek the investment with the least risk. Or, rather, given investment alternatives with the same risk, investors seek the one with the highest return. Investors will demand higher returns for higher risk investments. Thus, there is a risk-return trade-off. Low levels of uncertainty or risk are desirable, but the returns associated with low risk are also low. High levels of uncertainty or risk are not desirable, but they are associated with high returns. According to the American Association of Individual Investors (AAII), the annual returns for the past 60 years for the investments classes are as follows (AAII, 2009): 1 Wealth Creation & Inflation Asset Class Treasury bills Intermediate-term bonds Risk Class Low Medium Annual Return 4.5\% 6\% Stocks High 11\% Investors must accept some level of risk, but capital preservation and stability must be a part of a wealth accumulation program. Inflation Inflation relates to the purchasing power of the dollar over time. The inflation rate is the rate of change in prices for goods and services. Two popular measure of inflation are the consumer price index (CPI) and the producers price index (PPI). These rates track the prices of a basket of goods and services over time periods: monthly, quarterly, and annually. Inflation is one of the risks of holding investments. Other risks include such items as interest rate risk, exchange rate risk, and default risk. Risk refers to the rate of variability in investment value and/or possible loss of value of investment. Risk equals loss of value. The rate of inflation is a measure of the purchasing power risk. It depends on price levels. If prices rise, inflation rises and purchasing power decreases. Thus, in terms of purchasing power, it takes more dollars to purchase the same level of investment. Thus, increasing inflation reduce investment value in terms of purchasing power. Although recent inflation rates have been low, financial planners have generally used inflation rates of 3–4\% as a long-term inflation rates in investment models. Economists and financial planners will use the terms nominal rates and real rates of return. The nominal rate is the current stated rate of return, which includes inflation. The real rate of return is the nominal rate less inflation. For example, if the nominal rate of return is 10\% and the inflation rate is 4\%, the real rate of return is 6\%. Reference AAII. (2009). Retrieved from American Association of Individual Investors 2 Wealth Creation & Inflation Web site: http://www.aaii.com 3 Macroeconomics and Business The changes that occur in the macroeconomy have a profound impact on business. For example, when consumer spending rapidly expands spurred on by significant fiscal and monetary stimulus, it has a powerful effect on economic growth in a country. As the economy grows, businesses across a wide range of industries will enjoy growth in revenues and profits. Economic Cycles and Corporate Profits Most firms are cyclical—their business expands as the economic cycle expands, and it contracts as the economic cycle contracts. With rising incomes, which generally occurs during an economic expansion, consumers purchase more goods, including consumer products. Therefore, consumer product companies are impacted by economic cycles—branded and/or premium consumer products are particularly sensitive. One way to appreciate the relationship between economic cycles and businesses is to examine how corporate profits change as the economy expands and contracts. According to Organization Economic Cooperation and Development and the U.S. Commerce Department, gross domestic product increased 0.5\%, 2.2\%, and 3.1\% in the years 2001, 2002, and 2003 respectively. Over that same time frame, corporate profits increased 0.4\%, 3.3\%, and 4.6\%. Increased Globalization Although the U.S. economy is the largest in the world, the economic performance of economies around the world has become increasingly more important to firms all over the globe. This is due to the increased integration of economies as commerce has become more globalized. According to the World Trade Organization, world exports grew at 7\% annually between 1990 and 2000. Increasingly, firms are sourcing goods and services from many countries around the globe—in particular, China (goods) and India (services). Increased globalization and free and fair trade enhances economic development, which creates consumer markets for goods and services that perhaps would not exist in their current form if not for the globalization. Consumer product companies have taken advantage of these new, rapidly growing markets by selling and sourcing products in many of these countries while witnessing an expansion in profits. 1 Macroeconomics and Business Increased Political and Economic Risk As economies become more integrated with firms buying and selling products and services all over the globe, the level of political and economic risk increases. Firms that once sold and sourced their entire product line in the domestic market limited their risk to the domestic economic and political environment. However, as businesses expanded their markets and began buying goods from various, distant suppliers, the level of risk has risen significantly through the end of the 20th century and into the 21st. Critical commodities concentrated in areas of political instability (for example, world oil supplies in areas impacted by terrorism or unstable governments) create a major risk that corporate executives around the world watch closely. The risk affects business leaders, consumers, and even entire national economies dependent on the commodity. Countries with major economic markets drive business, to a degree, and they are a risk factor for investors even when a particular investment is not directly made in that country. If a key country has a stagnant economy, it will affect not only its immediate neighbors and suppliers but also, to a degree, the international community. When a major economic power suffers due to slow job growth, high interest rates, or political uncertainty, that uncertainty troubles the world economy. Another type of national risk is that of up-andcoming national economies. The risk for booming new economies is whether the infrastructure is sufficient to sustain the growing economy and meet expectations for commodities and service consistently over time. References Department of Commerce. (n.d.). Retrieved April 10, 2009, from http://www.commerce.gov/ Organisation for Economic Co-Operation and Development. (n.d.). Retrieved April 10, 2009, from http://www.oecd.org/home/0,2987,en_2649_201185_1_1_1_1_1,00.ht ml World Trade Organization. (n.d.). Retrieved April 10, 2009, from http://www.wto.org/ 2 Supply & Demand and Equilibrium Supply and Demand An understanding of the basics of supply and demand is central to the comprehension of economics. The principles of supply and demand explain why consumers buy goods at certain prices but purchase less as the price increases. It explains why producers produce more as price increases, and markets are always moving to happy medium. As noted in the graph above, supply and demand curves can be graphically depicted in two dimensions, with price on the vertical axis and quantity demanded on the horizontal axis. Demand The demand curve (line) is downward sloping because as price declines, consumers buy more of the good. In the example above, as price declines from $10 to $9, the quantity demanded increases from 100 units to 200 1 Supply & Demand and Equilibrium units. Up or down movements along the demand curve are caused by changes in the price of the good. In or out shifts of the demand curve are caused by demand shifters such as income, price of substitute goods, and advertising. For example, consider chicken as a substitute for beef. As the price of beef increases, the entire demand curve for chicken will shift to the right, meaning there is more demand for chicken at every price point. Supply The supply curve (line) is upward sloping because as price increases, producers supply more of the good. In the example above, as price increases from $1 to $2, the quantity supplied increases from 100 units to 200 units. Up or down movements along the supply curve are caused by changes in the price of the good. In or out shifts of the supply curve are caused by supply shifters, which would include effecters such as cost of labor, advances in technology, and taxes. For example, advances in technology have allowed computer manufacturers to build and produce more computers without substantial increases in labor resources. This increases the supply of computers at every price point. Surplus and Shortage A surplus occurs when producers produce more goods than consumers want to consume at prevailing prices. When this happens, there is downward pressure on price; to sell the goods, producers would have to lower the price. This will reduce the surplus and move the market toward equilibrium. A shortage occurs when consumers demand more goods than producers are willing to produce at prevailing prices. When this happens, there is upward pressure on price, which means that consumers bid up prices in effort to buy the good. As prices move up, producers will produce more and the market will move toward equilibrium. Equilibrium The point labeled equilibrium in the chart represents a very important economic concept. The equilibrium point represents the point at which supply 2 Supply & Demand and Equilibrium and demand are the same, which in the above chart is at a price of $55 and 550 units. Markets are always moving (more supply/less supply, more demand/less demand) and seeking for balance between demand and supply. The theoretical point all markets continually search for is this medium place of tension or balance. 3 Economic Growth and Employment How accurate is the unemployment rate? It depends to whom you talk. Liberals and conservatives see the same statistics but are diametrically opposed to each others interpretation. Liberals say the true unemployment rate might be two or three percentage points higher if all jobless people who were ready, willing, and able to work were counted. Currently, the Bureau of Labor Statistics does not count people who are discouraged. These are people who have been looking for work for a long period of time but have given up. They are no longer looking for work; therefore, they are not counted in the unemployment rate. Conservatives see it differently. They contend that the unemployment rate is overestimated significantly. Millions of illegal aliens are currently living and working in the United States. The latest estimate of the illegal alien population is about 20 million. Most of them are working, and many are in jobs that do not show up on employers books. Many citizens also work off the books, do not report their income, and are not counted by the Bureau of Labor Statistics. The Four Types of Unemployment Frictional unemployment is made of those people who are between jobs or just entering and reentering the labor market. These people usually are unemployed for short periods of time. At any given time, it is estimated that about 2–3\% of the labor force is frictionally unemployed. Structural unemployment is made of people who are out of work for long periods of time—sometimes months and occasionally years. People in this category are often employed by industries that are struggling and sometimes failing. The prospect of being reemployed in the same industry or job is slight. Normally these people will have to be retrained in something completely different. For example, the U.S. auto industry is shrinking, and tens of thousands of autoworkers have lost their jobs. Companies in the garment industry, steel companies, and almost all electronics firms have moved many of their jobs offshore. Cyclical unemployment follows the ups and downs of the business 1 Economic Growth and Employment cycle. When the economy falls into recession, the unemployment rate may go as high as 10\%. The current unemployment rate is approximately 9.1\% as of July 2011. Seasonal unemployment includes people who are employed in industries that depend on good weather such as construction, farming, and tourism. For example, the tourist season in Florida is slow during the hottest months of the summer. Natural Unemployment Rate Society has come to expect a level of natural unemployment; however, if you are one of the unemployed, there is nothing natural or expected about it. Politicians are extremely concerned about the unemployment rate, and when it climbs above 6\%, they generally start making noise about it. How does the unemployment rate in the United States compare with other industrialized countries? Unemployment rates in Europe are usually significantly higher than in the United States. As a rule of thumb, rates in Europe are three and five percentage points more than the U.S. unemployment rate. Certain economists argue that this number is significantly higher than that because of the European habit of hiding millions of unemployed people in permanent training programs and keeping them off the official unemployment roles. 2 Leveraging Macroeconomic Trends to Microeconomic Advantage Leveraging Macroeconomic Trends to Microeconomic Advantage Successful business executives have a keen understanding of macroeconomic issues and how they impact their company. Global economic issues, such as increasing consumer income in Asia or rising inflation in Latin America, impact the business plans of executives around the globe. Perhaps the single greatest global macroeconomic factor is globalization itself. Companies source and sell products all over the world with increasing efficiency and sophistication. Globalization creates opportunities for businesses to take advantage of lower trade barriers to create new markets, exploit new product offerings, and enhance their supply chains. Leveraging worldwide, macroeconomic trends to microeconomic advantage can differentiate firms, which is critical in today’s highly competitive global business environment. The two primary areas of opportunity are in increased sales and lowered costs. The Birth of New Markets New markets are being created quickly through globalization. The expansion of the European Union, the introduction of the Euro, China joining the World Trade Organization, and the implementation of the North American Free Trade Agreement have all created vast new markets for various goods and services. This has created opportunities for companies to sell existing products in new markets and develop new products to sell in niche markets such as computer software designed for countryspecific businesses. On the cost side, businesses have been able to flex down their cost structure by significantly enhancing their supply chains. Companies can now manufacture products in China, assemble them in Mexico, and sell them in the US for much less than they were able to produce, assemble, and sell them in a single market. In addition, transportation providers are now able to access these markets with less regulation and greater efficiency—driving down transportation cost and enhancing cost structure. The firms that have been most successful at taking advantage of these opportunities are differentiating from competitors, creating significant cash flow and enhancing firm value. Measuring and Managing Risk An increasingly global business environment—by its nature—is more risky than a single market business setting. The global business firm faces currency risk, project risk, economic and political risk, and risk of failure in the supply chain. This requires senior officers to have the proper metrics in place to measure risk and apply the correct methodologies to manage risk. Risk measurement requires that firms establish key metrics that can measure risk, anticipate risk, and be an early warning system when risk is likely to increase. In some cases, this requires sophisticated information technology with advanced logic. For example, many firms develop models that predict when a failure will occur in the supply chain and will take action to avoid the failure. In other cases, this may be as simple as having managers in a local market in communication with the company’s headquarters about political and economic changes that are occurring in the local market. On a project and day-to-day business level, companies use many statistical techniques to measure risk. For example, certainty-equivalent cash flows are used to adjust cash flows for risk. Some companies use moving averages with adjustments for seasonal variations to measure demand for goods and services. To manage risk, many firms use a variety of risk hedging techniques. Depending on the business, this ranges from currency hedging to interest rate swaps to options on commodities. Also, firms can manage risk by diversification (for example, sourcing goods in different markets to minimize political and economic risk associated with sourcing in a single market). ... Purchase answer to see full attachment