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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...
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