Based on the given scenario, Schmeckt Gut is planning to launch its energy bar in Antollia within a timeframe of two months. The research department has come up with possible developments in the near future in relation to the income growth, import tariffs imposed along with inflation and has also provided crucial data in this regards. The objective of the given assessment is to explore the interrelationships between the various projections based on the underlying data provided and also the economic concepts. Based on the discussion, recommendations would also be provided to the board of Schmeckt Besser energy bar.
Income growth and Inflation Rate
In economic concepts, typically growth in income would lead to higher demand for goods assuming they are normal. In the short run, the higher demand for goods would lead to a shift in the demand curve as highlighted below while the supply curve would remain static (Arnold, 2008).
Owing to the above shift in the demand curve, it is apparent that there would be an increase in the equilibrium price. This increase in the equilibrium price would lead to inflation or higher prices for goods and services. Thus, based on the demand supply curve, higher income growth should potentially lead to higher inflation (Krugman & Wells, 2008).
The AD=AS model can also enable understanding of the potential link between income growth and inflation rate. One of the key components of the aggregate demand is consumer spending and typically when there is an increase in the income level, there would be an increase in the consumer spending resulting in an increased AD. However, the short run AS would remain constant which would in turn lead to higher price along with higher output. The higher output would translate into higher inflation or price rise (Mankiw, 2012).
An additional explanation of the potential relationship between the two can be also explored using the Phillips curve. In accordance to the Philips curve, unemployment rate changes tend to alter the inflation rate. Further, as there is a decline in unemployment rate, then there would be an increase in the inflation rate. Usually, decrease in unemployment rate is also associated with rising income levels and hence the Phillips curve also tends to vindicate the relationship between the income levels and inflation as has been expressed above (Koutsoyiannis, 2013).
Also, in terms of the magnitude, it is expected that some portion of the increased income would also be saved and invested in various financial instruments for future use. Hence, the expected increase in inflation would be significantly lower as compared to the rise in income. Therefore, potentially a 5% increase in income could be linked to 2% increase in inflation and similarly a 7% increase in income would be linked to 3% increase in inflation.
If the tariff rate on the imported goods from Industria would increase, then obviously the price of these goods would increase. If the same good is produced locally also at a higher price, then the consumption of the same would also expand. Hence, instead of the cheaper imported good from Industria previously, now the expensive locally produced goods or high tariff imported goods would be consumed by the people. Owing to an increase in the price of these goods, there would be an increase in the inflation. However, the extent of inflation would tend to be determined based on the tariff increase and also the contribution of the imported good to the basket of goods which are used for inflation computation. Typically, the contribution of imported goods is small only and hence the impact of inflation would be quite small only. With all certainty, it would be appropriate to claim that the impact of tariff rise on inflation would be lesser in comparison to rising income. Hence, it would be appropriate that a 10% tariff rate would be associated with corresponding inflation of 1% or 2% (Krugman & Wells, 2012).
Further, the relationship between the tariff and inflation also need to be explored through the lens of AD-AS curve. Typically the imposition of a higher tariff on imports would lead to higher revenue for the government. The higher government revenue would transform into higher government spending which is one of the constituents of aggregate demand or AD and thereby would lead to an increase in the AD. Since the AS in the short run would not alter, hence there would an increase in the price leading to inflation. In the above explanation, it is assumed that on the Laffer curve the increased tariff would lead to higher taxation revenues for the government. This assumption is critical as after a particular tax rate, further increase in taxation would lead to a decrease in the government tax revenue. As a result an alternative explanation to increasing price has also been offered whereby on account of increased tariffs on imported goods from Industria, there could a decreased supply which on account of shortage would lead to price rise and consequent inflation (Barro, 2007).
As highlighted in the above discussion, the tariff on imports could potentially lead to higher revenue for the government provided the tariff levied does not cross the highest point on the Laffer curve. In such a case, this incremental revenue collected by the government would be spent by the government. The increase in government spending would tend to enhance the aggregate demand as one of the contributing components. However, this may be balanced by the decrease in consumer spending owing to the higher prices in accordance with the demand supply curve. Thus, based on economic principles alone it seems difficult to predict the precise impact of rising tariffs on the income level. As a result, it would be imperative to view the various factors on a consolidated basis so as to able to decipher the possible combinations of inflation, income growth and import tariff increase (Mankiw, 2014).
Based on the above discussion, it is apparent that higher inflation tends to be associated with higher income levels. However, with regards to the relation between the tariff on imports and income, the relationship is not very clear. However, it is known that higher tariffs tend to lead to inflation. Hence, a regression model needs to framed based on the given possibilities so that a possible conclusion can be drawn with regards to the matching the projections provided.
Dependent Variable – Income Growth (Y)
Independent Variables – Inflation Rate Development (IN), Tariff Rate on Imports (Timp)
Hence, the general model would be of the following form.
Y = β0 + β1IN +β2Timp
The formula for the computation of β1 and β2 are as follows (Hair et. al., 2015).Substituting the respective values, based on the given values of the given variables, we get the following Further, solving for βo based on the above values of other slope coefficients, the following computation is performed.Hence, the requisite regression equation is highlighted below.
Y = -0.0125 + 1.42IN – 0.164TIMP
Hence, based on the above relationship the following projection mapping would seem to be appropriate.
In order to highlight the relationship between the various given factors and demand for energy bar, the data provided by the research department needs to be considered. To begin with, the relationship of demand of energy bar with the individual factors has been explored which would be followed by the multiple regression model.
The requisite scatter plot between the above variables is highlighted as shown below.It is apparent from the above scatter plot and the resultant equation of the best fit line that there exists a positive relationship between the given variables. This seems of expected lines as higher income would typically boost the consumption of normal goods which is the case here. However, it is apparent that the relationship between the variables is not highly linear which implies that there are certain other variables which tend to dictate the demand for Schmeckt energy bar. Also, non-linearity may be present in the relationship of the given variables. However, a noteworthy aspect is that income alone can account for 60.9% changes witnessed in the demand for the Schmeckt energy bar. This clearly implies that income is a key factor which would dictate the demand for the energy bar (Hair et. al., 2015).
Relationship between tariff on import and demand for Schmeckt energy bar requisite scatter plot between the above variables is highlighted It is apparent from the above that there does not seem to be any significant correlation between the two variables i.e. tariff on imports and demand of energy bar. This is also reiterated from the dismally low value of R2 which highlights the fact that the predictive ability of the above model is quite low. One potential reason contributing to the above observation could be that the given variable is not imperative which would also be analysed using the multiple regression model highlighted below (Flick, 2015).
Hence, based on the above, it would be appropriate to conclude that higher the income levels of the consumers, higher would be the increase in the demand of energy bars. However, it would not be appropriate to consider this relationship as perfectly linear as potentially demand of energy bars is also driven to an extent by other factors which are explored in the following section.
Based on the data collected by the research department, a multiple regression model would be predicted using the following variables.
Dependent Variable – Annual average demand of energy bars per person
Independent Variable – Average income per person, Tariff rates on imports of energy bar, Number of Stores where energy bars would be offered
The regression has been performed using the Excel inbuilt function which leads to the following output.
The regression equation is as follows.
Demand for energy bars = -12.16 + 0.0048 Income -6.46 Tariff Rate + 4.07 Number of Stores
From the above, it is apparent that there is a positive relationship between energy bar demand and income along with number of stores. This makes sense since higher income and higher stores would lead to higher demand and higher sales. On the other hand, a higher import tariff would tend to increase the price and thereby lower the demand in accordance with demand supply concept. Hence, from the perspective of the energy bar, the highest demand would be witnessed when the import tariffs are at the lowest while the stores count and income levels are at the highest level. Also, it is essential to observe that at a significance level of 10%, all the slope coefficients are significant since the p value corresponding to each of these is lesser than 10% or 0.1 (Flick, 2015).
Further, using the ANOVA analysis, the significance F value comes out as 0.00 and hence with 99% confidence it can be stated that the given linear regression model is significant. This is also established from the fact that the independent variables jointly are capable to account for about 92% of the changes seen in demand of the energy bars. Hence, it would be appropriate to conclude that the given multiple regression model represents a good fit (Hair et. al., 2015).
Conclusion
Based on the above analysis, it would be fair to conclude and recommend that the energy bar should be launched at a time when the import tariff levels are the lowest while the income level is growing. This would ensure that a higher demand for the energy bar would exist and hence would maximise the chances of success of Schmeckt Besser energy bar. Additionally, in order to maximise the sales, it would be essential that the energy bar should be available at the maximum number of stores. Further, the entry mechanism chosen by the firm for selling the product in Atollia would also be dependent on the import tariffs. At no or low level of import tariffs, exports may be lucrative. However, at higher level of tariffs, it would make sense for the company to explore making the energy bar in Antollia provided the market is sufficiently large.
References
Arnold, A.R. (2008). Microeconomics (9th ed.). Sydney: Cengage Learning.
Barro, R. (2007). Macroeconomics: A Modern Approach (4th ed.). London: Cengage Learning.
Flick, U. (2015). Introducing research methodology: A beginner’s guide to doing a research project (4th ed.). New York: Sage Publications.
Hair, J. F., Wolfinbarger, M., Money, A. H., Samouel, P., & Page, M. J. (2015). Essentials of business research methods (2nd ed.). New York: Routledge.
Koutsoyiannis, A. (2013). Modern Macroeconomics (4th ed.). London: Palgrave McMillan.
Krugman, P. & Wells, R. (2012). Macroeconomics (3rd ed.). London: Worth Publishers.
Krugman, P. & Wells, R. (2008). Microeconomics (2nd ed.). London: Worth Publishers.
Mankiw, G. (2012). Principles of Macroeconomics (6th ed.). London: Cengage Learning.
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