Skip to 0 minutes and 13 secondsIt's the start of another working day at CV1Logistics and the finance manager is in a meeting with the managing director of CovPak. CovPak is a small packaging company based in the neighbouring industrial unit and is the main customer for CV1Logistics. CovPak manufacture packaging products from cardboard and wood pulp, raw materials that are imported from Canada and the United States. As a result of a recent trade tariff introduction, the cost of these raw materials has gone up, significantly increasing the cost of production for CovPak. This is an example of the macroeconomic measure of inflation being affected by a national government decision. CovPak now has a choice.
Skip to 0 minutes and 59 secondsAbsorb these cost increases themselves, pass it on to others in their supply chain, or pass it on to their customers. They are keen to keep their retail prices the same in order to stay competitive, so instead they are asking CV1Logistics to reduce their storage and handling charges. What business impacts do you think this will have on CV1Logistics directly? What longer term macroeconomic effects as a result of the introduction of these trade tariffs might the finance manager at CV1Logistics expect?
How key macroeconomic questions affect global logistics
So far, we’ve talked about economics from a microeconomic perspective, looking at things like deciding how to allocate scarce resources and how this affects global logistics.
Discussions about economic concepts such as opportunity cost, the factors of production and how they operate in a simple economy are all microeconomic ideas that attempt to describe how an ideal and theoretical economy would work (all else being equal). But what about macroeconomics and why it’s important to a logistics business?
Macroeconomics is what you hear in the news when politicians and businesses argue about how well the economy is doing. Watch the video to see how a government decision can impact business through macroeconomic mechanisms.
The problem with this is that everyone has a different view of how the economy is doing and what to do to make it better. This is why economics is sometimes called the ‘dismal’ science. It’s a social science that deals with people’s behaviour, and people’s behaviour is not predictable.
There is a link between the government, politics and economics. Politicians rely on economists to advise them on what is the best economic policy. It’s not the job of an economist to implement economic policy, only to suggest it. Often they get it wrong, such as in the global recession of 2007-8 following the banking crisis. Famously, not one economist predicted the collapse of a market built on poorly backed loans even though the information was available.
Politicians rely on three (macro)economic goals: grow the economy, limit unemployment and keep prices stable. If they manage that, usually they get re-elected. You can measure these three national economic targets like any business would measure their performance.
Gross Domestic Product (GDP) measures economic growth, unemployment rate highlights how many people are out of work and the inflation rate highlights how fast or slowly prices are rising.
Of course, economists can never agree on how to calculate these measures and governments often choose the numbers that make them look the best. In fact, an obsession with the actual numbers is not that helpful; knowing the direction of travel is. For example, looking at GDP, unemployment and inflation data, you notice different economies going through cycles of contraction and expansion at different times. This means that one part of the world can appear to be doing well, while another region is not doing so well. Sometimes everywhere can be moving in the right direction, while at other times this it not the case.
How this relates to global logistics
If we apply these general macroeconomic areas of interest to the real world of global logistics, we can see how they can affect management decision-making with regards to the allocation of resources and the factors of production. Any one of the key macroeconomic measures (GDP, unemployment and inflation) not doing so well can stop businesses making economic and investment decisions. Because government policies and control can affect macroeconomic issues, how the government manages the economy is important to all businesses, including logistics businesses.
An example that affects global businesses and economic growth is economies of scale and the productivity of factors of production. When the government invests in logistics infrastructure that improves productivity, such as faster and wider roads, bigger airports and port terminals, productivity improves and this leads to economic growth (GDP).
As investment rises, the more efficiency gains there are. Investment is all about confidence – when investors are confident in something, they will invest in it more. Investment is key to economic stability. The effect of investment on economic growth is recognised as the multiplier effect on aggregate demand, which was first noted by Milton Keynes (1936).
Recognising what is happening in the macroeconomy, not just in your own country but globally, is a key management skill that helps with running a global logistics business.
Conduct some of your own research on basic macroeconomic ideas. Consider the question posed in the video at the start of this step. What longer term macroeconomic effects, as a result of the introduction of trade tariffs, might the finance manager at CV1Logistics expect?
Keynes, M. (1936). The general theory of employment, interest and money. Palgrave Macmillan.
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