Schmeckt Gut: Addressing Board Of Directors On Economic Predictions And Analysis

Interrelationships of Economic Variables

The economic condition of a country, one of the primary indicators of the country’s well-being can be cumulatively seen by many economic variables. The primary ones are income of the citizens of that country (usually measured in a per-capita basis), the inflation rate prevailing in the country, the level of taxes and tariff structures designed by the government of the country and others. These variables are all interconnected and the change in one of these variables affects the other variables of economic growth, directly or indirectly, thereby, affecting the growth and economic conditions of the country significantly (Tanzi 2014). The report discusses about the interrelationships of these variables and the possibility of different projections of their values, based on several key economic theories and concepts. It takes as a case study, the scenario of Schmeckt Gut, an enterprise trying to launch its production, the Schmeckt Besser energy bar, in Atollia, within several months (Soderbery, A., 2015). With the help of the data found in the market analysis conducted by the company, the report in its second part, tries to analyze the effects of the predictions of the values of different economic variables will have on the potential demand of their products. The report also tries to recommend strategies for the Directors of the company, which can be taken in order to increase the profitability of the company, keeping in mind the different projections (Canto, Joines and Laffer  2014).

The per capita income of an individual of a country, though not a wholesome indicator of the country’s overall scenario is one of the primary yardsticks, based on which the economic policies are undertaken by the central authority of the country. Income, directly or indirectly, affects many other significant variables like the consumption pattern, overall price levels, tax structures and import export patterns of a country. Generally, with the increase in the income of the residents of a country, the standard of living of majority of a country starts changing, having a considerable affect on their demand patterns, consumption and savings behavior and the commodity bundles the residents demand. Commodity bundles consider the basic goods and service that are usually demanded by the residents of a country, on a regular basis (Canto, Joines and Laffer  2014).

Low-income countries in general, stress more on consumption of primary products like basic non-costly foods, clothing and shelters. These are mainly necessary goods, some of them being inferior in nature, which implies with the increase in the income of the overall population of a country, the relative share of demand for these commodities either decreases or remains the same. This is because, generally, with the increase in income, people demand more of high quality products, replacing the basic ones (Monnin 2014). More and more demand of luxury and high quality products leads to an overall increase in the demand of imported goods and services thereby having a significant implication on the export import market. The overall increase in the demand of goods and services also exerts an upward pressure on the price levels, thereby increasing the inflationary pressure on the economy. These dynamic can be studied with the help of the different robust economic tools:

Multiple Regression Analysis and Economic Theories

With an increase in the overall income, the demand for goods and services, especially those that are of better quality and those that are imported, starts increasing significantly. In this scenario, as can be seen from the data collected by the company, with increase in the income over time, the demand for a better lifestyle also goes on increasing (Rios, McConnell and Brue 2013). This can be reflected from the gradual increase in the number of gyms in Atollia, with the increase in the income of the residents of that place. With the increase in demand of fitness centers, the demand for accessories and supplements used in gyms are also expected to rise. This implies that the energy bar to be launched by Schmeckt, within the next couple of months, is expected to see a positive trend in its demand with the increase in the income of the individuals of Atollia. On the other hand, with the increase in the income level over the years, 2011 to 2016, the overall demand has also considerably increased, which in its turn may have exerted an upward push in the price levels of goods and services in the country, thereby increasing the inflation  in the country (Soderbery 2015). However, inflation, as can be seen from the statistics, have not uniformly increased or decreased over the time, which indicates presence of external factors and policy implications on part of the government (Eggoh and Khan 2014). The projected increase in the demand of goods and services will attract foreign companies to launch their products in this market and those already selling here will try to increase their supply. This may induce government to impose tariff restrictions to restrict foreign imports to a specific limit on one hand (for supporting local businesses) and to increase the public revenue on the other hand (Burda and Wyplosz 2013).

Aggregate demand of an economy is the total amount of expenditures by the economy, on commodities and services, within a particular time. The primary components of aggregate demand are consumption expenditures, investment expenditures, spending by the government and net exports of the country (net exports =exports –imports). In this scenario, with the increase in the income of the country in general, the consumption expenditures increase substantially (Rios, McConnell and Brue 2013). This implies a direct increase in the demand, which in its turn will attract more producers, thereby increasing the aggregate supply too. Increased demand for imports, however, will have a negative effect on the net exports of the country, thereby, affecting the aggregate demand in a negative way. This may enable the government to impose strict tariff restrictions. However, tariff can only e imposed up to a certain level, as over-imposition of tariff can lead to fall in the demand as well as supply of imported products drastically, thereby decreasing the revenue earned by the government from this sector. This can be explained with the concept of Laffer curve (Trabandt and Uhlig 2012).

Implications of Economic Predictions on Schmeckt Gut

The Laffer curve sows the relationships between the level of taxation and the resulting government revenue from the taxation. The concept is based on a simple and feasible assumption that at the two extreme levels of taxation, 0% and 100%, no revenue can be earned by the tax imposing authority. According to this theory, as the tax rates start increasing from low levels, initially with the increase in the tax level, the revenue earned from taxation increases till a critical level (Trabandt and Uhlig 2012). If tax rates are further increased above that critical level, revenue starts falling due to fall in demand as well as supply of that product. In the concerned scenario, as can be seen from the data provided, the tariff rates initially starting from 5%, takes a leap to 10%, during the first quarter of 2013. The tariff rate remains the same for a considerable period, until the third quarter of 2014 (Nagle, Hogan and Zale 2016). Demand, however, has increased gradually and stably, barring a few discrete downturns. With an increased tariff ate and a slow growing gradual demand, an upward rise in the inflation is also seen during this period of time, which may have been a fall out of the upward pressure exerted on the overall price levels, during this period. However, the tariff rates have fallen from 10% to 7.5%, from the fourth quarter of 2014. This shows relevance with the theory of the Laffer curve. This is because, with further increase in the tariff rate, the current increase in the demand of products might have seen a drop, thereby reducing the revenue of the government from tariff. This might have led to a fall in the tariff rate imposed by the government, to increase the revenue earned by the government from the imports (Burda and Wyplosz 2013).

One significant tool that can be used to see the feasibility of relationships between the increases in income, changes in inflation rates and tariff rates in the economy. This is the concept of Phillips Curve, which shows an inverse relationship between inflation and unemployment. According to this concept, reduction in unemployment is correlated to increase in the inflation of a country. This means, a high inflation, if tried to be reduced by the government, will have a direct non-favorable effect on the employment scenario of that economy, increasing the unemployment statistics in the economy (Mavroeidis, Plagborg-Møller and Stock 2014). Therefore, in the concerned scenario, with an increase in income and demand, as the price levels rise, the inflationary pressure also increases in the economy. The government may apply anti-inflationary measures to keep the inflations in check. However, due to the presence of the negative relationship between inflation and unemployment, the anti-inflationary measures can be taken only up to a certain extent as usage of very stiff measures may decrease the inflation in the economy but may also increase unemployment in the economy as a negative byproduct (Monnin 2014).

Conclusion

Therefore, with the help of the data on the different variables present and the different economic concepts discussed above, a 5% increase in the income can lead to a continuous and stable increase in the demand of the concerned products, thereby increasing the possibility of the government to impose tariff on the commodities. This 5% increase in the income can be associated to a 10% tariff, but only till a certain point of time, after which tariff rates are expected to decrease. The increase in income can also be associated to a 2% inflation rate, thought the rates may vary within a range not exceeding 4% and not going below 1% as very low inflation may lead to an  increase in the unemployment level, which may affect the gradual income growth of the economy quite adversely (Mavroeidis, Plagborg-Møller and Stock 2014).

The dynamics and inter-relations between the economic variables discussed above are expected to have individual as well as cumulative effects on the potential demand for the energy bars that are to be launched by Schmeckt Gut. The impacts can be studied and interpreted with the help of multiple regression analysis, which is elaborated as follows:

By regression of a variable y (say) on another variable x (say) it is meant the dependence of y on x, on an average. In bivariate analysis, one of the major problems is prediction of the value of the dependent variable y when the value of the independent variable x is known. The problem becomes simplified if we can express the y as a mathematical function of x, y = h(x), say. Then this equation is called the regression line of y on x. in the simplest case, when y is linearly related with x, either exactly or approximately, we can write

y = a + bx,

So that a + bx₀ is the predicted value of y when x = x₀, where, a denotes the predicted value of y in the absence of x and b denotes the increase or decrease in the value of y with per unit increase in the value of x (Cohen et al. 2013).

As with bivariate data, in multivariate setup also, it may be that one of the variables say x₁, is of primary interest and the other variables x₂, x₃…, x_p when considered together with x₁ in view of their possible influence on the latter. The object may be to build up a relationship between the dependent variable (regressand) x₁ and the independent variables (regressors), x₂, x₃…, x_p, with the idea of using this relationship for predicting the value of the regressand from knowledge of the values of the regressors (Montgomery, Peck and Vining 2015). Thus, in estimating the demand of the energy bars of Atollia in the next couple of months, it is appropriate to consider the effects of the income, tariff and inflation rate of that place on demand. The relationship can be given as;

Demand = a + (b * Income) + (c * Tariff) + (d * Inflation).

Here also, a denotes the demand in the absence of income, tariff and inflation, b, c and d denotes the changes in demand for one unit change in income, tariff and inflation respectively.

From the regression analysis of the data provided, it has been found that the regression equation for estimating the demand of the energy bars can be given as:

Demand = 89.45 + (0.02 * Income) – (11.58 * Tariff) – (13.9 * Inflation). (From Table 1)

The value of the R square is found to be 0.87. Thus, it can be said that the independent variables income, tariff and inflation can explain 87 percent of the dependent variable demand. Thus, any prediction made from this regression equation will be 87 percent accurate. It can also be seen that the coefficient for income is positive (Montgomery, Peck and Vining 2015). Thus, with one unit increase in income, the demand increases 0.02 times. Again, the coefficients of tariff and inflation are negative. From this, it can be said that with one unit increase in tariff, the demand decreases 11.58 times and with one unit increase in inflation demand decreases 13.9 times. Thus, it can be seen that if inflation rate and tariff rate increases, there is decrease in demand. The negative impact of inflation and tariff is much more than the positive impact of income (Cohen et al. 2013).

The results from the multiple regression analysis, leads to the following economic interpretations and the corresponding implications:

The analysis being 87% accurate, the predictions that are derived from the analysis tend to hold true in an overall basis. Here, with one unit increase in income, the demand is found to rise by 0.2 times. This implies that if the current growth pattern of income in the country stays the same for the coming years, the energy bars to be launched by the company within a few months, are expected to see an impressive and stable hike in their demand. This in its turn gives a positive signal to Schmeckt Gut to venture in the market of Atollia (Montgomery, Peck and Vining 2015).

However, the regression analysis also shows a distinct relationship between the tariff rates and overall demand, which indirectly shows the potential demand structure of the product that will be launched by the company. According to the results provided by the analysis, one unit increase in the tariff rate can lead to a drastic fall in demand 11.58 times (Rios, McConnell and Brue 2013). However, given the present status of the economy, it can be seen from the data provided by the market analysis of the company, that the tariff rates have decreased from 10% to 7.5% from the end quarter of 2014 and is currently stable at that percentage. This implies that, given the lower tariff rates, it will be judicious decision on part of the company to stick to their decision of launching their product in the concerned market. The past records also show an upward trend in the demand of their products in this market (Johnson  2013).

One important result is provided by the above regression analysis; the analysis shows a significantly negative relationship between inflation growth and the demand dynamics. According to the regression results, one unit of increase in inflation in the economy, will lead to a striking 13.9 times decrease in the demand for the energy bars. This relationship has to be taken into account by the company, before launching their products in the market of Atollia (Monnin 2014). The data on inflation shows that for the last two quarters of 2015 and the first quarter f 2016, the inflation  rate has remained more or less near 3% in the economy, which is towards the higher side, if compared with the past inflation  rates prevailing in the economy. The demand pattern, however, shows a steady and gradual upward trend despite the presence of inflation in the economy. Therefore, given the demand statistics, the potential demand for the energy bars to be launched by Schmeckt Gut in the coming period (Eggoh and Khan 2014).

Based on the results derived by the regression analysis and their economic implications, following strategies can e recommended to the Board of Directors of Schmeckt Gut, which if implemented, may prove beneficial for their new venture in the markets of Atollia:

1. The overall demand is seen to rise with increase in the income. This may imply that like Schmeckt Gut, other foreign companies producing similar products, will also take interest in venturing in the same market, thereby showing a credible threat of competition. To stay ahead of its competitors, the company can launch their products at a lower price than the price its competitors are tending to keep for their products. Using appropriate advertising techniques ad emphasizing on the nutritional benefits their product offers can also be a smart move to attract the customers, who are mainly those who are inclining to fitness regimes and healthy and nutritious products (Tanzi 2014).
2. Although the current tariff rates are moderate in the economy, the company needs to keep into account that a hike in the tariff rates can have massive negative implications on the demand of their products, as people will tend to substitute those with the domestic ones available. To avoid this unfavorable outcome and losing market shares, the company can keep a flexible pricing mechanism (Nagle, Hogan and Zale 2016). With this type of pricing system, the company can adjust the prices of their products according to the changes in the tariff rates in the economy, such that not much of the burden is borne by the customers (thereby securing its share of clientele) and the profit margins of the company are maintained (Johnson  2013).
3. The current inflation in the economy being near about 3% and the demand pattern showing an overall upward trend, the company needs to set their price judiciously. It has to be kept in mind that the product, which the company is going to launch falls in the category of normal luxury goods, whose demand in general tends to be highly price elastic. This implies that with a small increase in the price of these products, the demand seems to decrease substantially (Mavroeidis, Plagborg-Møller and Stock 2014). Therefore, a high inflation may decrease the demand of energy bars largely. Keeping this in account, the company should keep a close vigilance on the inflation level prevailing in the country and its dynamics and change the pricing strategies of its product accordingly. The company should also give importance to innovations and cost reducing technique implementations, such that inflation hikes fail to create fluctuations in the potential demand for its product (Tanzi, V., 2014).

References 

Burda, M. and Wyplosz, C., 2013. Macroeconomics: a European text. Oxford university press.

Canto, V.A., Joines, D.H. and Laffer, A.B., 2014. Foundations of supply-side economics: Theory and evidence. Academic Press.

Cohen, J., Cohen, P., West, S.G. and Aiken, L.S., 2013. Applied multiple regression/correlation analysis for the behavioral sciences. Routledge.

Eggoh, J.C. and Khan, M., 2014. On the nonlinear relationship between inflation and economic growth. Research in Economics, 68(2), pp.133-143.

Johnson, H., 2013. Aspects of the Theory of Tariffs (Collected Works of Harry Johnson) (Vol. 5). Routledge.

Mavroeidis, S., Plagborg-Møller, M. and Stock, J.H., 2014. Empirical evidence on inflation expectations in the New Keynesian Phillips Curve. Journal of Economic Literature, 52(1), pp.124-188.

Monnin, P., 2014. Inflation and income inequality in developed economies.

Montgomery, D.C., Peck, E.A. and Vining, G.G., 2015. Introduction to linear regression analysis. John Wiley & Sons.

Nagle, T.T., Hogan, J. and Zale, J., 2016. The Strategy and Tactics of Pricing: New International Edition. Routledge.

Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and policies. McGraw-Hill.

Soderbery, A., 2015. Estimating import supply and demand elasticities: Analysis and implications. Journal of International Economics, 96(1), pp.1-17.

Tanzi, V., 2014. Inflation, indexation and interest income taxation. PSL Quarterly Review, 29(116).

Trabandt, M. and Uhlig, H., 2012. How do Laffer curves differ across countries? (No. w17862). National Bureau of Economic Research.

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