Macroeconomics of the U.S. and South Korea
Macroeconomics is particularly concerned with the national or international economy. The key macroeconomic indicators are inflation, interest rates, gross domestic product (GDP), and unemployment. These indicators give a picture of the economic status of a country and can be used in the decision-making process for would-be investors planning to enter the market. As the leading economy in the world, the United States is responsible for approximately a fifth of the total global output. The service and the manufacturing industry are predominant in the U.
S. economy and are estimated to account for 80% and 15% of the country’s output (Focus Economics, 2019a). The global dominance of the U.S. can be attributed to a variety of factors. The country boasts of abundant natural resources, advanced infrastructure, a large skilled labor force, and a free-market. The American government plays a regulatory role in the market. Innovation, R & D, and huge capital investments are the main drivers of economic growth. Statistics of the U.S. economic data reveal that the GDP of the country has been steadily rising and unemployment rates have been falling. Interest and inflation rates have marked a steady increase since 2016 but remained low (Focus Economics, 2019a). In a comparison of the macroeconomics of the two nations, forecasts estimate that the U.S. economy will expand over the next year by a range of 1.7%, while the South Korean economy will expand by 2.1% this year.
The South Korean GDP has also experienced growth since 2014. In addition, the current trend has marked an increase in inflation and unemployment rates since 2016 (Focus Economics, 2019b).
Interest rates have steadily decreased since 2014. Recently, the country signed a trade deal with Indonesia which will scrape taxation on steel and automobiles. This deal is projected to boost the profits of manufacturers in South Korea (Focus Economics, 2019b). For both the U.S and China, the current U.S.-China trade wars have had an impact on the countries’ economies.
Measurement and Evaluation of Economic Metrics
Economic value added (EVA) is a measure of economic profit and a key indicator of an organization’s performance is EVA postulates that profit is earned when a firm is able to create more wealth than their capital and liability costs. EVA as a performance indicator is a useful metric for investors to assess the value of a company and enables comparative analysis to be conducted between companies (Costin, 2017). EVA is measured from the difference between the cost of opportunity capital invested and net operating profit after tax. There are a number of reasons that the use of EVA is advantageous to economic analysts. EVA places economic profit at a level above the return of investments (Costin, 2017). It is thus viewed as economic profit in terms of creating shareholder wealth. In addition, EVA integrates a culture of long-term thinking among managerial staff in favor of shareholders. Furthermore, it gives an accurate measure of economic profit by taking into account capital costs.
The valuation of business involves the approximation of the cost of capital. The estimation of the cost of capital involves identifying the model and selecting the inputs for the model (Bini, 2018). Usually, the model chosen is the one that is easy to use. The CAPM model is the most commonly used despite some of its shortcomings. Evaluation methods depend on the method and the valuation perspective. The methods of valuation include DCF analysis and residual income model (Bini, 2018). The cost of value determines the choice of perspective. The cost of value sought can be equity, weighted average cost, or unleveled capital costs. Depending on the purposes of the valuation, the price used can either be the actual or the average market price, either target or market price.
Significance and Implications of Economic Theories
There are a number of economic theories each with its strengths and weaknesses. The Keynesian theory developed in response to the recession with a focus on the demand aspect of the economy (Moosavian, 2018). It is related to macroeconomics theory. The theory posits that economic growth is due to an increase in aggregate demand and government expenditure. This theory advocates for government interventions through monetary and fiscal policies to attain economic milestones (Moosavian, 2018). Its basis of theorization lacks optimization principles. However, improvements to the theory in recent years are evident in the form of New Keynesian theories that have introduced optimizing agents. Keynesian theory assumes that prices and wages are fixed and are slow to react to economic fluctuations (Moosavian, 2018). In addition, this theory asserts that the Central Bank should be accorded the decision to handle economic fluctuations. This theory argues that the competition structure is monopolistic and the type of goods produced in these structures are differentiated (Moosavian, 2018). In Keynesian theory, monetary, technology, and preference shocks are experienced.
The classical theory of economics has its origins rooted in prosperity, thus it adopts an equilibrium pattern in analyzing economic phenomena (Moosavian, 2018). The primary focus of the classical theory is economic growth with a bias on the supply side of the economy. This theory uses free markets that discourage government interventions in the processes of achieving economic milestones. It emphasizes on micro-foundations and utilizes optimization. The theory posits that prices and wages are flexible and adjust quickly to economic fluctuations (Moosavian, 2018). In addition, classical theory discourages the intervention of the Central Bank to manage economic fluctuations but rather monetary rules should be the guide towards achieving economic stability. Since the classical theory is biased towards the supply side of the economy, it argues that supply creates its own demand (Moosavian, 2018). The shocks experienced in classical economics are technological shocks.
Investors make use of macroeconomic factors or indicators to determine the suitability of a country as an investment destination. Usually, these factors are viewed from an extended period in order to develop trends that depict the economic outlook of the country. However, despite statistical data on macroeconomic factors, shocks such as the one created by the U.S.-China trade wars can have detrimental effects on the economies of dependent countries.
- Bini, M. (2018). Implied cost of capital: How to calculate it and how to use it. Business Evaluation Journal, 5-32.
- Costin, D. M. (2017). Economic value added – a general review of the concept. Economic Sciences Series, 17(1), 168-173.
- Focus Economics. (2019a, December 20). U.S. Economic Outlook. Retrieved from https://www.focus-economics.com/countries/united-states
- Focus Economics. (2019b, December 13). Korea Economic Outlook. Retrieved from https://www.focus-economics.com/countries/korea
- Moosavian, S. A. (2018). Classical versus Keynesians: A comprehensive table to teach 50 distinctions between two major schools of economic thought. The Seventh Annual American Economic Association (AEA) Conference on Teaching and Research in Economic Education (CTREE), (pp. 1-16). Denver.