27.12.10

Well Done China!!!

According to JP Morgan and Morgan Stanley, China may raise the benchmark lending rate by as many as 3 times in the first half of 2011 as inflation is a major concern in China. Other emerging countries are expected to do the same shortly.

Ever since the phillips curve created by William Phillip in 1958, which shows an inverse relationship between Inflation rate and unemployment rate, very few nations choose the maintain price stability. They were more concern on the rise in unemployment rate.

Then in the 1970's, rational expectation and non-accelerating inflation rate of unemployment (NAIRU) arose that explain the long run relationship between inflation rate and unemployment rate. Unemployment rate will be at natural rate of unemployment in long run. Inflation rate on the other hand will fluctuate accoordingly.

Although the phillips curve is no longer used as it is too simplistic, the long run relationship between the inflation rate and unemployment rate is still correct according to NAIRU.

Since in the long run, we will have natural rate of unemployment, it is not hard for any economist to target inflation rate especially when we know that money neutrality concept holds (through countless number of researches).

It seems like China are among the first nation in the world that realize that and they start increasing their key interest rate as early as February of 2007. Although they did eventually lower the overnight rate to 5.31% on December of 2008, it is still among the highest interest rate in the world (lower than other well managed economies such as Brazil and India).

Since money supply is now considered as exogenous by some Economists, perhaps the best way of lowering money supply thus lowering inflation is increase interest rate.

US and other developed countries still maintaining a superbly low interest rate simple for the reason of boosting employment and GDP but look at the BRIC nations. They all have high interest rate and they all have powerful growth of GDP and GNP.

India are another well managed economy. The unemployment rate continue to decrease while the key rate is kept at such a high level.

We still have quantitative easing 2 (QE2) to come. It seems like developed countries are not going for interest rate hike anytime soon.

6.12.10

Do Business Students Need Macroeconomics?
















Nowadays many business programmes (undergrad or postgrad) do not include any Economics paper. Some only offer Microeconomics (although they may call it principles of Eonomics or introduction to Eonomics). I had a conversation with a MBA graduate last week about this and according to her, business students do not need Macroeconomics. She said (quote)"business student only need to know Microeconomics such as demand, supply and elasticities. They do not need to know how to calculate GDP and unemployment rate"

This is my opinion as an Economics graduates to the question "Do business students need to learn Macroeconomics"

I think Business student need Macroeconomics more than they need marketing, logistic, human resource management etc. Macroeconomics is not a study of approaches to determine GDP or Unemployment rate. Macroeconomics is a study of the relationship of aggregate variables in Economics. Macroeconomics determine the effects and consequences of a change in an aggregate economics variable to another (or more) aggregate economics variable(s).

If unemployment rate increases, what will happen?

If money supply increases, what will happen?

If tax increases, what will happen?

Since business (firm sector) is a subset of Economy (other agents include consumer/ household, government and international sector), It can affect the economics and vice versa.

The best example of how Economy can affect business (firm sector) is during an economic crisis. Sub-prime crisis in 2007 started when Federal Reserve increased the money supply and decreased the interest rate after the Dot-Com bubble in 2001. Eventually it led to the overshooting of money supply and GDP and we all know the consequences after that.

During the crisis, the firm with best management team in the world either suffered decrease in profit, huge loss or even faced bankruptcy.

WHY?

I did a simple correlation of profit of firms in Malaysia, Singapore and Hong Kong. I used 3 economics variables: GDP, unemployment and money supply (M1) and 3 management variables: gearing ratio, company credit rating and quick ratio.

The result speaks for itself.

Correlation with profit:

GDP = 78.32%

Unemployment rate = 91.12%

Money supply = 92.85%


Gearing ratio = -18.5%

Credit rating = 38.75%

Quick ratio = 62.33%


In essence, Economics is a study of choices occurred results from unlimited wants and scarce supply. So Economics students study the management of resources and the flow of income.

For me, Economics graduates are similar to Business graduates. Only different is Economics students study the management of an (aggregate) economy while Business students study the management of a firm.