MANAGERIAL ECONOMICS

Books
PC19: Samuelson, Nordhaus, Economics, 19th Ed., McGraw-Hill, 2010
PE7: Mankiw, Principles of Economics, 7th Ed., Cengage, 2015
KR9: Krugman, Obstfeld, International Economics: Theory and Policy, 9th Edition, Pearson, 2012
FS7: Fraser, Ormiston, Understanding Financial Statements, 7th Edition, Prentice Hall, 2004

Instructor: Marshall Langer, mlanger11@gmail.com

Dropbox link (for notes and files):

1. This course: https://www.dropbox.com/sh/3x18d1tpi90mn15/AABgMP_KcZ2OvPL4EcY1AUeqa?dl=0
2. Separate RBS course on Behavioral Economics: https://www.dropbox.com/sh/0hw17vvt3yevds8/AAAQgGv6Y4BppMjIIpjokjA7a?dl=0
Accounting and budgeting course:
3. https://www.dropbox.com/sh/zakhzs0ncprri6c/AABDRaJW6OBaKCikHIFKDp2Qa?dl=0
Excel specific files (Extra from RBS course on budgeting and Excel - OPTIONAL):
4. https://www.dropbox.com/sh/puhkby9ig6y2idq/AABLL9wJHsi4T3qdcpDQZr6xa?dl=0
Power BI/Tableau
5. For Power BI and Tableau see in class notes sections titled POWER BI TUTORIAL and VIDEOS/presentation tools
https://www.dropbox.com/sh/91g2buoyjxcqcyn/AADpKr2V1pUDYjUTJAa1XBN1a?dl=0
Research methods course:
6. https://www.dropbox.com/sh/1zcmzvi1xt1wz5f/AABiCZaDpTrRqFJ945MwbR3Za?dl=0

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OUTLINE *
Class 1
Macroeconomic principles and terminology (PC19: Chapters 19-22)
Class 2
Microeconomics (PE7: Chapters 5, 10-11, 14-17, 20)
Class 3 (if scheduled)
Behavioral economics
International macroeconomic interconnectedness
Class 4 (if scheduled)
Financial statement analysis
Overall for practice all subjects
General
Video
Q&A
Excel file(s)
Activity (HR)
Digital pills

Examples
Weight watchers Mexico case Exhibit 7
Banco Solidario case Exhibit 2
MG: case 5.2 and explanation (in word)
KR9: Chapters 19 on international macroeconomic interconnectedness and chapter 22 on financial crisis in Latin American and Asia
____________________
(*) Classes 3 and 4 are scheduled for some RBS programs. If not scheduled then not covered and not tested. For MIM, Class 1 and International
macroeconomic interconnectedness section of Class 3 are covered and tested.

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CLASS 1

MACROECONOMICS (PC19: CHAPTERS 19-22)

OUTLINE
Macroeconomic principles and terminology (PC19: Chapters 19-22)
Specific tracked macroeconomic statistics
Jamaica video
Money/credit
National income accounting
Trade, balance of payments (and trade deficits),
Wealth creation & measurement - Real GDP
-Without money
-With money
Current account (Imports minus exports)
M1 (money supply = credit)
Reserves (holdings of hard foreign currency – dollars, euros, yen, etc.)
External debt
Unemployment rate
Government fiscal and monetary policies
Economic crises
Video
Q&A
Excel file(s)

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LESSON
MACROECONOMIC PRINCIPLES AND TERMINOLOGY (PC19: CHAPTERS 19-22)
Specific tracked macroeconomic statistics

• Money and wealth. Meaning, electronic and paper form. Example of selling corn with nothing in return.
o Trade without money, wealth creation, inject money, effects.

• GDP. Output of a country (by Consumption (used within 1 year), Investment (consumption used for more than 1 year), Saving (GDP-consumption, less
investment). Negative Saving means importing meaning negative Current account. Positive Saving means exporting meaning positive Current
account.

• Saving. Amount not consumed

• Current account. Exports less imports – negative means borrowing from abroad to finance – unsustainable.

• Net foreign assets. Foreign hard currency held by a government (i.e. holding of British pounds by Argentina)

• External debt. Debt owed in foreign currency, generally incurred via negative current account (importing).

• Inflation. A rise in prices: Good inflation demand driven – trade more of something for something else. Bad inflation – increase in money supply
(credits) raises all prices but hurts people holding money because their amount does not increase.

• Deficits (trade, fiscal) – fiscal = government deficit, trade = current account deficit. Trade deficits meaning borrowing from abroad which can become
risky if excessive – only repaid by export earnings.

• Balance of payments. Portion of government borrowing financed by foreign central banks (see Official Reserve Transactions in KR9: p312-313).

• Real vs nominal. Real is a good for good exchange. Nominal is a price based on value of money.

• Productivity. Output per unit of work.

• Physical currency. In modern economies, relatively little of the money supply is in physical currency. For example, in December 2010 in the U.S., of
the $8853.4 billion in broad money supply (M1), only $915.7 billion (about 10%) consisted of physical coins and paper money. The manufacturing of
new physical money is usually the responsibility of the central bank, or sometimes, the government's treasury. Contrary to popular belief, money
creation in a modern economy does not directly involve the manufacturing of new physical money, such as paper currency or metal coins. Instead,
when the central bank expands the money supply through open market operations (e.g. by purchasing government bonds), it credits the accounts
that commercial banks hold at the central bank (termed high powered money). Commercial banks may draw on these accounts to withdraw physical
money from the central bank. Commercial banks may also return soiled or spoiled currency to the central bank in exchange for new currency.
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Additional macroeconomic statistics

• U.S. gov’t bond rates. Interest rate paid by U.S. government to borrow money.

• Hard/soft currency & exchange rates. Hard are widely accepted currencies like dollar, pound, yen. Soft are all others, generally not widely accepted
outside home country; not widely traded, more volatile.

• Currency pegging. Country pegs their currency to value of another, usually dollar. Peg must be actively managed by buying and selling hard currency
for their currency. If government stops supporting, peg will break and currency will decline in value and purchasing power.

• China currency manipulation. Increasing supply of currency relative to demand. While causing inflation, facilitates export output. So increasing
supply of currency increases inflation but at a lesser rate than increase in output.

• Purchasing price parity. Equivalency of purchasing power among countries. I work an hour in USA and can buy 1 big mac. A person in India may work
1 hour and earn less than an American but the Indian can also purchase a big mac because the ingredients are cheaper in India.

• Currency (financial) crises – Thailand, Argentina. Too much supply of currency relative to demand causes crisis.

• Unemployment. Persons not working who are capable of working

• Trade/comparative advantage. The theory of comparative advantage is an economic theory about the work gains from trade for individuals, firms, or
nations that arise from differences in their factor endowments or technological progress. In an economic model, an agent has a comparative
advantage over another in producing a particular good if they can produce that good at a lower relative opportunity cost or autarky price, i.e. at a
lower relative marginal cost prior to trade.

• Tariffs/subsidies. Government taxes on imports is tariff. Payment from government to U.S. business to cover losses from trade is subsidy.

• Additional macro terms:

o Interest rates – see FA 2.6
o Equity indices – see FA 2.5
o Bond spreads – see FA 2.5
See as example of macroeconomic analysis xls file titled International macroeconomic exercise.xls - w hw/review questions
Hedging macroeconomic currency risk
In Dropbox link: https://www.dropbox.com/sh/42fkqb0iywq0ltf/AACrG4IAQeA17QotWH5PHk58a?dl=0 see:
1. Class notes section of Futures
2. Reading on futures in Hull book (OF8) in reading folder – see references in class notes
3. Xls file tilted Forwards, futures, options on futures- w hw.xls in Excel files folder
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VIDEO
Jeffrey Sachs on Bolivia financial crisis: https://www.youtube.com/watch?v=ittBp7z-TbM
More Jeff Sachs on developing countries: http://www.pbs.org/wgbh/commandingheights/shared/minitextlo/vid_jeffreysachs.html
Milton Friedman – Anatomy of a crisis (3/10, 1980): https://www.youtube.com/watch?v=SWVoPrntBso
Tony James (ex boss, former Blackstone President): https://www.dropbox.com/s/q9ib92dtp8l9uqw/Titan%20Series-
Tony%20James%20and%20Peter%20Grauer.mp4?dl=0 @ 17.50-20.00 (globalization) 21.40-23.45 min (business in China); 28.00-28.50 min (today’s
employees); 40.30-42.20 (return call quickly)
The FED today (on Federal Reserve operations): https://www.youtube.com/watch?v=jFnH9MCdpLo
History of EU: https://www.youtube.com/watch?v=UNmsz6_EMJM
Intro to economics (by hedge fund manager Ray Dalio):
• Good video by Dalio: https://www.youtube.com/watch?v=PHe0bXAIuk0
• From WSJ by Dalio: https://www.youtube.com/watch?v=xguam0TKMw8
Jamaica IMF: https://www.dropbox.com/s/edta4tk2dchje3h/mmc-Stephanie%20Black%20-
%20Life%20and%20Debt%20%282001%29%20%28Globalization%20and%20the%20Jamaican%20Economy%29.avi?dl=0 (milk: 30.30-36.15 min / bananas: 39-44 min)
Jamaica debt/IMF: https://www.youtube.com/watch?v=YoIJPwfsbqg
Jamaica trade: https://www.youtube.com/watch?v=UzYGaFv1ryo
Jamaica dairy specific: https://www.youtube.com/watch?v=UzYGaFv1ryo
Asian financial crisis 1997: https://www.youtube.com/watch?v=dpxio4mItlY
Money for Nothing (@49-102 min) – good on 2008 financial crisis: https://www.youtube.com/watch?v=Bu8fi-f6DUs
Big Short scene on housing market: https://www.youtube.com/watch?v=xbiDrzTd8fE&t=309s
60 minutes Madoff: https://www.youtube.com/watch?v=s68FR1MXT8Q&t=2s
Agribusiness economics: https://www.youtube.com/watch?v=fbOiwV3gBLg
USMCA trade agreement: https://www.youtube.com/watch?v=veViqMVlmJM
Balance of payments and current account: https://www.youtube.com/watch?v=W0YwGLz50TA
Trade with China: https://www.youtube.com/watch?v=KkraSBM2YA4
GATT & WTO: https://www.youtube.com/watch?v=4hoA49qSitI
IMF: https://www.youtube.com/watch?v=MhrC2_Hak08
World Bank: https://www.youtube.com/watch?v=F59fF-xu-bY
Sovereign debt: https://www.youtube.com/watch?v=8xo3DfGTjuE
Deng Xiaoping on China capitalism: https://www.dropbox.com/s/uypsbdcnky7kh7x/bbc%20-
%20chinas%20capitalist%20revolution%2C%20deng%20xiaoping%20-%20to%2020%2C%2028.m4v?dl=0
WSJ Potomac Watch podcast (good on economic issues): https://podcasts.apple.com/us/podcast/wsj-opinion-potomac-watch/id971901464
Megyn Kelly podcast 04/14/22 episode: https://podcasts.apple.com/us/podcast/the-megyn-kelly-show/id1532976305?i=1000557641497 @8.50-47.00
minutes for entire interview with Peter Schiff, Chief economist for Euro Pacific Capital. See specifically on handling inflation 17.45-20.05; 20.25-23.10 on
effects of fighting inflation; 25.00-25.45 on U.S. as debtor nation; *31.00-35.15 on U.S. $ as reserve currency; *38.25-40.00 on China productivity.

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Movies
Too Big to Fail: https://www.dropbox.com/s/mql5f6ulgl8f70l/hrm%20-%20Too%20Big%20to%20Fail%20-%202845.avi?dl=0
Wall Street (1987): https://www.dropbox.com/s/dnrfgh7fssnsug8/Wall%20Street%201987%20-%2020%20meeting%2C%20115%20speech.avi?dl=0 @ 15-20
min for investment scene
Big Short: https://www.dropbox.com/s/j67jkxajrs8b09m/The.Big.Short.2015.DVDScr.XVID.AC3.HQ.Hive-CM8-28.5.avi?dl=0
Margin Call (about Lehman Bros.): https://www.dropbox.com/s/4e75r1g4uzoufok/Margin.Call.2011.720p.BluRay.x264.YIFY.mp4?dl=0

CASES AND READING

Tariffs and subsidies – Jamaica
Weight watchers Mexico case Exhibit 7
Banco Solidario case Exhibit 2
MG: case 5.2 and explanation (in word)
Inside Steve Jobs Brain - whole book.pdf
Jim Simons book on quant market investing – best investor of all time.pdf
Cryptocurrency – see Investment opportunities in digital finance – 052522.doc in folder titled Extra class notes - on CRYPTOCURRENCY.

EXCEL FILES
International macroeconomic exercise.xls - w hw/review questions

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PRACTICE PROBLEMS - MACROECONOMICS

1. An increase in the money supply directly offset by a commensurate increase in ____________ GDP will ____________ inflationary.

A. Real; Not be
B. Nominal; Not be
C. Real; Be
D. All; be only

2. Currency crises could likely result from:

A. Excessive purchases of government bonds by central banks.

B. Speculative attacks on the currency.
C. Breaking the peg
D. An increase in foreign reserves
E. All except D

3. China’s artificially low exchange rate:

A. Is negative for countries that import from China and positive for other developing nations.
B. Is positive for countries that import from China and negative for other developing nations.
C. Is deflationary in China
D. Has no effect

4. If China were to suddenly allow its currency to strengthen from about 7 Yuan/$ to 4 Yuan/$ capital flight out of China would be an issue. This means
that investors would exchange their ___________ for ____________ at a quick big profit and take it out of China.

A. Yuan; Dollars
B. Dollars; Yuan
C. Imports: Exports
D. Toys; tots

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5. If a museum raises its prices with no decrease in demand and no change in GDP this means that:

A. Less was spent on other things in society

B. The country borrowed from abroad
C. Use savings (net foreign assets)
D. People like museums
E. A, B or C

6. Elon Musk’s net worth is approximately $200,000,000,000. This is all in:

A. Cash
B. Mainly productive assets used to generate future wealth (robots, machines)
C. Mainly in unproductive wealth such as numerous unused homes he owns
D. Pie in the sky

7. According to an interview with Elon Musk, he is more about “creating wealth than using it.” So if Musk generates $100,000,000 of new wealth this
year but only consumes $10,000,000 with which to live, what happens to the other $90,000,000?

A. He loans it out or invests it with other members of society; so others also use his wealth to create new wealth.
B. He invests it abroad in other countries
C. He deposits in the bank who then loans it out generally for long term consumptions (called investment).
D. A, B and C, but B is not as beneficial to the home society as are A and C.

8. Which of the following are direct wealth creating activities:

A. Growing food
B. Eating food
C. Mining coal
D. Burning coal
E. Drilling for oil
F. Using the oil to drive

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9. Which of the following are direct wealth using activities:

A. Growing food
B. Eating food
C. Mining coal
D. Burning coal
E. Drilling for oil
F. Using the oil to drive
G. Retail stores
H. Advertising `

10. Advertising on Facebook represents a wealth using activity.

A. True
B. False, it’s more of a wealth transfer as the only real wealth used up is the valuable time of the person creating the advertising and that value is
variable depending on their skill level.
C. False, advertising on Facebook can be a wealth creating activity if it stimulates demand.

11. If by law wages are raised but no price increase can occur, each higher wage employee must become more productive or the company must accept a
lower risk/return profile.

A. True
B. False

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Assume that you are consulting for the Apple Computer Company. They do business – either manufacturing, sales or both – throughout most of the
developed countries in the world. Apple manufactures a significant amount of hardware in China. For the events below one could argue that it would be
positive for Apple or negative for Apple. Indicate whether the statement corresponding to the event is true or false.

12. Greece defaults weakening to the Euro to €1 per $

i. Possibly positive: stronger $ means more USA profit from selling Apple computers to Eurozone.

ii. Possibly negative: Weaker Eurozone economy causes migration of workers from Europe to China increasing labor supply there and thus reducing
real wages.

A. Both statements are true.

B. Both statements are false.
C. Statement i is true and statement ii is false.
D. Statement i is false and statement ii is true.

13. Vietnam pegs currency – the Dong – to U.S. $.

i. Possibly positive: less investment risk in Vietnam so Apple relocates factories out of China to lower cost Vietnam.

ii. Possibly negative: Apple competitors begin to manufacture in lower cost (as compared to China) Vietnam thus becoming more cost competitive
with Apple products.

A. Both statements are true.

B. Both statements are false.
C. Statement i is true and statement ii is false.
D. Statement i is false and statement ii is true.

14. EU economies grow by 5% next year (2x the typical growth rate).

i. Possibly positive: stronger euro means more imports from USA, including Apple products.
ii. Possibly negative: Stronger Eurozone companies output more electronic products, that compete more vigorously with Apple.

A. Both statements are true.

B. Both statements are false.
C. Statement i is true and statement ii is false.
D. Statement i is false and statement ii is true.
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 15. Soft currency governments that peg their currency to the $US must use hard currency to repurchase their currency.

A. True
B. False

See xls file titled International macro exercise.xls

16. In which country would you be less inclined to hold their currency for any extended period (high M1 growth relative to GDP growth)?

A. Mexico
B. Argentina
C. Bolivia
D. All are equal

See Exhibit 7 from the Weight Watchers case to answer this question

17. The exhibit provides macroeconomic statistics about Mexico. Three important stats include M1, net foreign assets and average cost of funds. The
fourth best measure in the exhibit to examine is:

A. Domestic credit
B. GDP at constant 1990 prices
C. M2
D. M2 growth

18. If the country of Finlandia, a net exporter 1) runs a positive current account balance (exports exceed imports) and 2) Finlandia’s currency does not
strengthen relative to trading partners (net importers) then Finlandia’s money supply will increase. Why is this?

A. Finlandia is selling home country’s government bonds to foreign import partners to finance trade.
B. Foreign import partners purchase newly created currency that is then used to buy Finlandia’s exported goods.
C. Foreign importers create more foreign currency with which to purchase Finlandia’s exports
D. Finlandia’s exporters are making loans to foreign import partners.

19. If the country of Finlandia, a net exporter 1) runs a positive current account balance (exports exceed imports) and 2) Finlandia’s currency strengthens
relative to trading partners (net importers) then Finlandia’s money supply will ____________ increased.

A. Have
B. Not have
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 20. The problems of the Japanese economy spilled over to the developing countries of East Asia, with which it trades heavily. Many of these countries
held their exchange rates fixed against the U.S. dollar. Japan’s slowdown in 1997 therefore weakened the East Asian economies directly, but also did
so through an exchange rate channel. Being tied to the dollar, East Asian currencies tended to appreciate against the Yen as the Yen slid against the
dollar. The east Asian economies, feeling the direct effect of Japan’s slower growth on the demand for their imports, simultaneously found their
exports priced out of foreign markets. There are 2 reasons this happened. One reason: Japan’s weak economy slowed demand for imports from
other East Asian countries. The second reason is that: (see detailed explanation in notes p28-29)

A. Exchange rates pegged to a strengthening dollar drove up export prices too.

B. Pegging caused the East Asian exporters to spend all of their hard currency reserves on Japanese Yen.
C. The East Asian countries imported less from Japan.
D. A strong dollar made the Yen too expensive.

Answers

1 A
2 E
3 B
4 A
5 E
6 B
7 D
8 A, C, E
9 B, D, F
10 B or C
11 A
12 B
13 C
14 A
15 A
16 B
17 B
18 B
19 B
20 A
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CLASS 2

MICROECONOMICS

OUTLINE
Microeconomics (PE7: Chapters 5, 10-11, 14-17, 20)
Elasticity (PE7: Chapter 5)
Pricing risk
Interpreting results
Regulation and taxes to correct negative externalities - PE7: Chapter 10
Deadweight loss of taxation
Public goods and common resources – PE7: Chapter 11
Free riders
Important public goods
Common resources
Types of markets: Monopoly, monopolistic competition, oligopoly – PE7: Chapters 14-17
Monopoly, perfect competition and oligopoly
Market analysis
Income inequality – PR7: Chapter 20
Policies to reduce poverty
Minimum-Wage Laws
Welfare
Video
Q&A
Excel file(s)
LESSON
REGION AND/OR INDUSTRY SPECIFIC

• Financial analysis (margins, growth rates and working capital utilization (days inventory): See P&G 5 year summary operating analysis.xls
• Industry specific analyses: See Drivers for different industries-w hw.xls
ELASTICITY - PE7: CHAPTER 5

• The price elasticity of demand measures how much the quantity demanded responds to a change in price. Demand for a good is said to be elastic if
the quantity demanded responds substantially to changes in the price (i.e. type of cheese purchased). Demand is said to be inelastic if the quantity
demanded responds only slightly to changes in the price (i.e. gas). Item is necessity.
See xls file titled rbs - Economics – Elasticity.xls for calculation/explanation of elasticity
See elasticity: https://www.youtube.com/watch?v=HHcblIxiAAk
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PRICING RISK

• See xls file titled Example of pricing risk / risk adjusted return calculation.xls
• See xls file titled Cost & benefit of new service Ryanair (simplified version)-w hw-re WSJ article Ryanair’s New Strategy-Being Nice.xls (see article pdf
in reading folder) – example of changing operating variables to test effect on margins, return, risk.

INTERPRETING RESULTS

• See xls file General financial statement analysis.xls on Dropbox 1 Excel/Financial statement analysis folder for examples and insights.
• See xls file Drivers for different industries-w hw.xls on Dropbox 1 Excel/Financial statement analysis folder for examples and insights.

REGULATION AND TAXES TO CORRECT NEGATIVE EXTERNALITIES - PE7: CHAPTER 10

• Societies (via government) can control negative externalities via regulation (EPA) or taxes (call Pigovian taxes). Most economists prefer taxes so that
necessary good still produced in needed quantity and all producers share equally relative to quantity produced. Regulation can have unintended
consequences and may be more costly to police.

• Economists usually prefer corrective taxes to regulations as a way to deal with pollution because they can reduce pollution at a lower cost to society.
The regulation would dictate a level of pollution, whereas the tax would give factory owners an economic incentive to reduce pollution.

• Economists also argue that corrective taxes are better for the environment. Under the command-and-control policy of regulation, the factories have
no reason to reduce emission further once they have reached the target of 300 tons of glop. By contrast, the tax gives the factories an incentive to
develop cleaner technologies because a cleaner technology would reduce the amount of tax the factory has to pay.

Deadweight loss of taxation

• When a tax is levied on buyers, the demand curve shifts downward by the size of the tax; when it is levied on sellers, the supply curve shifts upward
by that amount. In either case, when the tax is enacted, the price paid by buyers rises, and the price received by sellers falls. In the end, the elasticities
of supply and demand determine how the tax burden is distributed between producers and consumers.

FICA tax: https://www.youtube.com/watch?v=3Hsn78cjLZQ

Paul Krugman on taxes: https://www.youtube.com/watch?v=8HKoTjy03Ys

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PUBLIC GOODS AND COMMON RESOURCES – PE7: CHAPTER 11

Free riders

• Public goods are non rival – one person’s use doesn’t negatively affect others use. (i.e. seeing a fireworks display).

• Example fireworks. Free rider problem with public goods – person enjoys but doesn’t pay, they public (government) must pay – i.e. fireworks on July 4
may benefit town by more than cost but unlikely private company would pay because too many can and will benefit without paying.

• Textbook examples of public goods: national defense, research, welfare programs. What about potentiality for abuse – discuss.

Important public goods

• National defense
• Basic research
• Fighting poverty

Common resources

• Common resources are rival – one person’s use may negatively impact others use (i.e. water).

Tragedy of the commons

• Collective ownership of common resources like a park creates disincentive for any 1 person to care for it, thus it decays.

Important common resources

• Water, roads – generally regulated or paid for.

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TYPES OF MARKETS: MONOPOLY, MONOPOLISTIC COMPETITION, PERFECTLY COMPETITIVE (COMMODITY), OLIGOPOLY – PE7: CHAPTERS 14-17

• A competitive firm takes the price of its output as given by the market and then chooses the quantity it will supply so that price equals marginal cost.
By contrast, a monopoly charges a price that exceeds marginal cost.

• In competitive markets, self- interested consumers and producers reach an equilibrium that promotes general economic well-being, as if guided by an
invisible hand. By contrast, because monopoly firms are unchecked by competition, the outcome in a market with a monopoly is often not in the best
interest of society.

See banana market (Jamaica IMF): https://www.dropbox.com/s/edta4tk2dchje3h/mmc-Stephanie%20Black%20-

%20Life%20and%20Debt%20%282001%29%20%28Globalization%20and%20the%20Jamaican%20Economy%29.avi?dl=0 @ 39-44 min (see also milk market
@ 30.30-36.15 min)

See Saatchi & Saatchi Sagatiba film: https://www.dropbox.com/s/k6fgs7tjbth6bpg/inside%20saatchi%20-%20mktg%20communications.avi?dl=0 (1-4 min:

accept business decision; 6-8.4 min: advertising decisions; 11.15-12.4 min: Selfridges window; 21.15-23.1 min: focus group bar tenders; 29.45-35.35 min:
finessing the advertising) – See also xls file titled Sagatiba-Selfridges window analysis-w hw (simplified).xls which relates to the 11.15-12.4 min clip.

Monopoly, perfect competition and oligopoly

• One type of imperfectly competitive market is an oligopoly, a market with only a few sellers, each offering a product that is similar or identical to the
products offered by other sellers in the market. Economists measure a market’s domination by a small number of firms with a statistic called the
concentration ratio, which is the percentage of total output in the market supplied by the four largest firms.

• A second type of imperfectly competitive market is called monopolistic competition. This describes a market structure in which there are many firms
selling products that are similar but not identical. In a monopolistically competitive market, each firm has a monopoly over the product it makes, but
many other firms make similar products that compete for the same customers.

• To be more precise, monopolistic competition describes a market with the following attributes:

o Many sellers :There are many firms competing for the same group of customers.
o Product differentiation: Each firm produces a product that is at least slightly different from those of other firms. Thus, rather than being a price
taker, each firm faces a downward-sloping demand curve.
o Free entry and exit: Firms can enter or exit the market without restriction. Thus, the number of firms in the market adjusts until economic
profits are driven to zero.

• A perfectly competitive market describes commodities markets where there is no real differentiation in product, only price.

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Market analysis
• Determine viability/profitability of a target market.
See xls file titled Sensitivity analsyis.xls for basic market analysis
See xls file titled econ - Example microeconomic market analysis for more detailed market analysis.
See on Food economics: https://localfoodeconomics.com/wp-content/uploads/2017/03/Toolkit-Designed-FINAL-UPDATED-03-7-2017.pdf
INCOME INEQUALITY – PE7: CHAPTER 20
In 2011, the bottom fifth of all families received 3.8 percent of all income, and the top fifth of all families received 48.9 percent of all income. In other words,
even though the top and bottom fifths include the same number of families, the top fifth has more than twelve times as much income as the bottom fifth.
Policies to reduce poverty
Poverty is one of the most difficult problems that policymakers face. Poor families are more likely than the overall population to experience homelessness,
drug dependence, health problems, teenage pregnancy, illiteracy, unemployment, and low educational attainment. Members of poor families are both more
likely to commit crimes and more likely to be victims of crimes. Although it is hard to separate the causes of poverty from the effects, there is no doubt that
poverty is associated with various economic and social ills.
Minimum-Wage Laws
The minimum wage is easily understood using the tools of supply and demand, as we first saw in Chapter 6. For workers with low levels of skill and
experience, a high minimum wage forces the wage above the level that balances supply and demand. It therefore raises the cost of labor to firms and
reduces the quantity of labor that those firms demand. The result is higher unemployment among those groups of workers affected by the minimum wage.
Those workers who remain employed benefit from a higher wage, but those who might have been employed at a lower wage are worse off.
Welfare
One way for the government to raise the living standards of the poor is to supplement their incomes. The primary way the government does this is through
the welfare system. Welfare is a broad term that encompasses various government programs. Temporary Assistance for Needy Families (TANF) is a program
that assists families with children and no adult able to support the family. In a typical family receiving such assistance, the father is absent and the mother is
at home raising small children. Another welfare program is Supplemental Security Income (SSI), which provides assistance to the poor who are sick or
disabled. Note that for both of these welfare programs, a poor person cannot qualify for assistance simply by having a low income. He must also establish
some additional “need,” such as small children or a disability.
See on income inequality: https://www.youtube.com/watch?v=QPKKQnijnsM
Psychology of asking for a raise: https://www.youtube.com/watch?v=FWxoI0RrPvc
Thomas Sowell on the Myths of Economic Inequality: https://www.youtube.com/watch?v=mS5WYp5xmvI (brilliant economist, watch all of his videos)
SEE ALSO SEPARATE RBS COURSE ON PERFORMANCE MEASUREMENT FOR SOME INDUSTRY SPECIFIC KPI’S AND OTHER MICROECONOMIC RELATED ANALYSES @:
https://www.dropbox.com/sh/avrarzxmj3mljwm/AACEoc0SPNvkQ2t22Rzpenuka?dl=0
18
VIDEOS
OPEC: https://www.youtube.com/watch?v=oEm5OLcbW9Q
Food commodities: https://www.youtube.com/watch?v=aF0CH1OxivA (purely competitive market)
Standard oil monopoly: https://www.youtube.com/watch?v=jXBe1guXwfs
Minimum wage: https://www.youtube.com/watch?v=4GIdROzO94M
Elasticity: https://www.youtube.com/watch?v=HHcblIxiAAk
Income inequality: https://www.youtube.com/watch?v=QPKKQnijnsM
Thomas Sowell on the Myths of Economic Inequality: https://www.youtube.com/watch?v=mS5WYp5xmvI (brilliant economist, watch all of his videos)
Honest T: https://www.dropbox.com/s/k3klff3nx2rkx1z/Honest%20Tea.avi?dl=0 (See also related xls file on titled Example risk adjusted return.xls)
Red Bull: https://www.youtube.com/watch?v=ggEyE-IIPtA
FICA tax: https://www.youtube.com/watch?v=3Hsn78cjLZQ
PBS Frontline – The Amazon Empire (Bezos): https://www.youtube.com/watch?v=scDwiOheWRU&t=852s (for class: 11.30-15.30; Monopoly: 53.5-58.2 min)
See also: Decision making analysis of Amazon Europe case p9 - Decision 2.xls (w Amazon Europe case p9)
Whole foods/Amazon: https://www.youtube.com/watch?v=ICkoTUbor-U (and see highlights in Whole Foods case)
Starbucks supply chain: https://www.youtube.com/watch?v=ElYNhGbOTOQ
Airline flight flood supply chain: https://www.youtube.com/watch?v=4wkvaEM4bIg (see also corresponding xls file titled Example cost/benefit analysis of
invisible ink on airline food wrap.xls)
Wichita Falls resident re welfare: https://www.youtube.com/watch?v=_MCIXMeoyrs
Winsome Sears speech: https://www.youtube.com/watch?v=YrOlCeE8cj0&t=401s

EXCEL FILES
Elasticity.xls for calculation/explanation of elasticity
Economics - Breakeven analysis - w hw.xls
Example of pricing risk / risk adjusted return calculation.xls (Re Honest T: https://www.youtube.com/watch?v=WIRKq-AHZXU&t=372s)
Sensitivity analsyis.xls for basic market analysis.xls
Example microeconomic market analysis for more detailed market analysis.
Decision making analysis of Amazon Europe case p9 - Decision 2.xls
Sagatiba-Selfridges window analysis-w hw (simplified).xls (Re: https://www.dropbox.com/s/k6fgs7tjbth6bpg/inside%20saatchi%20-
%20mktg%20communications.avi?dl=0 @11.15 min)
Analysis of Nike shoe market in Bolivia.xls (Re: https://www.youtube.com/watch?v=ittBp7z-TbM)
Example cost/benefit analysis of invisible ink on airline food wrap.xls (Re: https://www.youtube.com/watch?v=4wkvaEM4bIg)
P&G 5 year summary operating analysis.xls
Is TECH CLEAN ENVIRONMENT- Financial Model - DEF_2014-w hw.xls (Example of work done previously by instructor – in Excel/Extra folder) – good example
of a more complex microeconomic analysis. Change variables and test effect on return, debt paydown, profitability, etc. Important to correctly link costs
and revenue. For example, if you raise salary you increase output, which means higher variable cost, higher health insurance, lower sick days, etc. This could
differ among companies and industries. i.e. the cost structure of an airline is different than a coffee chain.

READING (IN ADDITION TO TEXTBOOK(S))

Food economics: https://localfoodeconomics.com/wp-content/uploads/2017/03/Toolkit-Designed-FINAL-UPDATED-03-7-2017.pdf
From Cargill: https://www.cargill.com/about/navigating-change (see videos in article)

19
PRACTICE PROBLEMS - MICROECONOMICS

1. Price discrimination is illegal.

A. True
B. False

2. One type of imperfectly competitive market is a(n) _______________, a market with only a few sellers, each offering a product that is similar or
identical to the products offered by other sellers in the market.

A. Monopoly
B. Oligopoly
C. Peirpopoly

3. A second type of imperfectly competitive market is called ________________. This describes a market structure in which there are many firms selling
products that are similar but not identical.

A. Monopolistic competition
B. Pure competition
C. Philogopoly

4. In a monopolistically competitive market, each firm has a monopoly over the product it makes, but many other firms make similar products that
compete for the same customers. An example would be an Indian restaurant among the many diverse restaurants in the city.

A. True
B. False

5. Monopolistic competition describes a market with all of the following attributes, except:

A. Many sellers
B. Product differentiation
C. Free entry and exit
D. One dominant player
6. The minimum wage raises the cost of labor to firms and _______________ the quantity of labor demanded. The result is ______________
20
 unemployment among those groups of workers affected by the minimum wage.

A. Raises; lowers
B. Reduces; higher
C. Reduces; lower

7. Those workers who remain employed after minimum wage increase benefit from a higher wage, but those who might have been employed at a lower
wage are worse off.

A. True
B. False

Answers

1 B
2 B
3 A
4 A
5 D
6 B
7 A

21
CLASS 3 (IF SCHEDULED)

BEHAVIORAL ECONOMICS

OUTLINE
Behavioral vs. Traditional economics
Behavioral economics
Applications to HR and marketing management
Irrationality and behavioral economics
Influencing behavior
Feedback and employee discipline
Behavioral finance
Websites/articles
Videos
Practice Q&A

LESSON

BEHAVIORAL VS. TRADITIONAL ECONOMICS

• Behavioral Economics is the study of psychology as it relates to the economic decision-making processes of individuals and institutions. i.e. Applying
human emotion to (cold/rational) economic decisions. Behavioral economics uses an understanding of human psychology to account for why people
deviate from rational action when they’re making decisions. In the model of rational action assumed by traditional economics, a person is expected to
weigh the benefits and drawbacks of an action and then choose the option in their own self-interest. Behavioral economic theories are used to
explain most everyday decisions, such as what people buy, how they manage their finances, and whether or not they make healthy lifestyle choices
and/or respond to HR type stimuli such as office space, work hours, title, salary, etc.

• Traditional economics takes for granted that people always make rational choices. Alternatively, bounded rationality explains how people’s rationality
is limited by the timeframe, by their cognitive resources, and by the difficulty level of the decision. Decision-makers frequently act
as satisficers, seeking a satisfactory solution instead of an optimal one. Traditional economics explains how people make decisions when they have all
available information and can take time to think rationally about their options. However, real-world choices are often limited by deadlines,
uncertainty, and risk, leading to behavior that may seem irrational out of context. Behavioral economics offers insights on how people can make
more optimal decisions given these constraints.

See highlights in Website/article #1.

22
Applications to HR and marketing management

• From hiring decisions, employee motivation, engagement, and helping workers make better choices, behavioral economics insights and evidence-
based practices drive a new generation of HR strategies. Factors most conducive to job satisfaction are mentally challenging work, equitable reward,
supportive working conditions, freedom, feedback.

Misdirection

• Goal of making employees happy on the assumption that doing so will lead to high productivity is likely misdirected. Managers get better results by
increasing employee productivity. That success should lead to feelings of accomplishment, increased pay, promotions, etc. which leads to satisfaction
and happiness – sounds nice.

Employee involvement
Includes participative management, empowerment, board representation, etc. Involving workers in decisions increase their feeling of autonomy,
commitment and motivation. Moreover, a positive relationship appears to exist between organizational commitment and job productivity.
See Website/article #2:

• See highlights in article

• See bullets p6 on common mistakes
• See bullets p7-8 on solutions
• See bullets p9-10 on impacts
• See bullets p11-13 on results
Theories pertinent to behavioral economics

• Mental accounting. The process by which people code, categorize, and weigh economic outcomes.
• Nudge theory. Explores how people’s choices can be influenced (aka “nudged”) by individuals and organizations taking advantage of framing and
heuristics.
See HR activity at end of notes for metrics specific to HR micro decisions. See also article HR metrics to analyze.

23
Irrationality and behavioral economics
Instead of making optimal choices, people often behave in ways that seem irrational and even against their own interests. Behavioral economics explains
why individuals may make irrational choices by demonstrating how their decision-making is influenced by:
• Biases (such as future discounting)
• Heightened emotions
• Faulty heuristics
• Mental fatigue
• Loss aversion
• Choice overload
• Perceived social norms
• Situational framing
• Context
• Group acceptance
What's more, many decisions must be made under conditions of great uncertainty, where not much is known about all the risks and benefits of a choice or
where those features are constantly shifting. Behavioral economics aims to understand the effects of uncertainty on decision-making in such realms as
consumer purchasing, financial savings, and lifestyle changes.
Preventing organizational cynicism: https://www.youtube.com/watch?v=XqPYKgKxAOg
Influencing behavior
Many people are inclined to choose an option that brings instant pleasure, rather than the one which will beget long-term satisfaction at the expense of
short-term gratification. Using behavioral economics, individuals and institutions can take advantage of this to manipulate people into a specific course of
action or purchase.
One way that a person can be influenced is through a "nudge," a combination of positive reinforcement and indirect suggestions encouraging specific
behaviors. Not all of these manipulations are harmful, as behavioral economics can be used to get people to make positive behavioral changes, such as eating
less or saving more money.
Why employees don’t make rational decisions about career choice?

• Comfort
• Care
• inertia
• Fear

24
FEEDBACK AND EMPLOYEE DISCIPLINE

• Delivering negative feedback: https://www.youtube.com/watch?v=s76bX5ujl_4

• Employee discipline: https://www.youtube.com/watch?v=qv2nxVXXD8I
• Handling characteristically difficult employees: https://www.youtube.com/watch?v=DuC-r64fVZA
BEHAVIORAL FINANCE
See Behavioral finance: https://www.investopedia.com/terms/b/behavioralfinance.asp
FOR MORE SPECIFICS FROM AN RBS COURSE ON BEHAVIORAL ECONOMICS, SEE NOTES, READINGS, ETC. @:
https://www.dropbox.com/sh/0hw17vvt3yevds8/AAAQgGv6Y4BppMjIIpjokjA7a?dl=0. See specifically class notes, Activity p15 and article titled HR metrics
to analyze.
PRACTICE PROBLEMS – BEHAVIORAL ECONOMICS
1. Behavioral economics attempts to understand why people deviate from _____________ action when they’re making decisions.
A. Irrational
B. Rationale
C. Past
D. Future
2. Nudge theory explores the way in which people’s choices can be influenced (aka “nudged”) by ___________, heuristics and suggestion.
A. Framing
B. Force
C. Direct orders
D. Insubordination
3. In the video on asking for a raise (https://www.youtube.com/watch?v=FWxoI0RrPvc), Barbara Corcoran advises that you say the following to her (or
the boss) when you as an employee of hers gets an employment offer from a competitor.
A. “I really like it here and want to stay but I have a decent offer from a superior competitor. What are my long term prospects?”
B. “I have a great offer from a competitor. Match it or I’m leaving.”
C. “I really like it here and want to stay but I have a decent offer from a competitor. What are my long term prospect?”
D. Do nothing
ANSWERS
1. B
2. A
3. C
25
Websites/articles
1. https://www.psychologytoday.com/us/blog/science-choice/201705/what-is-behavioral-economics (article also posted Dropbox)
2. https://www2.deloitte.com/us/en/insights/deloitte-review/issue-18/behavioral-economics-evidence-based-hr-management.html (article also posted Dropbox)
What is behavioral economics: https://www.psychologytoday.com/us/basics/behavioral-economics
Laszlo Bock (Google) contents or book Work Rules: https://www.amazon.com/Work-Rules-Insights-Inside-
Transform/dp/1455554790/ref=sr_1_1?dchild=1&keywords=work+rules&qid=1595918803&sr=8-1 (look inside) – ePub posted Dropbox.
Video
General
Behavioral economics (Harvard)*: https://www.youtube.com/watch?v=e0KXhV6TG0c
Behavioral economics: https://www.youtube.com/watch?v=dqxQ3E1bubI
Behavioral economics: https://www.youtube.com/watch?v=wpMLYh-UIsA
Intro to economics - good summary - https://www.youtube.com/watch?v=PHe0bXAIuk0
Rational Economics vs Behavioral Economics: https://www.youtube.com/watch?v=9UDgvq_zTds
Nudge theory: https://www.youtube.com/watch?v=jVTg3ZsNTTY
Additional on nudge theory: https://www.youtube.com/watch?v=nB_zefXeYbg
HR
Behavioral Economics and HR: https://www.youtube.com/watch?v=uPts9-WkGa8 (HR: 25.15-31.10 min; Employee engagement: 36.40-40.40 min;
Implementation: 41.55-47.25)
Behavior economics of HR management: https://www.youtube.com/watch?v=zPZBrL43JYY
Psychology of asking for a raise (Barbara Corcoran)*: https://www.youtube.com/watch?v=FWxoI0RrPvc
Handling characteristically difficult employees: https://www.youtube.com/watch?v=DuC-r64fVZA
Marketing
Behavioral economics in marketing and market research:* https://www.youtube.com/watch?v=ZJJ1KaMVNaY
Marketing truths from behavioral economics: https://www.youtube.com/watch?v=AXQfLFzy0SQ
Finance
Behavioral finance: https://www.investopedia.com/terms/b/behavioralfinance.asp
Application
Elon Musk on wealth creation: https://www.youtube.com/watch?v=wWwY4RAc0kQ @1.3-3.2 min
Laszlo Bock (Google HR) interview: https://www.youtube.com/watch?v=rXJSnuo1Pc4
Google – Eric Schmidt (former CEO) and Laszlo Bock discuss HR strategy (Excellent): https://youtu.be/Qbwq5it78_A
Google on benefits/services: https://www.youtube.com/watch?v=9ANgEo40VSE
Google management style: https://www.youtube.com/watch?v=H8qj2aEyaRg
Preventing organizational cynicism: https://www.youtube.com/watch?v=XqPYKgKxAOg
Delivering negative feedback: https://www.youtube.com/watch?v=s76bX5ujl_4
Employee discipline: https://www.youtube.com/watch?v=qv2nxVXXD8I
Gracefully firing: https://www.youtube.com/watch?v=u1zX5ftiI2U
Minimum wage: https://www.youtube.com/watch?v=zIBlNLyvZKU&feature=youtu.be
Grameen bank microcredit: https://www.youtube.com/watch?v=qRh6F-m0kmE
26
INTERNATIONAL MACROECONOMIC INTERCONNECTEDNESS
KR9: CHAPTER 19 P537-P544
OUTLINE
Textbook examples of effects of international macro interconnectedness
Germany macro issues after renunciation
Japan macro issues during 1997 Asian financial crisis
Video
LESSON
TEXTBOOK EXAMPLES OF EFFECTS OF INTERNATIONAL MACRO INTERCONNECTEDNESS
Germany macro issues after renunciation
See on Economics of German reunification (1990): https://www.youtube.com/watch?v=d8WfEGegn6k
See KR9: p538: paragraph beginning with “The reunification” quoted below – explain.

• The reunification of West and East Germany on July 1, 1990, set off inflationary pressures in Germany. At the same time, other European countries
were pegging their exchange rates to Germany’s former currency, the deutsche mark (DM), within the European Union’s fixed exchange rate
mechanism, the European Monetary System (EMS). Germany’s contractionary monetary response to its internal inflation pressures led to slower
growth in its EMS partners, many of whom were not afflicted by rising inflation as Germany was. The resulting asymmetric pressures within the EMS
led to a massive speculative attack on the EMS fixed parities.
Sequence of events in Germany based on paragraph above
1. Higher demand in East because of reunification
2. In effort to meet demand causes higher prices – more cement needed so price rise - cause inflation.
3. To combat so don’t get bubble, Germany contracted money supply which led to slower growth in EMS partners – Germany bought less from trading
partners like Hungary and Czechoslovakia from whom them import a lot.
4. These trading partners were pegging currency to dm so that they could guarantee stability and German firms wouldn’t worry about holding those
trading partners less stable currency (trading partners must inevitably hold some of their partners currency for short periods)
5. Those trading partners were not afflicted by inflation so the contraction in demand hurt them – less growth and wealth creation
6. Additionally because of strengthening DM (less of it meant it strengthened), trading partners pegging currencies had to increase (artificially) demand
for their currencies using their DM to buy back their own currencies (not a good use of DM, they would rather have used to buy good stuff like oil and
medicine and Rome weekend vacations).
7. Massive speculative attack on fixed parities meaning speculators like Soros thought that these trading partners could not afford to support peg and
when pegs broke because not enough DM reserves in trading partners their currency values fell and traders who shorted (bet currencies would
decline against DM) profited. These speculators shorted the currencies of trading partners. What this means exactly:

27
 Steps in shorting process
A. We use example of trading partner Hungary.
B. Investor borrows 1,000 Hungarian Forints
C. At the time they borrow 1,000 Forints the DM:Forint exchange rate is 10 Forint per 1 DM.
D. Investor sells 1,000 Forints and receives 1,000 Forints / 10 DM x rate = 100 DM received.
E. So many sellers of Forints that the Hungarian government runs out of DM to repurchases Forints
F. So peg breaks and desperate German companies holding Forints offer to sell them for a worse exchange rate of 30 Forints per DM.
G. Investor who holds 100 DM must repay the borrowed 1,000 Forints so he sells just 33.3 DM at the new exchange rate, receiving 33.3 DM = 1,000
Forints at new worse rate of 1 DM = 30 Forints.
H. Investor repays the 1,000 borrowed Forints, keeping as a profit the remaining 66.7 DM.

Japan macro issues during 1997 Asian financial crisis

See video on Asian financial crisis: https://www.youtube.com/watch?v=dpxio4mItlY

*See KR9: p539, first 3 paragraphs: Main part begins with paragraph that starts with “in 1997-1998” quoted below - many east Asian growing economies (to
1997) fixed currencies to $ - how and what was compounding effect?

• In 1997–1998, however, the problems of the Japanese economy spilled over to the developing countries in East Asia, with which it trades heavily.
Many of these economies had experienced spectacularly rapid rates of GDP growth for many years through 1997. Many of them also held their
exchange rates fixed, or in target ranges, against the U.S. dollar. Japan’s slowdown in 1997 therefore weakened the East Asian economies directly, but
also did so through an exchange rate channel. Being tied to the dollar, East Asian currencies tended to appreciate against the yen as the yen slid
against the dollar. The East Asian economies, feeling the direct effect of Japan’s slower growth on the demand for their imports, simultaneously found
their exports priced out of foreign markets.

• Like in Germany example above – less demand - but extra added problem that trading partners (Thailand, Malaysia) were pegging their currencies to
US$ because they were trying to (and successfully) attracting large US$ investments then. German trading partners didn’t have this added problem,
they just suffered reduced demand but Asian partners of Japan suffered extra reduction because of relatively higher prices of their goods due to
exchange rate – this contributed to a major crisis in East Asia in 1997 which didn’t happen in eastern Europe after reunification.

28
Sequence of events in Asia
1. Japan doing badly
2. Their trading partners (Thailand, Indonesia, Vietnam, Burma) were doing well
Japan cut orders from trading partners (i.e. last week Japan ordered 10 shovels this week Japanese company orders 8)
3. Trading partners fixed xrates to $ (see effect of this below) so as the yen weakened against the dollar it also weakened against the trading partner
currencies which made their goods even more expensive and further reduced demand from Japan. So where Japan might have said, we are doing
badly send less they then said actually the price went up too so send even less) - instead of reduce order from 10 to 5, reduce from 10 to 3 because of
lower demand and higher relative price because of $ peg of these trading partners.
4. This weakened east Asian economies as demand for goods declined – less exports to japan

Result
Before (example, amounts not accurate):
1 Yen = 10 Baht
10 Baht = $2
Thus 1 Yen = $2

After:
Yen weakens against $ to 1 Yen = $1
What will happen to Yen/Baht exchange rate? Now 1 Yen = only 5 Baht so Thai prices would have doubled to Japan.

For more (OPTIONAL) on Japan stagnation and deflation 1982-1999 see report titled Japan stagnation 1982-1999 in Reading/Articles & cases folder and
associated readings.

For more on developing country economics see in class notes/extra folder file titled KR9-C22-Developing country economics.doc

TRADE: COMPARATIVE VS. COMPETITIVE ADVANTAGE

KR9: P25-26, P34-38

• A country must maintain a competitive advantage first. If they can’t sell their product due to high cost it doesn't make sense to produce it even if it
offers a comparative advantage at home. I.e. Jamaica film with Bananas - their cost of $11 vs. $5 in Honduras made sales difficult, even if Bananas
were the more efficient and profitable product in Jamaica relative to other things that could be produced.

• See myths about trade in section titled Misconceptions about comparative advantage productivity and competitiveness – KR8 p40; KR9 p37.

See on Comparative advantage: https://www.youtube.com/watch?v=38hvvAzgXZY

See Jamaica bananas: https://www.dropbox.com/s/95rpx80m2xgtyw4/rbs-agri%3Afb-supply%20chain-Stephanie%20Black%20-

%20Life%20and%20Debt%20%282001%29%20%28Globalization%20and%20the%20Jamaican%20Economy%29.avi?dl=0 @ 39-44 min

29
VIDEO
Economics of German reunification (1990): https://www.youtube.com/watch?v=d8WfEGegn6k
Asian financial crisis 1997: https://www.youtube.com/watch?v=dpxio4mItlY
Jeffrey Sachs and Bolivia financial crisis: https://www.youtube.com/watch?v=ittBp7z-TbM (up to 3.40 min for Bolivia crisis)
Money for Nothing (@49-102 min) – good on 2008 financial crisis: https://www.youtube.com/watch?v=1Kd6swhoZJ4
Jamaica debt/IMF - https://www.youtube.com/watch?v=YoIJPwfsbqg
Jamaica trade: https://www.youtube.com/watch?v=UzYGaFv1ryo
Jamaica dairy specific: https://www.youtube.com/watch?v=UzYGaFv1ryo
Income inequality: https://www.youtube.com/watch?v=QPKKQnijnsM
Comparative advantage: https://www.youtube.com/watch?v=38hvvAzgXZY
Zambia (Africa): https://www.youtube.com/watch?v=WvWpN-h7Ttw
Jamaica (milk: 30.30-36.15 / bananas: 39-44 min): https://www.dropbox.com/s/95rpx80m2xgtyw4/rbs-agri%3Afb-supply%20chain-Stephanie%20Black%20-
%20Life%20and%20Debt%20%282001%29%20%28Globalization%20and%20the%20Jamaican%20Economy%29.avi?dl=0

30
PRACTICE PROBLEMS – INTERNATIONAL MACRO INTERCONNECTEDNESS

1. See page 538. The paragraph states: “Germany’s contractionary monetary response to its internal inflation pressures led to slower growth in its EMS
partners, many of whom were not afflicted by rising inflation as Germany was.” Why is it relevant that EMS partners were not afflicted by inflation as
Germany was?

A. If EMS partners were also afflicted by rising inflation then the slowdown might have helped tame inflation but in absence of inflation only demand
was affected
B. Because prices would continue to rise anyway.
C. Since EMS partners were pegging their currency to the strengthening Deutschmark EMS partners were forced to buy back their currency to hold
the peg.
D. A and C

2. See KR9: p538: paragraph beginning with “The reunification” quoted below.

The reunification of West and East Germany on July 1, 1990, set off inflationary pressures in Germany. At the same time, other European countries
were pegging their exchange rates to Germany’s former currency, the deutsche mark (DM), within the European Union’s fixed exchange rate
mechanism, the European Monetary System (EMS). Germany’s contractionary monetary response to its internal inflation pressures led to slower
growth in its EMS partners, many of whom were not afflicted by rising inflation as Germany was. The resulting asymmetric pressures within the EMS
led to a massive speculative attack on the EMS fixed parities.

In the scenario above, which is true?

A. In the scenario above, the EMS partners were concerned with holding Deutschemarks.
B. In the scenario above, the Germans were concerned about holding the currencies of EMS trading partners.

A. A is true
B. B is true
C. Both A and B are true
D. Neither A nor B is true

31
 3. See KR9: p539, first 3 paragraphs: Main part begins with paragraph that starts with “in 1997-1998” quoted below.

In 1997–1998, however, the problems of the Japanese economy spilled over to the developing countries in East Asia, with which it trades heavily. Many
of these economies had experienced spectacularly rapid rates of GDP growth for many years through 1997. Many of them also held their exchange
rates fixed, or in target ranges, against the U.S. dollar. Japan’s slowdown in 1997 therefore weakened the East Asian economies directly, but also did
so through an exchange rate channel. Being tied to the dollar, East Asian currencies tended to appreciate against the yen as the yen slid against the
dollar. The East Asian economies, feeling the direct effect of Japan’s slower growth on the demand for their imports, simultaneously found their
exports priced out of foreign markets.

The main difference with the German example in the previous question is this. In Asia, the countries pegged their currency to the US$. This worsened
the crisis because:

A. As the $ strengthened, pegged currencies were forced to strengthen which made purchases with Yen more expensive.
B. As the $ strengthened, pegged currencies were forced to strengthen which made purchases with Yen less expensive.
C. As the $ weakened, pegged currencies were forced to strengthen which made purchases with Yen more expensive.
D. As the $ weakened, pegged currencies were forced to weaken which made purchases with Yen more expensive.

Answers
1. D
2. B
3. A

32
CLASS 4 (IF SCHEDULED)

FINANCIAL STATEMENT ANALYSIS

OUTLINE
Geographic segment data
Income statement, balance sheet, cash flow statement
Analysis and practice files
Presentation
Video

LESSON

See on Financial statement analysis: https://www.youtube.com/watch?v=rhsTylx7BGc

GEOGRAPHIC SEGMENT DATA

• See Apple 2019 10-K divisions p54 (international) posted Dropbox.

o See analysis of division revenue growth and operating profit margin in xls file titled Example analyzing segment data for Apple.xls
o Over time can analyze which components are growing, which aren’t, % of total revenue, % of Operating income vs. % of revenue (for example
Japan may contribute only 20% of firm revenue, but 50% of firm operating income. This is significant – demonstrating its relative importance
to the company.).
o Geographically, can see where most exposed, then study macroeconomic variable in that region (Per capita GDP growth, inflation, trade
policy).

INCOME STATEMENT, BALANCE SHEET, CASH FLOW STATEMENT

• Income statement – shows taxable income and tax deductible expenses on accrual basis – not all cash based. Need to look at revenue growth rate
changes over time and margin (gross margin, operating margin, net income margin) changes over time and try to understand what forces –
competitive, customer, market, poor management, etc. are contributing to changing margins. This statement is by far most important from analytical
perspective. See xls file General financial statement analysis.xls and Drivers for different industries-w hw.xls on Dropbox 1 Excel/Financial statement
analysis folder for examples and insights.

• Balance sheet – records current balance of things owned or owed – does not show contractual obligations. All shown at lower of cost or market
value. Important if company is deep in debt (debt/(debt+ equity)>60%

• Cash flow statement – reconciles income statement to cash basis – 3 parts – operating, investing, financing sources/uses of cash.
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Analysis and practice files

• See Analysis of IS, BS, CF – see FA: sections 5.2 and 6.6 in Dropbox/Reading folder
• See FS7: Fraser, Ormiston, Understanding Financial Statements, 7th Edition, Prentice Hall, 2004 excerpts posted on Dropbox
• See xls file General financial statement analysis.xls on Dropbox Excel/Financial statement analysis folder
• See xls file Drivers for different industries-w hw.xls
• See IS, BS, CF review problems on Dropbox in Excel folder/Financial statement analysis/review folder

Presentation

See Advanta writeup in Dropbox reading folder

PRACTICE PROBLEMS – FINANCIAL STATEMENT ANALYSIS

• See Q&A in sheets 2 and 3 in xls file titled General financial statement analysis.xls
• See Q&A in Drivers for different industries-w hw.xls
• See Q&A in sheet 1 in xls file titled Example analyzing segment data for Apple.xls

Video
Mondays at Blackstone investment company: https://www.dropbox.com/s/wrzmhnnbzwa90ez/hrm-Mondays%20at%20Blackstone.mp4?dl=0
Financial statement analysis: https://www.youtube.com/watch?v=rhsTylx7BGc
Chrysler (Marchionne) - http://www.youtube.com/watch?v=h3ppoyWNN7s (to 7.3 minutes)

Excel
Example analyzing segment data for Apple.xls
General financial statement analysis.xls
Drivers for different industries-w hw.xls

OVERALL FOR PRACTICE ALL SUBJECTS

See practice problems in Dropbox link at top, in folder titled practice problems, in xls files and here in notes.

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HR ACTIVITY
Based on article HR metrics to analyze, how would you assess the following statistics.
Table 1

5 years ago 1 year ago Now 5 years hence

Recruitment
Time to hire 30 days 18 days 9 days ?
Recruitment cost per hire $800 $600 $300 ?
Early turnover % (within 1 year) 15% 20% 22% ?

Profitability
Revenue per employee $75,000 $85,000 $100,000 ?
Profitability per employee $35,000 (47%) $45,000 (53%) $60,000 (60%) ?
Engagement rating (1-10 scale) 6.0 7.0 8.0 ?
Tech overload rating (1-10 scale) 4.0 6.0 8.5 ?

HR specific
Average time since last promotion 5.0 years 5.0 years 4.5 years ?
Ratio HR professional/employee 1:70 1:90 1:120 ?
Corporate turnover 10% 12% 15% ?

Based on data in Table 1:

1. What future recommendations would you make regarding hiring, training, communication, engagement?
2. Is trend good? Are any of the data worrying?
3. If you were allotted a budget of $100,000 to:
a) Lower recruitment costs
b) Lower turnover
c) Increase profitability
d) Reduce tech overload rating
Specifically, where would you spend it?
4. Ideally what metrics would you hope to see in 5 years? What is the anticipated cost to achieve that at a mid-sized ($1B revenue) multinational
corporation?
5. Assuming Table 1 represents statistics at a consumer products/manufacturing company such as P&G or J&J, what statistics would you expect to see at
a tech-oriented company such as Amazon or Apple?
6. If a competitor dedicated 50% more money than your company could afford in order to achieve superior metrics in 5 years, how would you respond?

35
DIGITAL PILLS

Digital pill #1

• Risk adjusted return xls file

• Sagatiba with film clip and xls file
• Decision making analysis of Amazon Europe case p9 - Decision 2.xls
• Microeconomics Q&A

Digital pill #2

Watch one of the following:

• Deng Xiaoping on China capitalism:

https://www.dropbox.com/s/uypsbdcnky7kh7x/bbc%20-%20chinas%20capitalist%20revolution%2C%20deng%20xiaoping%20-%20to%2020%2C%202
8.m4v?dl=0

• Jamaica IMF: https://www.dropbox.com/s/edta4tk2dchje3h/mmc-

Stephanie%20Black%20-%20Life%20and%20Debt%20%282001%29%20%28Globalization%20and%20the%20Jamaican%20Economy%29.avi?dl=0

• Megyn Kelly podcast 04/14/22 episode: https://podcasts.apple.com/us/podcast/the-megyn-kelly-show/id1532976305?i=1000557641497

• Money for Nothing: https://www.youtube.com/watch?v=Bu8fi-f6DUs watch from 1 hour 2 min – 2 hour 2 min

• Milton Friedman – Anatomy of a crisis (3/10, 1980): https://www.youtube.com/watch?v=SWVoPrntBso

And
The FED today (on Federal Reserve operations): https://www.youtube.com/watch?v=jFnH9MCdpLo

Digital pill #3

• International macroeconomic interconnectedness

o Germany macro issues after renunciation
o Japan macro issues during 1997 Asian financial crisis
• Trade: comparative vs. competitive advantage

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