Read/review the following resources for this activity:
In this paper, you will apply what you have learned in Chapter 5 to the firm or business you selected in order to see how the concepts can be applied to a business situation.
Keep in mind that throughout this course, papers are intended to bring real-world situations to the course material that we are covering. Part of your grade will depend on the connections you make between your chosen firm (which could include the economic environment of your chosen firm, the markets in which your chosen firm interacts with outside actors, the decisions your chosen firm makes, etc., depending on the particular question)and the material from the chapters we covered.
Go to the St. Louis Fed FRED (Federal Reserve Economic Data website (linked in the Resources section above) and search for “Real GDP”. You can also find GDP data (and many other data series) by clicking on “Categories”, then “National Income & Product Accounts” and then GDP. For either method, select the “Billions of Chained 2009 Dollars*, Quarterly, Seasonally Adjusted** Annual Rate” and you should see a graph. To see a little more detail, adjust the lower limit of the date displayed to January 2000. This is accomplished by clicking on the first date in the field on the right-hand side above the graph, then clicking the double arrows that are to the left and right of the decade until you reach the 2000-2009 range, then click 2000. Then click on “Jan”, and the graph will redraw itself to the new range.
Given the data that you found regarding the GDP of the country and thus the economic environment into which your firm finds itself, what business decisions might the firm you chose in week 1 make? Might they need to adjust their pricing? Should they increase or decrease their output, or should they maintain the same level of production? Why? Are there other changes to the business environment that could affect your firm’s decisions or profitability (perhaps relating to other competing businesses or suppliers to the market in which your firm produces)?
If this was 2005 (and you only had data through 2005), how would you answer those questions? What if this was 2009?
Notes about the particular form of the data:
* Chained 2009 Dollars is a slightly more complex way of adjusting prices to obtain a Real GDP.
** Seasonally Adjusted means that the data is ‘smoothed’ to account for events unique to particular times of the year. For instance, if we were to look at retail sales, the (unadjusted) level of sales would be higher in November and December as compared with October or March because of holiday shopping. This makes unadjusted retail sales levels harder to compare between months—if we note that December sales are higher than October, is that because the economy is doing better or because many people are out shopping for the holidays?
If we know that historically, retail sales are 40% higher in December than in October, we can seasonally adjust December’s retail sales by dividing by 1.4. Now we can meaningfully compare the October and December retail sales; if December’s sales are exactly 40% higher, then when we divide by 1.4, December’s retail sales will be equal to October’s retail sales. For instance, if October’s retail sales were $50 Million, then a 40% increase in December would result in $70 million in retail sales. If we divide the $70 million by 1.4, we obtain $50 million as the seasonally adjusted December retail sales. Now, comparing October’s sales ($50 million) and December’s sales ($50 million), we see that the seasonally adjusted retail sales are equal and from that we can infer that the economy is just as strong in December as it was in October.
If the retail sales in December were less than we expect, say $60 million, that would mean the economy is not doing as well in December as it was in October. The unadjusted numbers do not illustrate that but if we seasonally adjust by dividing the $60 million by 1.4, we get a seasonally adjusted $42.85 million in retail sales in December. Comparing the seasonally adjusted numbers we can see December’s (seasonally adjusted) sales are less than October, and infer the economy is not doing as well in December as it was in October—the extra sales that we would expect from the holiday season no longer mask the declining economy.
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