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Macro and Microeconomics Questions and Answers

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Question 1

Role of Micro and Macro Factors on Business Decision Making

Businesses are run with an objective of generating profitability from the economic perspective. The role of decision making with respect to demand and supply is critical for the effective running of the business. For the Siemens Wind Energy production investment in UK, microeconomics has enabled managers to understand the trends of the consumer demand. The demand of the consumer receives impact from the large number of factors such as price, sensitivity to price that is the price elasticity; numbers of other businesses providing similar product, substitute, complementarities, etc. Many of these serve a defining function for the corporation in the potential sales stream. Economics also helps businesses to make production-related choices such as infrastructure and input costs, number of units, number of employees and wages, and prices of utilities, etc., in a fashion that is profitable to satisfy consumer demand. In addition, pricing options for gross margins are taken on the basis of the company’s business environment. In preserving the economic target of achieving sustainability for the organisation, all these are important.

In addition to this, to understand the macroeconomic conditions, a manufacturing problem like other companies is also needed. In the UK, for instance, government incentives are appealing to local and foreign suppliers of wind energy. These investments have position in creating jobs. The degree of unemployment and government labour policies would decide the cost of labour for the business (both skilled and unskilled). It also has an impact on the potential market of the company commodity being decided. The UK government has also reduced taxes to encourage energy sector investors.

GDP of the economy that decides the buying power of the population, etc. In addition to these fiscal and monetary policy consequences, it is therefore necessary to consider the foreign trading laws and policies of the government whether the input is manufactured from abroad or is to be exported to other countries. Business economics therefore play a leading role in the efficient sustainability and running of business.

Question 2

Improvement in the Company Performance with One Macro and One Microeconomic Factors

Siemens’ Energy section has increased investment in the UK wind energy power. Siemens plans for the new investment of £160 million in the Green Port Hull project in Northern England. The project will contribute more than 1,000 jobs as well as play an important role in expanding the offshore wind industry in the UK[1].

The investment in a wind project is backed by the investment attractive framework offered from the government of UK for the growth of offshore wind. Governments are concerned for the economic development as well as generating revenue for meeting an administration cost of the country. For the purpose, the government uses different policy measures. For example, taxation and policy measures are used to control excessive growth of any industry; while, at the same time these measures are beneficial in order to attract investment in the country. Such incentives to attract investment in certain industry is also based on the fact that it plays a role in expanding the employment levels in the country. Siemens’ Energy investment in UK’s offshore wind energy project also takes the advantages of such policy measures from the government of UK. It will save the company’s excessive investment requirement for the infrastructure. Government of UK has offered multiple tax benefits to local and foreign investors. These tax benefits range across taxes related to sales, energy, CO2, VAT (value-added tax), and other taxes. These tax incentives are in addition to the payments that will be made for the energy production in UK[2]. These tax incentives not only have a direct impact the government exchequer but at the same time results in the achievement of portion of objectives that government plans to achieve through public spending. Furthermore, these objectives are achieved in a more effective, efficient, and economic friendly way.

On a micro level, the industry appears to be profitability promising for the Siemens’ Energy. The production of the wind energy is a capital intensive project and is dependent on the huge initial investment. Support from the government will reduce the investment pressure on Siemens.  Newly growing industry will have limited competition for skilled labor that in turn will reduce the labor cost of the green-collar jobs. These will reduce the fixed cost of the business to a considerable extent. In addition to these, the future stream of the revenue is also positive and promising as the people and business are shifting towards this greener energy and environment. Furthermore, achieving economies of scale over a period will also reduce its cost of operation. Hence, positive growth in revenue as well as the consistent reduction in the production (operating cost) will enable the company to achieve the break-even point much earlier than would be possible by investment in other industry with a competitive landscape. Therefore, controlled input cost and the positive potential revenues in turn will result in the achievement of the profitability objective of the business.

Question 3

Assessment of the Decision of Investment in Pakistan by Siemens in the Light of Macroeconomic Factors

Siemens plans to expand its operations internationally with investment in renewable energy production. Pakistan being an underdeveloped country is facing power crises.  Mainly in the summers the power outrage often result in the industrial shutdown in order to meet the power and energy demand for the domestic electric supply. Most recently, the electricity shortage in the country has reached 2,000 MW[3].

For the purpose, Siemens plans to invest in the energy production sector in Pakistan. At the initial stage, the energy investment will be target to meet the energy demand of the industrial sectors, and the investment will be conducted in the city of Faisalabad. The city has huge textile industries based with client market in European and other countries. The industries are forced to shift their investment to the neighboring countries of Bangladesh due to the power shortages.  The current government of Pakistan have high business-friendly attitude providing schemes to attract local and foreign investors in Pakistan for investing in different industries. The strategic geographical position of the country is also highly critical and has much room to expand the trade of the country with other countries.

Macroeconomic Conditions

With this landscape at work, Siemens’ plan to invest in the establishment of the energy production facility in Pakistan is highly positive. The macroeconomic conditions of Pakistan are improving. Improvement in FOREX and budget deficits are expected as the government has taken measures to negotiate a loan from the IMF for meeting its requirement. Also, the exchequer will receive support from the planned auction of license of the 4G services in telecommunication services.  In addition, according to the business community the receipt of GSP Plus Status, strict budgetary measures and the public-private working relationship will future improve the business environment in Pakistan. Investment from the Siemens will directly contribute in the reduction of unemployment in Pakistan. Also, it will enable other businesses to contribute in employment generation in the country. Considerably high unemployment in the country provides cheap labor that will control the fixed cost of the investment.

Fiscal Policy of Pakistan

The fiscal policy refers to the tools and procedures that the government employees for maintaining its revenue and expenses. With fiscal policy at work, the government plans to achieve its economic growth targets. The other targets such as reducing unemployment, etc. are also achievement through these fiscal policy measures. The current fiscal policy of Pakistan is directed toward improvement with expected GDP growth of around 3.1 percent for the current year. The improvement is the result of the government favorable policies for the energy and the manufacturing sector. Also, it expects to achieve the target of 3.7 percent in the coming fiscal year. The time is considered beneficial for investment in the energy sector as the country expects   to receive considerable investment as a result of an amnesty scheme for the new investors. The scheme will retire in 2016 and so business will make investment in the meantime[4]. With these measures at work, GDP and the CPI inflation are expected to improve considerably. GDP is expected to reach 5.0 by the year 2018/19 while CPI inflation is projected to reduce the 6.0 from the current trend of being around 10 percent. With these fiscal policy measures and other schemes, the unemployment status of the country is project to improve to 10 percent in the year 2014 as compared to 13.5 percent in the year 2010[5]. 

Hence, the improvement in the country macroeconomic conditions is reflected in the stock market, in the form of consistent rise in the index.  Investment from diverse investors will require energy; therefore, the fiscal measures are in line with the requirement of investment for the Siemens.

Monetary Policy of Pakistan

The monetary policy is a policy tool with the government using which the government controls the amount of money in the economy. The policy measures such as interest rate and capital reserve requirement for the banks. Increasing trend in interest rate and capital reserve requirement reduces the amount of money in circulation in the economy and vice versa. This directly impacts on the cost of doing business as well as the purchasing capacity of the business and individuals in the economy. Interest rate in Pakistan is considerably high as compared to the developed countries; however, it plays an effective role in controlling the money supply in the economy. As a result of this inflation is being controlled. The government aims to reduce the reliance on central bank of the country for its financing needs. As a result of achievement of this objective, banks will also be able to finance private investors for business than giving loans to the government only. Strengthened central bank of the country in terms of increased reserves will reduce the reliance of the country on foreign debt that will reduce the taxation rates. Hence, the future of doing business in the country is positive. Despite all the above policy factors that provide an attractive investment avenue for the Siemens, Pakistan is highly restrained due to the law and order situation in the country. However, the government’s business and investment friendliness will provide support in this aspect as well.  All these refer to sound opportunity for the Siemens to invest in the energy sector of the country that has considerable potential, but are restraint due to limited resource.

  • [1] http://www.forbes.com/sites/mikescott/2014/03/31/siemens-invested-in-uk-wind-sector-despite-government-policy-not-because-of-it/
  • [2]http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/taxes-incentives-renewable-energy-2012.pdf
  • [3] http://www.paktribune.com/business/news/Electricity-shortfall-reaches-2000-MW-12044.html
  • [4] http://www.imf.org/external/pubs/ft/scr/2014/cr1490.pdf
  • [5]http://www.budget.gov.ie/The%20National%20Recovery%20Plan%202011-2014.pdf

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