Question

(Related to the Chapter Opener on page 776) Suppose that Intel is forecasting demand for its computer chips during the next year. How will the forecast be affected by each of the following? a. A survey shows a sharp rise in consumer confidence that income growth will be increasing. b. Real interest rates are expected to increase. c. The value of the U.S. dollar is expected to increase in exchange for foreign currencies. d. Planned investment spending in the economy is expected to decrease.

Short answer

The forecast for Intel's computer chips will be affected differently by each factor: 1) a rise in consumer confidence regarding income growth will increase the demand forecast; 2) an expected increase in real interest rates will decrease it; 3) increase in U.S. dollar value in exchange for foreign currencies will decrease foreign demand and therefore the total forecast; 4) decrease in planned investment might decrease the overall forecast.

Step-by-step solution

- Analyzing Consumer Confidence

If consumer confidence rises with regards to income growth, this will likely increase the demand for Intel's computer chips. If consumers are confident about their income growth, they are likely to increase their spending, thus increasing the demand. Hence, the increase in demand should be reflected in Intel's forecast.

- Impact of Real Interest Rates

If real interest rates are expected to increase, this could potentially decrease the demand for Intel’s computer chips. Higher interest rates mean higher borrowing costs, which could lead to a decrease in corporate and consumer spending. It could also lead to a rise in saving as opposed to spending. Thus, this aspect might contribute to a decrease in Intel's forecasted demand.

- Value of U.S. Dollar in Foreign Exchanges

If the value of the U.S. dollar is expected to increase in exchange for foreign currencies, this could potentially reduce foreign demand for Intel's computer chips. This is because, as the dollar appreciates, Intel's chips become more expensive in foreign markets, reducing the demand. Thus, this factor could lower Intel's forecasted demand.

- Decreasing Planned Investments

If planned investment spending in the economy is expected to decrease, this could potentially lead to a decrease in the demand for Intel's chips. Lower investment could result from lower economic activity overall, which would reduce demand for inputs such as computer chips. Thus, this aspect should also contribute to a decrease in Intel's forecasted demand.

Key concepts

Consumer Confidence

Understanding how consumer confidence impacts economic forecasting is crucial for predicting market trends and business revenue. Rising consumer confidence indicates that individuals feel secure about their financial future and are more willing to spend money. In the context of a company like Intel, a significant increase in consumer confidence regarding income growth suggests that consumers will likely spend more on technology and products that contain computer chips.

When consumer confidence is up, as reflected in surveys and economic indicators, it ties directly to increased consumer spending. This uptick in disposable income usage could potentially translate into higher demand for consumer electronics, driving sales for companies that provide essential components like Intel. Thus, Intel's forecast should account for this and project higher demand for their chips, considering the optimistic sentiment among consumers.

Real Interest Rates

The concept of real interest rates is integral to economic forecasting because it reflects the cost of borrowing money after accounting for inflation. An expectation of increasing real interest rates implies a more expensive borrowing environment for both consumers and businesses. This increased cost can discourage taking loans for big-ticket items such as homes, cars, and business expansions that might include purchasing new software or hardware incorporating Intel's chips.

Higher real interest rates often encourage savings over spending, as the returned interest on savings becomes more attractive. For Intel, this means potentially less business and consumer spending on the products that use their computer chips, leading to a forecast of decreased demand. Consequently, in their economic forecasting, Intel would be wise to prepare for a slight decline in the growth curve, stemming from the dampening effect of higher borrowing costs on market demand.

Exchange Rates

Exchange rates play a significant role in international trade and economic forecasting. When the value of the U.S. dollar is expected to increase compared to foreign currencies, U.S. exports become more expensive for buyers using those currencies. For a company like Intel that sells computer chips globally, a stronger dollar can mean decreased competitiveness abroad.

An anticipated rise in the value of the dollar should prompt Intel to adjust its forecast for international sales. The chips might see reduced demand from foreign markets because they become pricier for international customers. This situation could lead Intel to perhaps focus more on domestic markets or on strategies to mitigate the impact of unfavorable exchange rates, such as currency hedging or adjustments in pricing strategies.

Investment Spending

Investment spending is a critical engine of economic growth, encompassing outlays on goods intended to serve productive use in the future. When forecasts show a decline in planned investment spending, it can be indicative of slower economic growth and can have a ripple effect on various sectors, including technology.

If businesses and the government cut back on investment spending, it signals a possible downturn that could lead to reduced demand for industrial components like computer chips. Companies may hold off on upgrading systems or expanding production, which could negatively impact Intel's forecasted sales. Recognizing these trends, Intel might adjust its production accordingly and focus on cost optimization to navigate through periods of reduced investment spending more effectively.