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1. economic growth
2. Inflation
3. Interest rates
Economic growth
• Economic growth is the change in the general level of
economic activity
• When production is high, incomes are high
• What is produced and sold = income for others
• When economic growth is negative for 2 consecutive
quarters, the period is referred to as a recession.
Result is a low demand for products and services and
therefore reduces revenue of firms.
Indicators of economic growth
1. Aggregate expenditures (aggregate expenditure is the sum
of expenditures on consumption, investment, government
expenses and net exports) (measure of national income)
2. GDP = Gross domestic product
= total market value of all final products and services
produced in the U.S. (=measure of total production level)
• They are closely related and their differences will not be
discussed here (macroeconomics class)
• GDP is issued quarterly
Indicators of economic growth
Economic growth
• % change in GDP from one quarter to another
2. Demand-pull inflation
• Due to strong consumer demand. Sometimes even shortages can
arise and so producers raise prices. They are confident that they will
sell anyway
Inflation
• Strong economic growth puts pressure on wages
as well as prices
There are less unemployed people, people may
negotiate for higher wages and this especially
works when there are no other qualified workers
available
Result: production cost rises and firms try to
increase their prices (wage-price spiral)
Interest rates
• When interest rates go up, it is nice for your savings but not
nice when you have to borrow money, so also for businesses.
• When taking on a loan from a bank, typically the interest rate
is adjusted for the market value periodically, usu. every 6
months.
• Interest rates can significantly influence a firm’s profit
• Sometimes projects (expansion) are canceled because the
interest rate is much higher than at the time of developing
the plan (feasibility study), finance costs can not be covered
Interest
• Not only the expenses (interest) of firms are affected by a
change in interest rate, the revenues of firms can also be
affected.