This course weds business strategy with the principles of macroeconomics. It offers valuable a powerful toolbox together with cases and lessons across all major functions of business, management, from finance, operations management, and marketing to human resource management, organizational behavior, statistics, and, of course, business strategy.
The Major Macroeconomic Policy Tools
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From the course by University of California, Irvine
Strategic Business Management - Macroeconomics
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From the lesson
An Overview of Modern Macroeconomics
Meet the Instructors
Dr. Peter NavarroProfessor
Paul Merage School of Business
In dealing with economic problems such as inflation and unemployment,
and in seeking to maintain Robust Economic Growth,
national governments have a number of macroeconomic policy tools at their disposal.
I have already briefly mentioned both fiscal policy, and monetary policy.
But other tools include: tax policy,
trade policy, exchange rate policy and even, regulatory policy.
Let's now drill down a bit on each of these policy tools and solutions.
Fiscal policy uses increased government expenditures or
alternatively tax cuts to
stimulate or expand the economy out of recession or slow growth.
For example, increased government spending directly increases G in the GDP equation.
Similarly, cutting taxes can indirectly stimulate consumption in
the GDP equation because such tax cuts leave more money in people's pockets to spend.
As to whether it is better to cut taxes or
raise government expenditures to stimulate an economy,
this is one of the great ideological debates of our time.
As a rule here, it may be said that,
ideological conservatives tend to favor tax cuts as a stimulus,
and vehicle to shrinking the size of government,
while ideological liberals seeking to expand the role of government,
typically favor increased government expenditures as a stimulus too.
Fiscal policy can also be used to contract the economy and fight inflation by
reducing government expenditures or by reducing consumption by raising taxes and thereby,
reducing consumer purchasing power.
While tax policy is an important component of fiscal policy,
it is worth treating separately for a brief moment.
The two big issues here revolve around the actual type of tax system a country uses,
and the level of taxes it imposes on its businesses and citizens.
For example, while some countries rely heavily on income taxes to raise revenues,
other countries rely more on consumption taxes such as,
so-called value added taxes.
At the same time, some countries impose very heavy taxes on their citizens,
and use the revenues to redistribute income from the rich to the poor.
On the other hand, some countries are known for
very low tax rates which tend to give these
countries a competitive edge in
global trading markets because they can offer their exports at lower prices,
albeit at the cost of a more unequal income distribution.
Monetary policy uses control over the money supply by a nation's Central Bank,
to stimulate the economy during recession or periods of
slow growth or to contract an economy to fight inflation.
And note that monetary policy is often used in conjunction with fiscal policy.
For example, suppose a country like Japan is facing a recession,
its Central Bank can loosen monetary policy by increasing the money supply.
As we will learn in more detail in a subsequent lesson,
this increase in the money supply will in turn, lower interest rates.
Of course, lower interest rates directly
stimulate business investment in the GDP equation,
and real GDP goes up.
Note however, that lower interest rates also indirectly increase net exports.
Why is this so?
Because, as we will learn in more detail in a later lesson,
lower interest rates tend to weaken the domestic currency.
In this example, the Japanese Yen.
And, in this example,
a cheaper Yen in turn,
will make exports cheaper,
and imports more expensive.
As exports rise and imports fall,
the GDP growth rate in turn,
rises through a rise in net exports in the GDP equation.
Suppose on the other hand,
the Central Bank wants to contract the economy to control demand-pull inflation,
what will be the preferred monetary policy here?
Take a minute to draw a figure like this one that depicts the application and
effects of contractionary monetary policy.
Does your figure look like this?
To contract the economy,
a nation's Central Bank can shrink the money supply to drive
up interest rates which effectively represent the price of money.
Higher interest rates will lower business investment directly,
as such, higher rates make any given investment less attractive.
Higher interest rates should also reduce net exports
as the domestic currency strengthens--in this example,
the Japanese Yen--and it becomes more difficult to export products abroad.
And by the way, this is all complicated stuff that I will
definitely explain much more fully in subsequent lessons.
As you can likewise see from the GDP equation,
trade is very important to GDP growth.
One key question every nation faces is,
how freely it should allow imports into its markets?
While so-called protectionist countries erect very high barriers to
imports through tools like tariffs and currency manipulation,
other countries favor lowering trade barriers to encourage trade with other nations.
This is an important subject in macroeconomics from
a national policy point of view because of this key point.
In theory, free and fair trade between nations can
result in increased economic growth for all the participating countries.
In such, gains from trade thereby make all of the trading nations better off.
And, this gains from trade argument is
the standard argument in support of trade deals pursued by many nations.
However, in the real world,
if one country cheats in the international arena by using unfair trade practices,
like illegal export subsidies and
currency manipulation to gain jobs and growth at the expense of other trading partners,
trade becomes much more of a zero sum game where the cheaters win,
and those who abide by the rules of free trade lose.
Trade policy is also important from a business point of view.
For example, a company depended on exports for growth and profits,
will want to be able to trade freely with
other countries without being subject to burdens and tariffs.
At the same time, a company vulnerable to import competition,
will want to ensure that any foreign competitors are playing by the rules.
It may even try to use its political power,
to have its government adopt protectionist measures.
It should also be noted here,
that there are other important trade policy issues related to
the setting of international standards for both health and safety for workers,
and protections for the environment.
Here, countries that use sweatshop labor,
and factories that spew out pollution little or no controls will likewise
gain unfair advantage over other trading nations even as workers are exploited,
and the environment is damaged.
In such cases, those countries that lose jobs and
growth to countries with sweatshops and pollution havens may,
as a matter of national trade policy,
seek to impose health and safety rules as well as
environmental protection standards as conditions of any trade deal.
Alternatively, countries losing jobs
and growth to sweatshop and pollution haven countries,
may seek to impose
so-called countervailing tariffs on imports to level the playing field.
All nations in the world have some forms of regulation.
Some nations have a lot more regulation than others.
In both Europe and United States for example,
there are regulatory agencies that deal with everything from environmental protection,
employment and labor laws,
food and drug safety,
and truth in advertising,
the anti-trust, health care, and privacy laws.
Of course, each of these forms of regulation is
designed to protect the public and promote the public good.
Yet, every regulation entails significant costs on taxpayers,
businesses, and the broader economy.
For example, electric utilities must install
expensive technologies on coal burning power plants to reduce pollution emissions,
coal mines have to install sophisticated filtering equipment to prevent lung disease,
and the pharmaceutical companies attempting to
bring new drugs to market that might fight lung disease,
must spend years and millions of dollars on drug trials to
ensure the drugs work with minimal side effects.
One of the key insights of a school of macroeconomics known as supply-side economics,
is that a nation can increase its growth in wealth not just by cutting
taxes but also by streamlining some forms of regulation and eliminating others,
thereby reducing the costs of doing business.
That is often the central idea behind any kind of
regulatory reform the government might pursue to stimulate economic growth.
And the political rhetoric often revolves around
the appealing idea of eliminating so-called red tape.
First, the challenge of regulatory reform is to balance
the need to protect the public with the competing need for economic growth.
And therein, lies the political tale.
It's a controversial tale.
We will talk more about it further discussions.
But for now, know that regulatory reform is a frequent political topic that
business executives have great interest in as regulation
affects business environment in a myriad of ways.
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