My Notes

Faculty of Businees
Introduction to macroeconomics BUEC1602

Assignment 1

Done by :
Fatma Mafatah al-Breiki 101512 .

INTRODUCTION

In my Assignment I will answer three question which talk about Macro environment and Real GDP . Before starting let me give you short definition for etch one :
Macro environment : the external environment to the factors which is affect its productivity and performance .
GDP : the total market value of all final goods and services produced within a given time period .
For more information read the following …

Q1: ” Understand macro environment of a country is very important in business decision making . “ ?? Explain this statement . Macro environment is a dynamic factor and keeps changing drastically, leading to increase in roads of competition and complexity. Efficient financial management calls for better financial decisions. This is only possible when every factor is reviewed which can affect the decision in any way and macro environment is one of the most important factors. This has made financial management more serious and sensitive for any business. Effective evaluation of the country projects and other situations is very dangerous in financial decisions. The evaluation calls for analysis of various factors belonging to both macro (external) as well as micro (internal) environment. Financial management a specialized field of general management is affected to a large extent by macro situations. We have to make various decisions related to finance broadly such decisions include capital budgeting (enables investment decisions), capital structure (takes care of decisions relating to mix of sources of funds and working) & working capital decisions (capital assesses : the day to day needs of business). While taking these decisions, one needs to understand the criticality of environmental forces. Since there is no single factor that makes our macro environment but group of various forces like political, legal, economical, social, technological etc, together build it. An effective financial decision needs assessment of these factors. To evaluate various macro forces, it is necessary to be aware of the system and processes of the country establishing the economy. For e.g. financial system of a country which plays a major role while making financial decision. Awareness about financial environment helps us understand how it constraints or simplify implementation of decisions. Financial environment includes of various intermediaries as well as controlling bodies. A simple example will help us understand the criticality of macro factors thoroughly. A change in credit policy like tightening of prudential norms for banks (for e.g. Increase in Cash Reserve Ratio and Statutory Liquidity Ratio by central bank of a country) will reduce the money supply in the economy. Decreased money supply will push up the interest rates and make credit costlier for people who want to borrow. Costly credit will directly affect the capital structure decision. It will also affect capital budgeting decision while assessing the possibility of the investment alternative. Since, a higher cost of capital will increase the percentage of discounting factor (opportunity cost) with which the future cash flows are discounted. This may cause deferring or canceling the capital expenditure (CAPEX) plans. Also, one should be updated with various changes taking place around the world. We are living in a time of globalization where nothing is stable and information technology has made the access to news and information of the world just a click away. World is becoming a level playing ground where not only national but international factor can also cause a risk. Like, “Sub-prime Crisis” brought a challenging time for almost whole world. To summarize, financial management and its decisions are greatly based on some major moulds . These moulds are greatly based on the macro factors such as country or worldwide interest rates, gross domestic product (REAL GDP) of a country, growth rate of economy, production and sales figures, population census etc. It clarifies to a great extent that financial decisions may go wrong if proper study of macro factors is not done. If the foundation goes wrong, dreaming about a strong building would be equivalent to day dreaming.

Q2 : What are the main suggestions to increase the Real GDP of Oman ?? Our REAL GDP are increase vary slowly over the years , to make it reach high amount in a short time we should do many things , to generate all these things we can say that the Omani government and people should do the following : 1) Reduce the production cost and time. Which will make the companies produce more goods and services at a short time , this will affect the price level to be less and then people will buy more ; so the REAL GDP also will be more . 2) Increase the Total Investment by, making and applying the policies that make either omani or forging business people attract to invest in our county ,then as more as the investment increased the real Real GDP will increase . 3) Make more government and privet Organizations which required more omani people , that is will lead to more employment for the labor so the personal income will be more and the real REAL GDP will be more too . 4) Increase Export and decrease the Import . This will happen when the first point are applied accurately , the product will be more than our needs ; so we will export it to another countries which is need to its ,then REAL GDP will reach a high level because of our product distribution . 5) Provide more Trainings and education for the labors , that will help them to be more skilled and fast productivity ,which will guide us to improve our production level as well as the production period and quality . As a result of doing all these things the Omani Real GDP will sharply go up .

Q3 : Describe the shortcoming of GDP measures ?? The shortcoming of GDP means the ways of selling or buying which is not have impact on the GDP. These shortcoming are divided into five important things : * Used Goods : the goods or money that are changed hand to hand, which mean that is no goods or services are produced .Like if you buy something from another person that is mean you will not add any value to the GDP because it’s already taken from the first time of buying it , but if you buy it directly from the market you will add some value in GDP. * Output produced Abroad : the output that is produced outside the country don’t add value to the GDP because of only the output which is made by factors of production located within the country can affect the GDP .

* The underworld economy ( Black Market) : illegal market that is used to prostitution, gambling , drugs …etc , the people who work in this business don’t care about any things just how to increase their profits even when the have a few intermediaries . * Transfer payment : does not create a value-added ; It can improve equality by transfer tax money to the ones who cannot stand up for themselves for example old people, unemployed workers…. etc so it’s also don’t have an impact on the GDP .

Conclusion ….

Finally, I have finished answering my assignment questions which is about : Q1: ” Understand macro environment of a country is very important in business decision making . “ ?? Explain this statement . Q2 : What are the main suggestions to increase the Real GDP of Oman ?? Q3 : Describe the shortcoming of GDP measures ?? I hope that my suggestion , explanation and description are clearly to you to get my ideas .

References …. 1) http://www.efinancemanagement.com/corporate-finance/finance-financial-management/69-how-macro-environment-affects-financial-management-decision.

2) http://books.google.com.om/books/about/Wages_Of_Crime.html?id=mr6q4zNufC0C&redir_esc=y.

3) http://au.answers.yahoo.com/question/index?qid=20101227175141AABIMBD.

References: …. 1) http://www.efinancemanagement.com/corporate-finance/finance-financial-management/69-how-macro-environment-affects-financial-management-decision. 2) http://books.google.com.om/books/about/Wages_Of_Crime.html?id=mr6q4zNufC0C&redir_esc=y. 3) http://au.answers.yahoo.com/question/index?qid=20101227175141AABIMBD.