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Paper on the Importance of Different Macro Variables

   

Added on  2020-05-11

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Running head: MACROECONOMICSMacroeconomicsName of the StudentName of the UniversityAuthor note

1MACROECONOMICSExecutive Summary The paper aims at analyzing importance of different macro variables on long-terminvestment for a business organization. While starting business in any nation the macroeconomiccondition should be taken for consideration. The idea is to choose an Australia originatedcompany and considers its investment in any of its major trade and investment partner. Thechosen Australian company is BHP Billiton and the target country for investment is China. Inboth the nation mineral industry is considered a vital sector of the economy. Apart from a largeproducer of minerals, Chin constitutes a large and sustainable demand for imported rawmaterials. The consumption demand is growing at an exponential rate. Since the growth began,the demand for different mineral rose. Leading mining consumer, China has most high demandfor products like thermal coal and iron ore. For the two products, the consecutive demand inChina is 49% and 58% of world demand respectively. Mining sector in China is seen as afragmented industry. However, thee re several companies operating in this area, they are unableto meet the growing domestic demand. Therefore, Chins has to rely on imported items. Australiaplays an important role in meeting China’s mineral demand from very beginning. Miningindustry is a crucial industry for Australia as well. In different part of the country, mineral andores are mined and use to meet domestic demand as well as demand for export. In view ofimmense of importance of the natural resources and mining industry,the sector is chosen. Doingbusiness in China now becomes easier as the nation initiated different policies in favor ofbusiness. Chia is recently going through a phase of slow growth rate. This can be a matter ofconcern. However, China has sustainable growth plan for future and hence, will yield a goodlong-term investment return. With a slow growth rate, unemployment is growing and along with

2MACROECONOMICSthis average wage is growing. The real interest rate in China is declining because of a reductionin nominal rates. There is ample fiscal stimulus in terms of raising government expenditure. Thetaxation policy in China is well designed and segregated among central, local and custom offices.Government has recently pull back some of tax facilities provided to foreign companies.However, there are still scope for flourishing business in China.

3MACROECONOMICSTable of ContentsIntroduction......................................................................................................................................4General business environment.........................................................................................................6Economic Growth and business cycles............................................................................................8Unemployment..............................................................................................................................11Average wage rate.........................................................................................................................13Human capital................................................................................................................................15Inflation..........................................................................................................................................17Real interest rate............................................................................................................................18Government expenditures in the economy....................................................................................21Domestic credit to private sector...................................................................................................23Taxation policy..............................................................................................................................25Government expenditures on infrastructure..................................................................................27Exchange rate regime and exchange rate fluctuation....................................................................31Monetary policies in China............................................................................................................34Effects of Global Financial Crisis in China...................................................................................35Conclusion and Recommendation.................................................................................................37References......................................................................................................................................41

4MACROECONOMICSIntroductionChina and Australia maintained a good international relation in terms of trade andinvestment. Economic growth in China propelled since 1970. The economic growth has broughtgrowth in different sectors including manufacturing, infrastructure and smoothen the path ofeconomic urbanization. Along with demand has created for different raw materials, energydemand for transport and electricity and other building materials for manufacturing. Since thenAustralia is in a well position to meet the demand for the emerging economies. China is regardedas the largest exporter and importer of Australia. A significant investment relation is also holdbetween the two nations. In the new growth phase the drivers of economic growth has alsochanged. The driving factor of growth has transformed from manufacturing led growth to a shifttowards production of a complex goods and services. This moderates Australia’s resourcedemand. There is a transformation of China’s demand from an earlier demand of raw materials toa broader demand of service, manufacturing and expertise. Investment decision in any countrydepends on the macroeconomic environment of the country of interest. Macroeconomicenvironment is a broad spectrum. There is no single indicator for reflecting overall macroenvironment. Rather a number of different aspects needs to be evaluated. First important aspectthat needs to be considered in the prevailing business environment of the country. A favorablebusiness environment include aspects such as method of dealing to obtain permit forconstruction, advantages of property rights, credit facilities, protection of the interests of smallinvestors, payment of tax, cross boarder exchange, enforcement of business contract andresolving in the area of insolvency.

5MACROECONOMICSRate of economic growth is an important determinant of demand and return frominvestment. There are fluctuations in economic activity with respect to different business cyclephases. The extent of economic growth and business cycle fluctuation are therefore important forselecting a destination country for investment. Scope of employment opportunities and averagewage rate prevailing in the industry determine the scope of expansion in the industry andcorresponding profitability. Availability of skilled labor force helps to attract foreign investment.In today’s world, human capitals often considered more important than physical capital. Interestrate is regarded as the cost of investment. Real interest rate is the inflation-adjusted interest rate.Both inflation rate and real interest rate are useful indicators of macro environment. Governmentis the central authority of any nation and expenditure incurred by government on improvingeconomic state of the nation indicate ease of doing business for investor. Government makesinvestment in areas where private players do not find interest such as road, electricity, water andinternet. Along with government, position of private sectors also matters for determining thebusiness or competitive environment. The more is the flow of domestic credit to the privatesector, greater is the potential for private sector. An important instrument of government is tax. Ifgovernment is interested in encouraging private and foreign investors then it provides taxrelaxation for doing business. The government sets a rigid tax structure when government wantsto protect domestic economy from foreign competition. In case of foreign investment, exchangerate is an important determinant of stability in the transaction process. Trends in exchange ratehelps to understand stability of exchange relation between nations. Monetary policy as designedby the central monetary authority affects different macroeconomic variables such as GrossDomestic Product, inflation and unemployment. Global financial crisis is a majormacroeconomic event that affects several nations at the same time. The extent of the effect

6MACROECONOMICSdepends on interim policy of nation to absorb external shock. Stronger the economy to resistshock lesser is the impact of shocks.In the report investment decision of BHP Billiton to one of the major trade andinvestment partner, China is evaluated. BHP Billiton is one of the leading global companies ofmetals, mining and petroleum based products. China constitutes large demand for Iron Ore. Inorder to meet domestic demand China has to import Iron Ore overseas and often faces a veryhigh price. Therefore, BHP Billiton investment in China will help to explore Chinese miningindustry and at the same time will benefit the company as well. However, demand base is not theonly factor to be considered while taking investment decision. The macroeconomic environmentof the target country is the primary factor that determines the success of such investment. Afavorable macroeconomic environment ensures success of business investment and help tosustain operation in the long-term. Therefore, recent macroeconomic condition of China iscritically analyzed to make the investment decision economically viable.General business environmentThis is the first and foremost important thing for business concern. While startingbusiness in a foreign country the business owner needs to get permission for setting up factories.There should be easy availability of electricity and property rights needs to be well defined.Apart from that other things come under a favorable business environment are access to creditwhenever needed, the structure of taxation that is whether a discriminatory tax practice forforeign investors exists, facilities of cross border trade and legal arrangement for contractenforcement . Whether China is a good investment destination for starting a business thatdepends on these aspects.

7MACROECONOMICSTable 1: Business Envirionment in China[ CITATION The1712 \l 1033 ]The above table above shows the overall business environment in China as well as itsperformance in different indicators that determine a favorable business environment. In anoverall measure of business environment China ranked 80 in 2016. In 2017, with reformsundertaken for improving business condition rank improved by 2 points and now China holds theposition of 78. China has made it easier to start a business there by simplifying different norms.Business now can get code for registration, business license and tax registration only with asingle form. Availability of credit is an important thing for business. China has provided credit

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