GB540 Unit 7 Macroeconomic Indicator Analysis Example

From 3,600 Motors to About 3,575: A Unit 7 Macroeconomic Indicator Analysis for Three Markets

[Student Name]

Purdue University Global

GB540: Economics for Global Decision Makers

Unit 7 Macroeconomic Indicator Analysis

[Instructor Name]

[Date]

Ruddiman Marine and every indicator value are composite and illustrative, set for the exercise rather than taken from any release; the economics sources cited are real.

The Plan Being Tested

Ruddiman Marine's plan of 3,600 motors divides into 2,192 for the United States, from the Unit 3 forecast at current prices, 808 for Australia and 600 for Norway. Those figures assumed economic conditions would match the last season. This analysis asks whether the latest indicators change that.

The Dashboard

Six indicators for each country, composite and labeled as such.

United States. Real GDP growth 1.8 percent. Unemployment 4.3 percent. Consumer price inflation 2.9 percent. Policy interest rate 4.25 percent. Real disposable income growth 1.2 percent, against 1.7 percent assumed in the plan. Consumer confidence down 1.1 index points since the plan was set.

Norway. Real GDP growth 0.9 percent. Unemployment 4.1 percent. Inflation 3.15 percent. Policy rate 4.25 percent. Real disposable income growth 0.3 percent, against 1.5 assumed. Consumer confidence down 6.4 points.

Australia. Real GDP growth 2.1 percent. Unemployment 4.0 percent. Inflation 2.85 percent. Policy rate 3.60 percent. Real disposable income growth 2.0 percent, against 1.2 assumed. Consumer confidence up 2.4 points.

Real Policy Rates

The real policy rate, the nominal rate less inflation, shows how tight monetary conditions are. It is about 1.35 percent in the United States, 1.10 in Norway and 0.75 in Australia. All three are positive, so monetary policy is restraining spending in each, most in the United States and least in Australia.

Which Indicators Move Boat Buyers

Of the six indicators, two connect most directly to purchases of a discretionary durable good like an outboard motor. Real disposable income determines what households can spend, and consumer confidence reflects whether they feel secure enough to make a large purchase. Ludvigson (2004) found that confidence measures carry some information about future consumer spending beyond what income and other indicators already contain, though the added information is modest. GDP growth and unemployment matter too, but mostly through income and confidence, so counting them separately would double count.

Interest rates matter through financing. Bernanke and Gertler (1995) describe how tighter monetary policy raises the cost of credit for households and firms, and spending on durable goods is among the most responsive. For a $4,600 motor, though, the effect on a buyer's payment is small, as the last section shows.

The Translation Table

Two sensitivities convert indicators into motors.

Income. An income elasticity of 0.46, from the Unit 3 demand estimate. Each percentage point by which income growth falls short of plan reduces demand by 0.46 percent.

Confidence. A sensitivity of 0.45 percent of demand per index point, from Ruddiman's own seasonal sales against confidence over the last eight seasons, composite for this exercise.

United States. Income 0.5 points short, minus 0.23 percent. Confidence down 1.1, minus 0.50 percent. Net minus 0.73 percent, or about 16 fewer motors, to 2,176.

Norway. Income 1.2 points short, minus 0.55 percent. Confidence down 6.4, minus 2.88 percent. Net minus 3.43 percent, or about 21 fewer motors, to 579.

Australia. Income 0.8 points ahead, plus 0.37 percent. Confidence up 2.4, plus 1.08 percent. Net plus 1.45 percent, or about 12 more motors, to 820.

Total. About 3,575 motors, down from 3,600.

The economy changes the plan by less than one percent overall, but it moves Norway by more than three percent, and that is where the plan should change.

A Caution on the Income Elasticity

The 0.46 estimate comes from differences in income across counties, not from changes in income over time. Households in richer counties buy more motors, but a household whose income growth slows for a year may cut back by more or less than that cross-section suggests. The estimate is the best available, but the Norwegian adjustment, which rests mostly on confidence, is more secure than the US adjustment, which rests partly on income.

Pricing a Rate Rise

Markets expect a half-point rise in the US policy rate before the season. If consumer loan rates follow, a 60-month loan on a $4,600 motor at 7.5 percent rises from about $92.17 a month to $93.27, about $1.10. Mishkin (1995) lists several channels through which policy rates reach spending, including credit costs and the exchange rate. For Ruddiman's buyers, the credit channel is too small to change the plan. The exchange rate channel, through a firmer dollar against the krone and the Australian dollar, could matter more, which the next unit examines.

What to Watch During the Season

The adjustments rest on indicators that will be revised and on confidence readings that can change quickly. The plan should be checked against two monthly releases in each market, real disposable income and consumer confidence, and the Norwegian order adjusted again if confidence there falls by more than three further points before the spring order is confirmed.

Recommendation

Plan about 3,575 motors: 2,176 for the United States, 820 for Australia and 579 for Norway. Ask the Norwegian distributor to reduce its spring order by about 21 motors.

References

Bernanke, B. S., & Gertler, M. (1995). Inside the black box: The credit channel of monetary policy transmission. Journal of Economic Perspectives, 9(4), 27-48. https://doi.org/10.1257/jep.9.4.27

Ludvigson, S. C. (2004). Consumer confidence and consumer spending. Journal of Economic Perspectives, 18(2), 29-50. https://doi.org/10.1257/0895330041371222

Mishkin, F. S. (1995). Symposium on the monetary transmission mechanism. Journal of Economic Perspectives, 9(4), 3-10. https://doi.org/10.1257/jep.9.4.3