Essay on Macroeconomic Variables Affecting a Business Environment

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CHAPTER 1

QUESTION: IDENTIFY AND EXPLAIN TEN (10) MACROECONOMIC VARIABLES AFFECTING A NAMED BUSINESS ENVIRONMENT.

HOW CAN THESE BE REGULATED?
INTRODUCTION
In today's world, no business operates in isolation without interacting with the environment where it operates. Irrespective of the nature of business whether public or private organization; manufacturing; service industry; local or international firm, its operations are inhibited by the environment in which it operates.
During 2003-2007, Nigeria attempted to implement an Economic Empowerment Development Strategy (NEEDS). The purpose of NEEDS is to raise the country’s standard of living through a variety of reforms, including macroeconomic stability, deregulation,
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Reserves and External Debt.

A low ratio of international reserves (in the central bank and financial system as a whole) to short-term liabilities (domestic and foreign, public and private) is seen, particularly by investors, as a major indicator of vulnerability.

Another popular indicator of reserve adequacy is gross official reserves in months of imports of goods plus services. Total external debt and its maturity structure are important indicators as well.

Terms of Trade. Past experience indicates that a large deterioration in the terms of trade has been a contributing factor to banking difficulties in many countries. Small countries with high export concentration are the most vulnerable to banking crises induced by a sudden and large deterioration in the terms of trade. On the other hand, large improvements in the terms of trade have the potential of causing problems in the financial system through inflation and asset price bubbles. These impacts are exacerbated when the terms of trade improvement is transitory.

Composition and Maturity of Capital Flows. The composition of capital flows (portfolio versus direct foreign investment; official versus private; highly leveraged institutions and investment banks versus commercial banks and trade finance) may also be a good indicator of potential vulnerability. Countries are particularly vulnerable if their current