Midterm Review

Macroeconomics Analysis for Business Decision

1. What is Economics? Difference Between Microeconomics and Macroeconomics

Economics is the social science that studies how individuals, businesses, governments,
and societies make choices about the allocation of scarce resources. It analyzes the
production, distribution, and consumption of goods and services.
Microeconomics focuses on the behaviors and decisions of individual consumers and
firms. It examines how these entities allocate resources and the factors that influence
their decisions, such as supply and demand, price elasticity, and market structures.
Macroeconomics, on the other hand, looks at the economy as a whole. It studies
aggregate indicators such as GDP, unemployment rates, inflation, economic growth,
and the overall performance of an economy at a national or global level.
2. What is GDP? Approaches to Calculate GDP
Gross Domestic Product (GDP) is the total monetary value of all finished goods and
services produced within a country's borders in a specific time period, usually annually
or quarterly. It serves as a comprehensive measure of a nation's overall economic
activity.
There are three primary approaches to calculate GDP:
1. Production (or Output) Approach: This approach sums the value of all goods
and services produced in the economy, subtracting the value of goods and
services used up in production (intermediate consumption).
2. Income Approach: This calculates GDP by summing up all incomes earned in
the production of goods and services, including wages, profits, rents, and taxes,
minus subsidies.
3. Expenditure Approach: This approach calculates GDP by summing all
expenditures made in the economy. The formula is: GDP=C+I+G+(X−M)
where:
o C = Consumption
o I = Investment
o G = Government Spending
o X = Exports
o M = Imports
3. Causes of Unemployment and Inflation; Their Impact on the Economy
Causes of Unemployment:
• Cyclical Unemployment: Caused by economic downturns; demand for goods
and services decreases, leading to layoffs.
• Structural Unemployment: Results from changes in the economy or labor
market, such as technological advancements that make certain skills obsolete.
 • Frictional Unemployment: Short-term unemployment occurring when
individuals are temporarily unemployed while transitioning between jobs.
Causes of Inflation:
• Demand-Pull Inflation: Occurs when demand for goods and services exceeds
supply.
• Cost-Push Inflation: Caused by rising costs of production, such as wages and
raw materials, leading to higher prices.
• Built-In Inflation: Comes from an ongoing cycle of wages rising, leading to
higher production costs and further price increases.
Impact on the Economy:
• Unemployment: High unemployment can lead to lower consumer spending,
reduced demand for goods and services, social issues, and decreased economic
growth.
• Inflation: Rising inflation can erode purchasing power, create uncertainty in the
economy, and lead to higher interest rates as central banks attempt to control
inflation.
4. Differences Between GNI, GDP, GNP, and GDP per Capita
• GDP (Gross Domestic Product): The total value of goods and services produced
within a country’s borders.
• GNP (Gross National Product): The total value of goods and services produced
by the residents of a country, regardless of where the production occurs
(includes net income earned abroad).
• GNI (Gross National Income): Measures the total income of a country's
residents, including GDP plus net income from abroad (dividends, interest,
remittances).
• GDP per Capita: GDP divided by the population of a country, indicating the
average economic output per person and often used as an indicator of living
standards.
5. Causes of Economic Growth and Methods to Measure It
Causes of Economic Growth:
1. Increased Capital: Investment in physical and human capital.
2. Technological Advancement: Innovations that increase efficiency and
productivity.
3. Labor Force Growth: An increase in the labor force or productivity
improvements.
4. Natural Resources: Access to abundant natural resources can drive growth.
Methods to Measure Economic Growth:
1. Real GDP: Measures the value of goods and services adjusted for inflation.
2. GDP Growth Rate: The percentage change in GDP from one period to another.
 3. GNI and GNP: Evaluate growth from national income perspectives.
6. What is GDP per Capita? Calculation of GDP per Capita
GDP per Capita is the GDP of a country divided by its population, providing an
average economic output per person. It is a useful measure for comparing living
standards between different countries.
Calculation: GDP per Capita=GDP/Population
7. Measuring GDP Growth Rate
The GDP growth rate measures the percentage change in GDP from one period to the
next. It can be calculated using the formula:
GDP Growth Rate=[(GDP this Period−GDP Previous Period)/GDP Previous Period]×100
8. Three Factors Influencing Economic Growth
1. Human Capital: The skills, education, and health of the workforce.
2. Physical Capital: Infrastructure, machinery, and technology that enhance
productive capacity.
3. Institutional Framework: The legal and political environment, including property
rights and regulatory quality that supports economic activities.
9. What is Productivity? Increasing Productivity
Productivity measures how efficiently inputs are converted into outputs, often
calculated as the ratio of output (goods and services) to input (labor, materials, etc.).
Ways to Increase Productivity:
1. Investing in Technology: Using advanced technology to improve efficiency.
2. Training and Education: Enhancing workers’ skills to improve their performance.
3. Process Improvement: Streamlining operations to eliminate waste.
4. Investment in Infrastructure: Improving facilities and equipment to support
better workflows.
10. Unemployment and Employment in Cambodia
In Cambodia:
• Employed: Individuals actively engaged in paid work, including part-time and
informal jobs.
• Unemployed: Those without work but actively seeking employment, with a
notable focus on informal sector workers.
11. Discouraged Worker and Underemployment
• Discouraged Worker: An individual who is not currently seeking employment
because they believe no jobs are available for them or consider themselves
unqualified.
• Underemployment: Refers to workers employed in jobs that do not utilize their
skills or education fully, or those working fewer hours than desired.
12. Income Approach to GDP
Income Approach calculates GDP by summing all incomes earned in the production of
goods and services, which can include:
• Wages and Salaries: Compensation received by employees.
• Profits: Earnings of corporations and businesses.
• Rents: Income received from leasing property.
• Interest: Earnings from lending money.
• Taxes: Taxes on production and imports.
13. Expenditure Approach to GDP
Expenditure Approach calculates GDP by summing the spending on goods and
services in the economy:
GDP=C+I+G+(X−M)
where:
• C = Consumption
• I = Investment
• G = Government Spending
• X = Exports
• M = Imports
14. Shortcomings of GDP
• Does Not Measure Informal Economy: GDP fails to account for informal or
underground economic activities.
• Ignores Distribution of Income: GDP does not indicate how income is
distributed among residents, potentially masking inequality.
• Non-Market Transactions: Excludes non-market activities such as household
labor.
• Environmental Degradation: Does not consider environmental costs related to
production processes.
• Quality of Life: GDP does not measure overall well-being, happiness, or living
standards beyond economic activity.
15. Effects of Recession and Government Control
Effects of Recession:
• Increased Unemployment: Companies reduce growth or lay off workers.
• Reduced Consumer Spending: Lower consumer confidence leads to decreased
expenditures.
• Investment Decline: Businesses hesitate to invest due to economic uncertainty.
Government Control of Inflation and Unemployment:
• Monetary Policy: Central banks can adjust interest rates and control the money
supply to manage inflation.
• Fiscal Policy: Governments can adjust spending and taxation to foster economic
activity and reduce unemployment.
16. The Business Cycle
The business cycle refers to the fluctuations in economic activity characterized by
periods of economic expansion (growth) and contraction (recession). Phases include:
1. Expansion: Increasing economic activity, GDP growth, and rising employment.
2. Peak: The highest point of economic activity before a decline.
3. Recession: A decrease in economic activity lasting more than two consecutive
quarters.
4. Trough: The lowest point of economic activity, followed by recovery.
17. Causes of Prices to Rise
Prices can rise due to various factors, including:
• Demand-Pull Factors: Increased consumer demand outstrips supply.
• Cost-Push Factors: Rising costs of production, such as wages and raw materials,
lead to higher prices.
• Monetary Policy: Expanding the money supply can lead to inflation, increasing
prices.
• Supply Chain Disruptions: Shortages or delays in the supply chain can lead to
limited availability and increasing prices.

19. Gross Investment Calculation

To calculate gross investment, we consider the total spending on final purchases of
plant and equipment, including new construction and inventory changes, without
subtracting replacement costs.
• Total spending on plant and equipment: $80 billion
• Replacement of worn-out equipment: $15 billion (not subtracted in gross
investment)
• Inventory addition: $10 billion
• New construction: $5 billion
Gross Investment = Total spending + Inventory addition + New construction
Gross Investment = 80billion+10 billion + 5billion=95 billion

20. Real GDP Calculation

A. Calculate Real GDP in Year 5:
To find real GDP, we use the
formula: Real GDP=Nominal GDPPrice Index×100Real GDP=Price IndexNominal GDP
×100
Given:
• Nominal GDP in Year 5 = $480 billion
• Price Index = 120
Real GDP=(480/120)×100=400 billion
B. Calculate Real GDP Change from Base Year to Year 5:
Base Year Nominal GDP = $380 billion
Base Year Price Index = 100 (since it is the base year)
Real GDP in Base Year=(380/100)×100=380 billion
Change in Real GDP = Real GDP in Year 5 - Real GDP in Base Year
Change = 400 - 380 = $20 billion

21. Nominal GDP Calculation

A. Find Nominal GDP in Years 1 and 2:
• Year 1: Production = 8 units at $10 each
Nominal GDP Year 1=8×10=80 (million)
• Year 2: Production = 9 units at $12 each
Nominal GDP Year 2=9×12=108 (million)
B. Price Index Calculation:
Base Year Price Index = 100
Price in Year 2 = 12 PriceinBaseYear= 10
Price Index in Year 2 = (12/10)×100=120
C. Real GDP in Year 2:
Real GDP Year 2=Nominal GDP Year 2/Price Index100
Real GDP Year 2=(108/120)×100=90 (million)

20. Real GDP Calculation for Years 2019, 2020, and 2022
D. Find Real GDP:
• 2019:
Real GDP=1536128×100=1200 (million)Real GDP=1281536×100=1200 (million)
• 2020:
Real GDP=1663132×100=1260.61 (million)Real GDP=1321663
×100=1260.61 (million)
• 2022:
Real GDP=1792140×100=1280 (million)Real GDP=1401792×100=1280 (million)
E. Nominal GDP in Year 2021:
Real GDP in 2021 = $1274 million
Price Index = 135
Nominal GDP=1274135×100=944.44 (million)Nominal GDP=1351274
×100=944.44 (million)

21. Cambodia Real GDP and Population Growth Rate

Given:
• Real GDP 2020 = $240 billion
 • Real GDP 2021 = $260 billion
A. Growth Rate of Real GDP:
Growth Rate=(260−240)/240×100=8.33%
B. Years to Double Real GDP:
Using the Rule of 70:
Years to Double=70/Growth Rate=70/8.33≈8.4 years
C. Real GDP per Capita:
• Population 2020 = 15 million
Real GDP per Capita 2020=240 billion / 15 million=16,000
• Population 2021 = 16 million
Real GDP per Capita 2021=260 billion/16 million=16,250
• Growth Rate of Real GDP per Capita:
Growth Rate=(16,250−16,000)/16,000×100=1.56%
D. Years to Double Real GDP per Capita:
Years to Double=70/1.56≈44.87 years

22. Catching Up of Follower Country

Given:
• Leader Country Real GDP per Capita = $80,000
• Follower Country Real GDP per Capita = $40,000
• Growth Rate of Leader Country = 0%
• Growth Rate of Follower Country = 3.5%
Years to Catch Up:
Using the formula for future value: Future Value=Present Value×(1+r)n
We need to find n such that: 40,000×(1+0.035)n=80,000
(1.035)n=2
Taking the logarithm: nlog(1.035)=log(2)n=log(2)/log(1.035)≈20.9 years

23. Total Working Hours in Cambodia

A. Estimate Total Working Hours of Each Worker per Year:
Each worker works:
• 8 hours/day
• 6 days/week
• 50 weeks/year
Total working hours per worker per year: 8×6×50=2400 hours
B. Total Working Hours Produced by All Workers:
Total workers = 10 million
Total hours = 10,000,000×2400=24,000,000,000 hours
A.Calculate the Real GDP in Cambodia:
Using the formula:
Real GDP=Total Hours Worked×Productivity
Given:
• Total Working Hours = 28,000 million hours
• Productivity = $10 per hour
Calculating the Real GDP:
Real GDP=28,000 million hours×10 dollars/hour=280,000 million dollars
Thus:
Real GDP=280 billion dollars

B. Calculate the New Real GDP in Year 2:

Now, if we consider the scenario where the productivity rises to $10.40 per hour, we
will calculate the New Real GDP using the same working hours (28,000 million hours).
Using the formula:
New Real GDP=Total Hours Worked×New Productivity
Given:
• Total Working Hours = 28,000 million hours
• New Productivity = $10.40 per hour
Calculating the New Real GDP:
New Real GDP=28,000 million hours×10.40 dollars/hour=291,200 million dollars
So the New Real GDP will be:
New Real GDP=291.2 billion dollars

C. Calculate the Rate of Economic Growth of Cambodia:

To find the growth rate based on the initial and new Real GDPs:
• Initial Real GDP = $280 billion
• New Real GDP = $291.2 billion
Using the growth rate formula:
Growth Rate=New Real GDP−Initial Real GDPInitial Real GDP×100
Substituting the values:
Growth Rate=291.2−280280×100=11.2280×100≈4%

24. Labor Force Data for Cambodia

Given Data:
• Total Population = 17 million
• Under 16 or Institutionalized = 3 million
• Students and Discouraged Workers = 1.5 million
• Disability and Retirees = 1.5 million
• Unemployed = 1 million
 • Part-time Workers = 4 million
• Full-time Workers = 6 million
A. The Size of the Labor Force
The labor force consists of all employed and unemployed individuals who are actively
seeking work.
Labor Force=Employed+UnemployedLabor
Where:
• Employed = Full-time Workers + Part-time Workers
= 6 million+4 million=10 million
So,
Labor Force=10 million+1 million=11 million
B. The Number Classified as "Not in the Labor Force"
To find the number not in the labor force, we subtract the labor force from the total
population.
Not in Labor Force=Total Population−Labor ForceNot in Labor
Not in Labor Force=17 million−11 million=6 million
C. The Unemployment Rate
The unemployment rate is calculated as follows:
Unemployment Rate=(UnemployedLabor Force)×100
Unemployment Rate=(1 million11 million)×100≈9.09%

25. Okun's Law and GDP Gap

Given:
• Natural Rate of Unemployment = 5%
• Current Unemployment Rate = 13%
• Potential GDP = $500 billion
A. Calculate the Size of the GDP Gap
According to Okun's Law, for every 1% increase in the unemployment rate above the
natural rate, the GDP will be roughly an additional 2% lower than its potential.
GDP Gap=(U−Un)×2GDP
Where:
• U = Current Unemployment Rate = 13%
• Un = Natural Rate of Unemployment = 5%
GDP Gap=(13−5)×2=8×2=16%
B. Calculate Output Lost if Potential GDP = $500 billion
Output lost can be calculated as:
Output Lost=Potential GDP×(GDPGap/100)
Output Lost=500 billion×16/100=80 billion
26. Unemployment Rate Calculation
Given:
• Total Population = 200 million workers
• Labor Force = 100 million
• Full-time Employment = 80 million
• Part-time Employment = 16 million
• Discouraged Workers = 5 million
Calculate the Unemployment Rate
The labor force consists of all employed and unemployed individuals actively seeking
work.
Total employed = Full-time + Part-time = 80 million+16 million=96 million
Unemployed = Labor Force - Total Employed
Unemployed=100 million−96 million=4 million
Now, calculate the unemployment rate:
Unemployment Rate=(UnemployedLabor Force)×100Unemployment
Unemployment Rate=(4 million100 million)×100=4%

27. Labor Force Data for Cambodia

Given Data:
• Total Population = 17 million
• Population Under 16 or Institutionalized = 3 million
• Students and Discouraged Workers = 1.5 million
• Disability and Retirees = 1.5 million
• Unemployed = 1 million
• Part-time Workers = 4 million
• Full-time Workers = 6 million
A. Calculate the Size of the Labor Force
Labor Force=Employed+UnemployedLabor Force=Employed+Unemployed
Where:
• Employed = Full-time Workers + Part-time Workers
= 6 million+4 million=10 million
Thus,
Labor Force=10 million+1 million=11 million
B. Calculate the Size of Not in the Labor Force
Not in Labor Force=Total Population−Labor ForceNot in Labor Force=Total Population
−Labor Force
Not in Labor Force=17 million−11 million=6 million
C. Calculate the Official Unemployment Rate
Unemployment Rate=(UnemployedLabor Force)× 100
Unemployment Rate=(1 million11 million)×100≈9.09%

28. Suppose the government's national income and product accounts reveal the
following information:
Given Data:
• Personal Consumption Expenditures (C): 525
• Gross Private Domestic Investment (I): 110
• Consumption of Fixed Capital (Depreciation): 31
• Government Purchases (G): 72
• Net Exports (NX): -15
• Compensation of Employees: 462
• Proprietors' Income: 59
• Interest: 29
• Rents: 26
• Corporate Profits: 75
• Corporate Income Taxes: 28
• Dividends: 30
• Undistributed Corporate Profits: 17
• Net Foreign Factor Income: 12
• Transfer Payments: 33
• Social Security Contributions: 39
• Taxes on Production and Imports: 22
• Personal Taxes: 71
• Personal Saving: 4
A. Verify GDP Using the Income and Expenditure Approach
1. Expenditure Approach:
GDP=C+I+G+NX
GDP=525+110+72−15=692
2. Income Approach:
B. Find Net Domestic Product (NDP)
To find NDP, we can adjust GDP by subtracting depreciation:
NDP=GDP−Consumption of Fixed Capital
Using total Gross thus:
NDP=692−31=661
C. Verify National Income (NI)
1. National Income by Adjustment from NDP:
NI=NDP+Net Foreign Factor Income
NI=661+12=673
2. National Income Calculation from Components (Calculation):
NI=Compensation of Employees+Proprietors’ Income+Interest+Rent+Corporate Profit
s−Corporate Income Taxes
NI=462+59+29+26+75−28=623
Thus both definitions by adjustments equate further elevating:
D. Find Personal Income (PI)
To find PI, we make the following adjustments to NI:
PI=NI−Corporate Income Taxes−Retained Earnings+Transfer Payments
Adjust for retained thus left out dividends thus,
PI=673−28−17+33
Hence net total simplified thereafter gives:
=673−28−17+33=673−45+33=661
Thus PI streamlined adjusts to $661.
E. Find Disposable Income (DI)
Finally, to find DI from PI:
DI=PI−Personal Taxes
We adjust the figures:
DI=661−71=590

International Business Strategy

1. Key Reasons for Businesses to Enter International Markets

• Market Expansion: Access to new customer bases can help businesses to grow
sales and revenues beyond domestic borders.
• Diversification of Markets: Reducing dependence on a single economy can
stabilize revenue streams, especially during economic downturns in one market.
• Cost Advantages: Access to lower production costs, such as cheaper labor or
raw materials, allows businesses to enhance profitability.
• Innovation and Learning: Exposure to global markets can lead to new ideas,
technologies, and methods of doing business.
• Competitive Advantage: Establishing a presence in international markets can
strengthen brand reputation and create barriers to entry for competitors.
• Increased Resources: International markets may offer access to new
technologies, skilled labor, and venture capital.
2. Factors Influencing International Markets
• Economic Factors: GDP growth rate, inflation rate, exchange rates, and overall
economic stability affect the attractiveness of entering a foreign market.
• Political and Legal Factors: Government stability, regulatory frameworks, trade
agreements, tariffs, and political risk are crucial considerations.
 • Cultural Factors: Understanding cultural differences, consumer behaviors, and
local customs is essential for effective marketing and business operations.
• Technological Factors: The level of technological advancement and innovation
in a country can affect business processes and competitiveness.
• Social Factors: Demographics, education levels, and lifestyle changes influence
market demand and consumer preferences.
3. Three Levels of Business Strategy
• Corporate-Level Strategy: This encompasses the overall scope and direction of
the organization. It involves decisions about which markets to compete in,
mergers, acquisitions, and resource allocation across business units.
• Business-Level Strategy: Focused on how to compete successfully in particular
markets. This includes positioning the business in its market and identifying
competitive advantages to outperform rivals.
• Functional-Level Strategy: Involves specific functions within a company (e.g.,
marketing, finance, HR) and outlines the tactics needed to support the broader
business strategy in effective execution.
4. Stages in Strategic Management
1. Goal Setting: Defining the organization's objectives and what it seeks to achieve
in the long term.
2. Analysis: Assessing the internal and external environment to identify strengths,
weaknesses, opportunities, and threats (SWOT analysis).
3. Strategy Formulation: Developing strategies based on analyses to achieve
defined goals.
4. Strategy Implementation: Putting strategies into action through organizational
changes, resource allocation, and management systems.
5. Evaluation and Control: Monitoring performance and making adjustments as
necessary to align with strategic goals.
5. PESTEL Framework
The PESTEL framework is a strategic tool used to understand the external macro-
environmental factors that may impact an organization. It includes:
• Political: Government policies, regulations, political stability, and trade
restrictions.
• Economic: Economic growth, interest rates, inflation, exchange rates, and
unemployment rates.
• Social: Cultural trends, demographics, population growth rates, and consumer
preferences.
• Technological: Innovations, technology changes, and the impact of technology
on the industry.
 • Environmental: Environmental regulations, ecological aspects, climate change,
and sustainability concerns.
• Legal: Laws affecting the industry (e.g., health and safety, labor laws, intellectual
property).
6. Reliable Sources to Gather Information on PESTEL
• Government Reports and Websites: Such as statistics departments or trade
ministries.
• Industry Reports: Provided by market research firms (e.g., Statista, IBISWorld,
Gartner).
• Academic Journals: Research articles and case studies published in reputable
journals.
• News Outlets: Reputable news organizations (e.g., The Economist, Financial
Times).
• International Organizations: World Bank, International Monetary Fund (IMF),
United Nations (UN) reporting.
7. Porter’s Five Forces Analysis
Porter’s Five Forces framework helps analyze the competitive environment of an
industry:
1. Threat of New Entrants: The ease or difficulty with which new competitors can
enter the market and challenge existing players.
o Factors: Barriers to entry, economies of scale, brand loyalty, government
policies.
2. Bargaining Power of Suppliers: The power suppliers have to drive up prices
due to their control over certain inputs.
o Factors: Supplier concentration, availability of substitute inputs,
importance of volume to suppliers.
3. Bargaining Power of Buyers: The ability of customers to affect pricing and
quality.
o Factors: Buyer concentration, price sensitivity, availability of alternative
products.
4. Threat of Substitute Products or Services: The likelihood that customers will
switch to alternative products that fulfill similar needs.
o Factors: Availability of substitutes, price-to-performance ratio of
substitutes.
5. Rivalry Among Existing Competitors: The intensity of competition among
existing firms in the industry.
o Factors: Number of competitors, rate of industry growth, product
differentiation, exit barriers.