Macroeconomic Business Environment

To: Dansky Blakleyovich

From: Economics Department

Date: 14th June 2018

Subject: Macroeconomic Business Environment

Due to the request of providing a qualitative assessment to predict the macroeconomic business environment (including expected changes in the Yuan per US dollar) and the resultant financial performance of BE, this is a business memo that includes the following analyses. BE is changing from an importer to an exporter. First, as an exporter, in as far as BE was paying taxes inform of export duties, it has to pay taxes as import duties. China accounts for almost half of the United States trade deficit in goods. The US president Mr. Trump has promised to deal with countries whose trade deficit is due to unfairness (Kantchev). China oversupplies aluminum and steel into the US while imposing barriers to car exports from America. Chinese imports cut jobs in the U.S manufacturing industry increasing the unemployment rate. If the president decides to impose barriers to imports from China, he can only do so by imposing high import duties and introducing other hidden tariffs. This will increase the importation cost while lowering the exportation cost with an aim to balance trade.

The long-term variable rate tied to the 10-year Treasury yield is the rate that controls all other interest rates in the market. The Treasury Department auctions the 10-year Treasury note as a debt instrument. Currently, the United States government is taking expansionary measures to expand the economy and deter the ongoing deterioration of the economy (Timiraos). An expansionary policy will reduce taxes and increase government spending. In such an economic phase, there are plenty of other investments to make. The low taxes mean people have extra money and are looking out for investments with high returns. The increased government spending means the government has to issue treasury notes, but due to the high demand, investors are willing to pay less than the face value of the Treasury notes. In this scenario, the Treasury note sells at a discount indicating a low long-term variable rate.

Sticking with a variable loan since the interest rate is low is a successful move to an investor.  Low-interest rates reduced the foreign exchange rates, which in this case will remove the exchange rate effect. However, this is only possible if the economy is in the expansionary phase. If the government decided to change its economic policies or other economic factors change, then the variable interest rate will change.

While doing business, it is important to consider the unemployment rates and the GDP. With the high unemployment rate in the United States, only a few people are working (Sparshott). With no money to spend, the demand in the market will reduce thus translating to low revenues for companies. A high GDP stimulates the economy, and there is increased demand for goods translating to higher company revenues. Low demand for goods translates to low supply and production of goods. This will lead to a relatively high cost of goods since elements such as labor costs will not reduce with low production.

Several factors can affect the interest rate expense. Among them is the exchange rate. Depreciation in the exchange rate, for example, results in inflationary pressures since imports are more expensive that the exports. The demand for exports will be greater. At the rate of growth, the China currency is growing at; it might become stronger than the US currency in future. China is exporting more than it is importing to the US meaning its US dollar exchange reserves are high (Cui). The trade deficit experienced by the US lowers the GDP and increases the unemployment rate. With the government taking expansionary measures by lowering taxes, investments will increase and thus boost the GDP. This assumes that the extra income from lower taxes is not saved rather injected into the economy through investment or consumption.

The forward markets indicate that offshore Yuan will decline 3.2% in the next year, to 7.12 to the dollar. This is an indication that the US dollar will gain value against the Yuan. Such an increase in the value of the exchange rate will shift the IS curve to the left thus reducing the equilibrium interest rate and income. A low interest rate will increase investment causing the IS curve to shift to the right thus increasing the income levels. On the other hand, inflation seems to be on the rise and the rate of GDP has grown by 2.3% for the last one year. A high inflation means that money supply is high than money demand meaning the cost of holding money is high. The increase in income will counteract the inflation thus shifting the LM curve to the right and maintaining a higher interest rate than the equilibrium rate above. Generally, one can expect the interest rate to be on the rise as the inflation increases and the dollar gains value against the Yuan.

Best,

Economics Department
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