MACROECONOMIC SITUATIONS

Introduction

Edgar, my cousin with his entrepreneurial spirit is considering buying four gas stations as the prices are at an all-time high as well as the demand. It is a prime market. Edgar has established that consumers are not having a problem paying the high prices and this is providing him with sufficient motivation. Further, the global prices for gasoline are expected to rise due to the increasing global demand. 

Cousin Edgar needs to understand that there are some necessary aspects of the economy that he needs to grasp. This report will bring into his attention the concepts of GDP growth rate, interest rates, level of unemployment, the business cycle, fiscal policy, monetary policy, international trade, and demographics. All these concepts need to be factored in by Cousin Edgar before making the decision to invest.

GDP Growth Rate

The GDP of the United States is impacted by various economic activities as follows. To begin with, according to the CIA World Factbook (2018) the service industry accounts for 80.2% of the GDP which is the biggest contributor. Services in this category include; insurance, healthcare, education social assistance and many other. Second after the service industry is manufacturing and mining and construction which adds 18.9% to the GDP. Agriculture accounts for a meagre 0.9% of the GDP but surprisingly, the U.S. is a net exporter of food (CIA World Factbook, 2018).

After the economic downward spiral that hit the global economy in 2008/09, the GDP has been growing substantially since then. This means that economic agents such as those in the oil industry have been experiencing improved business conditions since the economy has been in the recovery phase. In spite of more demand of gas, there is an increased demand for ‘cleaner and less harmful gas, for instance, that which is unleaded. This means that Edgar needs to be aware of this and provide his customers with the best quality product. Due to the strengthening economy as indicated inventory is mostly available even when it comes to costs. 

With increasing GDP growth rate, there is a tendency for consumers to ask for more and as such, they forward the demand to their suppliers, Edgar being one of them. The need to be creative is also necessary as there is a demand for more sophisticated products especially with increasing purchasing capabilities. This will ensure that Edgar is able to retain his clients.

Business Cycles 

The concept of GDP growth is necessary in determining the current position of the economy with relation to the business cycle. There are four business cycles, peak, recession, trough, and the expansion (recovery) cycles. Figures 2 and 3 illustrate the concepts of business cycles. Figure 2 is emphatic about the historical business cycles in the U.S while Figure 3 is emphatic about the economy in general.

Figure 2: Business Cycles in the U.S

Figure 3: General Business Cycles 

The best time to invest is when the economy is in the expansionary phase as suggested by Smets and Wouters (2007). This is the phase where the economy is rising and headed for a peak. Cousin Edgar needs to be careful not to invest during the recession and trough phases where the businesses are going down and flat respectively. The four business cycles are indicative of the GDP growth rate is mostly affected by the following four headings as suggested by Vassalou (2003). First, the concept of personal consumption where Cousin Edgar is targeting. The second concept of GDP growth is business investment. Edgar, in himself is investing. If investments are high, the GDP will grow substantially and the business environment will improve. Third is government spending. The government can stimulate GDP growth through spending. When it spends more, it follows that there will be high GDP growth rate. At the end, is imports and exports. When the amount of exports exceeds imports in terms of value, it follows that the GDP will grow substantially. It is at this time that the economy is generating substantial international trade that is in favor of the local economy. 

The oil industry responds instantly to changes in recession and expansion of the economy. Being in the extraction sector, changes in industry often end up reducing or increasing the scope of business associated to Edgar. Looking back to previous business cycles, there was a peak in 1978, preceded by a recession which recovered between the 1972 and 1976. There was another recession in 1980 but recovery was quick and in 1988, the business cycle was at its peak again as shown in Figure 2.

Economic activities vary with periods and are characterized by recessions and expansions which end up with troughs and peaks respectively. During the expansionary phase, the economy registers increasing employment, higher sales as well as more investments. It is in this phase that Edgar should target to grow and recoup his investments to ensure that there is a high return on investment. Edgar should compare the current phase in the business cycle with similar phases in history and determine if the economy is expanding and if there should be more waiting or whether she should dive right in. the various phases are indicated in Figure 2.

Employment 

Employment is a factor that will significantly affect Cousin Edgar’s business due to the fact that the business is highly dependent on the spending ability of people. Going back to the concept of business cycles, employment increases at the expansionary phase and reaches the highest at the peak. During the phases of recession and troughs, employment reduces and flattens effectively reducing the purchasing ability of a sizeable chunk of his to be market. It is good to invest during the expansionary phase. 

Unemployment and employment behave exactly along the business cycles discussed above. When the economy performs well, the businesses are able to generate employment (during the recovery and expansionary phases). As described by Tradingeconomics.com, unemployment rates in the U.S. as at the first quarter of 2017 were 4.5%. When the unemployment rates are high, it means that the general purchasing power of the population is low and as such, there will be reduced demand for Edgar’s products. When the unemployment rates are low, the economy is able to generate sufficient incomes and Edgar will get a market for his products. Irrespective of the type of unemployment (frictional, cyclical, disguised, and structural) the effect on purchasing capabilities is negative. 

Fiscal Policy

The government is at liberty to adjust its spending levels to stimulate or control the economy. The main goal is to often ensure consistent economic growth, full employment, as well as stabilizing commodity prices. Taxes and interest rates are adjusted to control people’s behavior as well as control purchasing power. The government can decide to waiver taxes on some products to promote their consumption. Such tax cuts act as incentives to encourage consumption. For instance, the state of Maryland gives a personal tax waiver of 30% on investments directed at renewable energy. This effectively means that the government of Maryland is discouraging the use of fossil fuel. 

During the 2008-09 global economic turmoil, there was a severe effect to the auto manufacturers. One good example is General Motors and Chrysler which were on the verge of bankruptcy. To illustrate the effect of fiscal policies, President Obama’s administration came to the rescue of the affected with the implementation of the Trouble Asset Relief Program. Fiscal policies are government interventions that are aimed at protecting the economy from shocks. As a result, in the case of GM, jobs and economic activities were protected.

Monetary Policy

Monetary policies can either be expansionary or contractionary. When monetary policies are expansionary, they aim to increase money supply in the economy and as such expanding the economy. Contractionary efforts constrict the economy and are aimed at controlling inflation. Expansionary policies reduce interest rates hence making it possible for communities to have more purchasing power. During the implementation of expansionary policies, Edgar’s business can be greatly benefited. Monetary policies include, open market operations, bank reserve requirement, as well as quantitative easing. Interests rates are often a favorite tool for use by the government to control inflation. As indicated by Woodford (2011). It is better to invest when the interest rates are low since it is at this time that the population can afford to borrow and repay.

International Trade

The value of exports with reference to imports explains the position of a country with reference to international trade. The terms of trade describe the gains or losses incurred by a country attributable to international trade. U.S has a higher comparative advantage when it comes to technologically related goods and this earns it a net positive balance of trade over the years as shown. When it comes to oil, the US imports a lot of it from Arabian countries and in the case of a dispute, it means that those people dealing in the oil industry will be gravely affected and will not be able to function optimally as it was well witnessed in the 1973 Oil Embargo as explained by Hamilton (2011).

Demography

Demographics relate with the structure of the population especially from the age point of view. When the population is composed of young people who can work and drive consumption, it means that there is a high chance that Cousin Edgar will succeed.  As indicated by Gorgievski et al., (2011), small businesses are heavily dependent on the demographic values in its area of operation. Cousin Edgar needs to understand his specific areas of operation and understand the demographic in the area. 

Recommendation

It is important to understand the current phase the economy is in the business cycle. Once established, a suitable decision will be made with reference to the growth prospects of the economy, spending capability of the population and interest rates among others. Cousin Edgar needs to understand the demographic dynamics of the area he is willing to invest in. this will tell him of the purchasing capabilities of the population, tastes and preferences. 

References

CIA World Factbook. (2018). United States. Retrieved from https://www.cia.gov/library/publications/the-world-factbook/geos/us.html

Gorgievski, M. J., Ascalon, M. E., & Stephan, U. (2011). Small business owners’ success criteria, a values approach to personal differences. Journal of Small Business Management, 49(2), 207-232.

Hamilton, J. D. (2011). Historical oil shocks (No. w16790). National Bureau of Economic Research.

 Smets, F., & Wouters, R. (2007). Shocks and frictions in US business cycles: A Bayesian DSGE approach. American economic review, 97(3), 586-606.

Woodford, M. (2011). Interest and prices: Foundations of a theory of monetary policy. princeton university press.Vassalou, M. (2003). News related to future GDP growth as a risk factor in equity returns. Journal of financial economics, 68(1), 47-73