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ECON545: Project 2�Macroeconomic Analysi

Project 2 on macroeconomic analysis.

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    1 ECON 545 : Project 2 — Ma croeconomic Analysis Each of the scenarios has a list of Macroeconomic areas you are to address , with sources, in your answer. Briefly you are to research and show how these apply to your scenario: GDP growth rate ( 20 points ), the business cycle ( 30 points ) , fiscal policy and level of unemployment (50 points) , mone tary policy and interest rates (50 points), international trade ( 40 points ), and demographics ( 20 poin ts) . Cousin Edgar is always thinking of the next business idea. This time, he plans to invest in buying four gas stations. He reckons American consumers have come to accept the high gasoline prices, and estimates world prices for gasoline to increase even further with high demand from India and China. Besides, Cousin Edgar thinks he will make a good profit on the sale of convenience items at each station. But before buying the gas stations, he decides to ask for your advice because you are taking this course in business economics. Answer – T he new business idea of Cousin Edgar is v ery innovative but being an inte lligent business man Edgar should look for all the broad macroeconomic conditions in the U.S economy where he is planning to buy four gas stations and to set up the stores of convenience items at each station. Being a student of economics, I would like to give him few idea s and some broad perspectives which Edgar should be taken care of before in vesting such a huge amount at one instance. We will start from the overview of the U.S economy, the current GDP volume and the contribution by each sector. The inflation rate and the unemployment rate would also have great impact on the growth and the operations of the business in U.S . With crude oil prices over $120 per barrel, it is no wonder that gas prices are so high. Oil prices affect not only gasoline, but everything that revolves around gasoline as well. Groceries are more expensive, anything that is deliv ered by a semi - truck is higher than and even something as simple as ordering a pizza is costing a little more these days. Therefore, the price elasticity of other goods is higher than the price elasticity of demand for Gasoline. Hence, Edgar

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    2 cannot keep much higher prices for his products at Gasoline station. It would not be necessary that everybody who is going to visit the station would purchase the goods from the Edgar’s store. (Bank, 2014) Oil companies are having a hard time keeping up with the rapid growth of India and China. If these trends continue, it is likely that oil prices could reach $200 per gallon or more. Oil prices are also affecting the rest of the economy. With people spending so much more money on gas and groceries, they are spending much less on other products. As this continues inflations is becoming an ever growing threat. The limited budget of the people should be allocated as efficiently as possible. The government has constructed an economic stimulus packet to help compensate for high gas prices and also to help stimulate the economy. By sending out free money, they are hoping that people will run out and start spending, however, recent polls show that most people will be using the free money to pay bills or to invest. The aggregate demand in the economy will increase which will further push up the expenditures by the people on the Gasoline and its products. (Fed, 2010) The demand of products at Gas oline station would depend on the demand of the Gasoline by the consumers. Higher the demand of Gasoline, more people would visit the Gasoline station. The current demand for Gasoline in U.S is , and the demand for Gasoline is inelastic too. It means that if there is rise in the price of Gasoline by say $5 per barrel, then there will not be fall in the demand for Gasoline. This is because Gasoline is an essential good and there are also no close substitutes available for Gasoline. Henc e, Edgar would earn a reasonable amount of revenue if he sets up his business at Gasoline station.

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    3 The supply of Gasoline would also play a significant role in the business status of Edgar, Since the supply of Gasoline would depend on many factors from where it has been imported and also the international tariffs and tax structure, therefore the market equilibrium quantity and price of Gasoline will be affected by foreign demand of Gasoline by countries such as India and China. Supply and demand analysis of Gasoline can be seen in the graph below: - As we are aware that the prices of Gasoline have been rising over the time as there is high consumption of fuel in the country, it has been creating a spiral in the country which will affect all businesses in the country. The prime reason behind this spiral is the setting up of low interest rates by the Federal Reserve and the most important is sub - prime mortgages. They are spending more money just to get to work every week, and the thought of using excess gas to go on vacation or a shopping spree is enough to make you shudder. According to the latest GDP in U.S, the figure was $16.24 trillion in 2012. The population of U.S was313.9 million in 2012. The GNI per capita in U.S in 2012 was $52,340 and it has been rising thereafter. Therefore, it shows that t he country is coming out of the 2008 crisis PRICE QUANTITY SUPPLY

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