ROYAL MELBOURNE INSTITUTE OF TECHNOLOGY

Economic Analysis ForBusiness

Assignment 1

Mohnish Avinash Gulati s3179685

1. Executive Summary

The aim of the report is to find five news items within the span of past 3 months that deal

with the following five topics of value added and the role of the entrepreneur, supply and

demand, macroeconomic theory, classical theory of cycle and money and credit with one

story each for each topic.

Based on the discussion it was concluded that

True Gold Mining undertook value adding activity by building a reservoir to mine

gold. The prices of the mangoes fell due to the significant influences of supply and

demand forces Due to increased taxation and reduced Government spending Australian economy is

going to contract as it is going to affect investment, consumption and net exports of

the country. Dubai is in the process of undertaking a structural shift from oil based economy to

tourism to increase growth cycle phase and avoid reliance on foreign imports. RBA introduced its exports and reduced unemployment in the real estate sector by

easing credit to borrowers thereby making investments easier.

Table of Contents

1. Executive Summary............................................................................................................1

2. Aim.....................................................................................................................................3

3. Introduction.........................................................................................................................4

4. Discussion...........................................................................................................................5

4.1 Value added and the Role of the Entrepreneur............................................................5

4.2 Supply and Demand or Marginal Analysis..................................................................5

4.3 Macroeconomic Theory...............................................................................................7

4.4 Classical Theory of the Cycle......................................................................................8

4.5 Money and Credit........................................................................................................9

5. Conclusion........................................................................................................................11

6. References.........................................................................................................................12

7. Appendices........................................................................................................................13

7.1 Value Added and the Role of the Entrepreneur News Article...................................13

7.2 Supply and Demand or Marginal Analysis News Article..........................................14

7.3 Macroeconomic Theory.............................................................................................15

7.4 Classical Theory of the Cycle....................................................................................16

7.5 Money and Credit......................................................................................................17

2. Aim

The aim of the report is to find five news items within the span of past 3 months that deal

with the following five topics of value added and the role of the entrepreneur, supply and

demand, macroeconomic theory, classical theory of cycle and money and credit with one

story each for each topic.

3. Introduction

The report is about how economic theories such as value added, supply and demand,

macroeconomics, theory of cycle and money and credit are used by entrepreneurs, financial

institutions and banks to undertake daily life decisions and develop policies. In the report

each of the five theories are applied to five news articles to explain the reliance of this

theories on decision making by individuals.

4. Discussion

The five news items that deal with the following five topics are discussed below

4.1 Value added and the Role of the Entrepreneur

The news article is about True Gold Mining Corporation Infrastructure project where the

company has built a water reservoir in Burkina Faso which is a country in the African

continent. True gold Mining has built this water reservoir in order to undertake value adding

activity of gold mining and also undertaking a CSR activity of serving the local people with

drinking water (Bay, 2014).

Value added is a concept where the total revenue generated is greater than the total costs. It is

a perception in general and the utility derived can be qualitative, quantitative or both (Kates,

2013). The value added in undertaking the construction of the reservoir is that the company

expects estimated revenue of about 97,000 ounces of gold over an 8.5 year life which the

company believes is greater than all its costs that went in constructing the reservoir i.e. hiring

the mining company, undertaking paperwork, generating finance etc. Also there is value

added from a social perspective as well where the water reservoir serves as a purpose of

drinking water to the surrounding people around that area. The important part in the value

adding process is the role of the entrepreneur which is True Gold Mining Corporation who

did all the hard work of building the reservoir, paying the salaries of its workers to undertake

the gold mining project, arranged finance and insurance and did all the work pertaining to the

project as the company believed the output obtained from selling the gold and the utility

derived from drinking water is greater than the resources that he is using up. Also, along with

that the company took the risk of risking its own productive resources of labour and capital to

undertake value adding activity.

4.2 Supply and Demand or Marginal Analysis

The news article is about the effects of changes in the supply and demand forces on price of

Alfonso mangoes. The article talks about how the prices of Alfonso mangoes dropped in

India by about 50% due to the following reasons. Firstly, the European Union (EU)

introduced a ban on the imports of Indian mangoes. This resulted in reduced demand, ceteris

paribus. Secondly there was a sudden unplanned rise in the supply of the commodity due to

temperature changes in the mango producing states which resulted in early ripening of the

mangoes (Bhosale, 2014).

Supply and demand are like invisible forces of nature which summarises the relationship

between sellers and buyers. The supply and demand curves tells us the behaviour and

intended behaviour of sellers and buyers when there are changes in the economic

environment. The point of meeting is called equilibrium (Kates, 2013). The changes in the

prices of mangoes can be explained by the supply and demand concept. Let us assume before

the changes the equilibrium of the curves is given by E1 as shown in the figure below.

Figure 1: Initial Equilibrium Position

Since the demand of a commodity is influenced by changes in Government regulations when

the EU imposed a ban on the import of mangoes there was a reduced demand of the

commodity and hence the demand curve moved towards the left, ceteris paribus. Also,

simultaneously the supply curve moved towards the right as there was early ripening of the

fruit in the producing states which resulted in greater supply of mangoes, ceteris paribus.

Hence the new equilibrium position E2 obtained is shown in figure 2. From the new

equilibrium position it can be shown that the new price P2 is less than the old price P1 which

is exactly what happened in reality as the prices dropped by 50% in the producing states.

Figure 2: Final Equilibrium Position

4.3 Macroeconomic Theory

The news article is about the effects of Chinas real estate slowdown and Australias new

deficit levy policy on the economic growth (Real GDP growth rate) of Australia. The drop in

property prices and budget deficit levy will reduce Australias real GDP growth by about a

per cent if the drop is significant according to Moody analytics. Also, the Government has

decided to reduce public spending and increase tax rates. This can further shave off 1% of the

GDP growth due to decrease in spending as per Credit Suisse Analyst (Mason, 2014). The

effects can be explained by economic theories stated below.

GDP = Consumption (C) + Investment (I) + Government Spending (G) + Net Exports (NX)

The reduction in Australias real GDP growth rate can be explained by the GDP equation and

the supply and demand of commodities. A slowdown in Chinese real estate will cause a

decreased demand of iron ores exports, ceteris paribus. This will cause the demand curve to

move towards the left. Thus a new equilibrium position will be obtained and there will be a

smaller quantity sold at a reduced price which is shown in Figure 3 below. This will result in

the reduction in net exports causing a decrease in GDP.

Figure 3: Price changes due to changes in demand

Also, a decrease spending will reduce the Investment component from the GDP equation

causing a decrease in GDP. A higher tax rate means a decrease in disposable income in the

hands of the consumers. This implies decrease in consumer spending causing a decrease in

business income. This may result in higher unemployment. Since consumer expenditure is

proportional to GDP growth a decrease in consumer spending will further decrease the GDP

amount. Hence analysts believe that Australias GDP growth rate will decrease and the

economy will not be operating to its full potential.

4.4 Classical Theory of the Cycle

The news article is about a speech delivered by HH Sheikh Maktoum Hasher Al Maktoum,

executive chairman of investment bank Shuaa Capital and a member of the Dubai royal

family. He spoke about the measures of restructuring the Dubai economy to avoid downturn

in the growth cycle and improve growth and development. The primary focus of the speech

was to undertake measures to move from oil based economy to tourism to prevent the

economy from future crisis such as the GFC. He also indicated the investors that the

structural shift would positively affect certain sectors such as hospitality, transportation and

healthcare (Odedra, 2014).

The classical theory of the cycle is a theory that says that unemployment and economic

slowdown is not caused by demand deficiency but by producers wrongly anticipating the

demand. The theory says that an economy goes through a series of business cycle and

recessions are caused due to structure of production and it usually starts with few firms in an

industry. Dubai being an economy highly reliant on its oil exports any mistake by firms in the

buyers country would lead to significant effects on the economy of Dubai leading to

recession. This is what had happened during the Global Financial Crisis. Hence to continue

the growth phase in the cycle the speech was delivered to inform investors. Also, Sheikh

Makhtoum is trying to influence the entrepreneurs to transfer resources in the industry of

healthcare, transport and healthcare as he believes that there will be increased demand in

these sectors due to structural shift.

4.5 Money and Credit

The news article is about the Reserve Bank of Australias (RBA) low interest rates policy

effects on the growth of the economy. The RBA maintained lower interest rates to encourage

borrowing and reduce unemployment and to boost exports to improve the current GDP

situation of Australia. By increasing credit supply RBA successfully boosted investments in

the property sector and made its exports competitive as buyers had to pay less (Heath, 2014).

GDP = Consumption (C) + Investment (I) + Government Spending (G) + Net Exports (NX)

The theory of money and credit is basically the cyclical theory of credit which explains the

causes of recession and growth due to expansion and contraction of credit. During booms

there is expansion of credit and bursts there is contraction. It is a monetary theory directly

associated to interest rates (Investopedia, 2014). In our case, by easing the access to credit the

RBA encouraged borrowers to borrow more money for businesses. This gave an opportunity

to investors to undertake value adding activities. Since to undertake value adding activities

labour becomes a critical factor of production the policy helped to reduce unemployment in

the property sector and exports based industries. This improved overall economic situation of

Australia as the economy went closer to working to its full potential value. Also, since the

interest rates lowered lending became unattractive hence capital outflows started from the

economy thereby reducing demand of the AUD which caused to lower the exchange rates. A

lower exchange rates improved exports adding positively to the GDP and thereby promoting

employment in the export sector. An ease of credit promotes investment and employment

which results in greater consumption and increased value of investment. This thereby

increases the value of GDP. Hence the article said low interest rates spur economy.

4.6

5. Conclusion

Based on the five stories it is concluded that

True Gold Mining undertook value adding activity by building a reservoir to mine

gold. The prices of the mangoes fell due to the significant influences of supply and

demand forces Due to increased taxation and reduced Government spending Australian economy is

going to contract as it is going to affect investment, consumption and net exports of

the country. Dubai is in the process of undertaking a structural shift from oil based economy to

tourism to increase growth cycle phase and avoid reliance on foreign imports. RBA introduced its exports and reduced unemployment in the real estate sector by

easing credit to borrowers thereby making investments easier.

6. References

Bay, J. 2014 True Gold completes water infrastructure in Burkina Faso

Viewed 13/05/2014 Bhosale, J., 2014 Mangoes turn juicier! Price of premium Alphonso variety almost

halves

Viewed 08/05/2014 Heath, M. 2014 RBA Saw More Signs Low Interest Rates Helping Spur

Economy Viewed 10/05/2014 Investopedia, 2014 Credit Cycle < http://www.investopedia.com/terms/c/credit-

cycle.asp> Viewed 13/05/2014 Kates, S. 2013 Free Market Economics: An Introduction for the General Reader

Edward Elgar Publishing, USA ISBN 9780857932440 Mason, M. 2014 China property slowdown to hurt Australia

Viewed 14/05/2014 Odedra, R. 2014 Next 5yrs could be "one of the biggest boom cycles" - Dubai

royal Viewed 15/05/2014

7. Appendices

7.1 Value Added and the Role of the Entrepreneur News Article

7.2 Supply and Demand or Marginal Analysis News Article

7.3 Macroeconomic Theory

7.4 Classical Theory of the Cycle

7.5 Money and Credit

1. Executive Summary2. Aim3. Introduction4. Discussion4.1 Value added and the Role of the Entrepreneur4.2 Supply and Demand or Marginal Analysis4.3 Macroeconomic Theory4.4 Classical Theory of the Cycle4.5 Money and Credit

5. Conclusion6. References7. Appendices7.1 Value Added and the Role of the Entrepreneur News Article7.2 Supply and Demand or Marginal Analysis News Article7.3 Macroeconomic Theory7.4 Classical Theory of the Cycle7.5 Money and Credit

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