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Macroeconomic Assignment Example

2021-07-15 22:11:37
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Carnegie Mellon University
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The aim of this paper is to conduct a macroeconomic analysis of demand for products of Tim Hortons Incorporated (THI) in the Chinese market. Before expanding to the Chinese market, these factors are crucial for THI as it will determine whether or not they will venture into the Chinese market.

Part 1

The food offering has a price of demand that is elastic in China, and this is not an exception for THI, with regards to its food products. With rapid urbanization, and increased income among the middle class, are some of the factors that make demand for quality fresh food products in China (Mankiw & Kneebone, 2013). However, regardless the fact that coffee consumption has also been increasing at a double-digit rate and it is not expected to slow, its price elasticities, have proven to be inelastic. The economy of China is growing, and it implies that the demand for coffee in China has increased correspondingly (Mattingly, 2016). Coffee retailers such as Costa, Starbucks that currently holds the largest share, McCafe and Kentucky Fried Chicken have continued expanding their coffee products in China although they have a high priced offering (Nan, n.p). Tim Hortons Inc can capitalize on this factors to build a strong brand equity and tapping into the potentially lucrative market in China.

The price elasticity demand for fast food in China is also elastic. This is also driven by rapid economic development, urbanization and cultural exchanges that have created change in peoples lifestyles (Morrison, 2012). The fast-food industry is rapidly expanding in China, and the American fast food culture is its major driver (index Mundi, 2017). For example, KFC opened 4260 chains in China in less than 30 years, with McDonald expanding at the rate of 10 restaurants per week. The fast-food industry has proven to be highly elastic in China powered by high demands and changing eating patterns (Ramasamy, Yeung, & Laforet, 2012).

The coffee and fast food elasticities in China and Canada are not the same, especially for coffee. While the elasticity demand for coffee in Canada is elastic, the opposite is true in the Chinese markets (Ragan, 2013). The Canadian demand for coffee is highly dependent on price. With regards to fast food, both countries have elastic price demands for fast food, and it is driven by the fact that food consumption patterns have changed (Ragan, 2013).

Part 2

The Purchasing Power Parity (PPP) the buying power of Chinese customers is highly dependent on their income (Taylor, 2013). The purchasing power of the middle class is high, but comparing China to Canada, the purchasing power of Canadians is much higher (Barton, Chen & Jin, 2013). Therefore, it is crucial that THI takes note of these factors. The PPP is dictated by some factors including the inflation rate (Mattingly, 2016). Considering that inflation is higher in China than Canada, assuming that a cup of THI coffee is retailed in Canada and China at the same price, more Canadians would purchase it more than Chinese, considering the economic difference in both countries (Taylor, 2013). It is therefore recommended that THI, is consistent with regards to pricing like established companies in the Chinese market for instance Starbucks.

THI is a foreign company in the Chinese market, and therefore it is subject to market conditions such as exchange, inflation and interest rates (Mankiw & Kneebone, 2013). The Chinese economy is growing rapidly and therefore, but on the contrary, it is suffering a very high inflation rate of up to 10% per year (Hassan, 2016). This has a ripple effect on the economy; as first, it increases interest rates, as well as exchange rates (index Mundi, 2017). The effect of these three factors includes low purchasing power among the consumers, less competitive domestic products internationally which then affect exchange rates (Hassan, 2016). Firms including foreign entities have been forced to provide higher wages to employees and thus forcing them to increase their commodity prices (Morrison, 2012). It is therefore recommended that THI does a microeconomic analysis before expanding to the Chinese market that is highly volatile. Although other franchises such as Starbucks have succeeded, they have to consider taking a unique strategy to allow them to venture into the market.

Reference

Barton, D., Chen, Y., & Jin, A. (2013). Mapping Chinas middle class. McKinsey Quarterly, 3, 54-60.

Hassan, H. (2016). Inflation and its impact on the Chinese economy. [online] Foreign Policy News. Available at: http://foreignpolicynews.org/2016/09/23/inflation-impact-chinese-economy/ [Accessed 5 Dec. 2017].

Index Mundi (2017). China GDP (purchasing power parity) - Economy. [online] Indexmundi.com. Available at: https://www.indexmundi.com/china/gdp_(purchasing_power_parity).html [Accessed 5 Dec. 2017].

Mankiw, G., & Kneebone, R. D. (2013). Principles of Macroeconomics, 6Ce (Vol. 6). Nelson Education.Mattingly, J. W. (2016). Coffee in China: Market Trend and Consumer Demand.

Morrison, W. M. (2012). China's economic conditions. Current Politics and Economics of Northern and Western Asia, 21(3/4), 289.Nan, Z. Coffee Market in China: Trends & Consumer Strategies.

Ragan, C.T.S., (2013). Macroeconomics (14th Canadian ed.). Don Mills, Ontario: Pearson Education Canada.

Ramasamy, B., Yeung, M., & Laforet, S. (2012). China's outward foreign direct investment: Location choice and firm ownership. Journal of world business, 47(1), 17-25.Taylor, M. P. (2013). Purchasing power parity and real exchange rates. Routledge.

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