CH:7PG 110 UNIT :1

EXTERNAL ECONOMIC INFLUENCES ON BUSINESS BEHAVIOUR

A target rate of economic growth. A target rate of price inflation) Long term of balance between the

value of goods bought from other countries or sells to others.

Exchange rate stability. Low levels of unemployment.

ECONOMIC OBJECTIVES OF GOVERNMENTS

It is an increase in output & real income of an economy. It is usually measured by a change in national income.

ECONOMIC GROWTH

Increase in out put and Investment in

technology Increase in economic resourcesIncrease in productivity

FACTORS THAT LEAD TO GROWTH

Business cycle/trade is the regular swings in economic activity varying from boom conditions to recessions measured by real GDP that occur in most economies.

BUSINESS CYCLE

a) Output is falling, thus unemployment increase & goods & services demand decline further as incomes fall.b) Government tax revenue fall lead to less income tax received & sales revenue drop.c) Weaker exchange rates.d) Adverse balance of trade.e) Closure of small companies .

EFFECT OF GLOBAL RECESSION:

a) Capital assets. Land & property are cheap.b) Demand for inferior goods could increase.c) The risk of job losses may encourage improved relations between employers & employees to increase effi ciency.d) Hard decision. This make the business able to take advantage of economic growth when this starts again.

WELL-MANAGED FIRMS ABLE TO TAKE ADVANTAGE WHEN

RECESSION OCCURRED SUCH AS:

Inflation is a sustained rise in the average price level.

Deflation is fall in the average price level in an economy./Period of declining economic activity.

Inflation And Deflation

a) Select a base year where there is no natural disaster.b) Selection of basket of goods.c) Price of good is converted into current year index.d) Weightage - Consumer expenditure.e) Use the following formula to calculate current year index.

HOW TO MEASURE INFLATION

A) Cost-Push Inflation Increase in the costs of production with unchanged

demand.Rising imported raw materials costs.  High indirect taxes.Lower exchange rate.

B) Demand-Pull InflationA reduction in taxes.Economic growth in other countries.Rising consumer confidence.Depreciation of the exchange rate.

WHAT IS THE CAUSES OF INFLATION?

a) Cash saving decreases & value of money will be eroded.b) High infl ation rate reduce the value of money per capita income. Low living standard.c) Lead to greater income inequality.d) Rising prices attract more producers to increase production.e) Cash-fl ow problems.f) It aff ects the assets held by fi rms.g) Higher rate of interest.h) Businesses will lose competitive if infl ation is higher than other countries.i) Reduce labour costs.j) Cut profi t margins.k) Cut back on interest spending.l) Reduce borrowing.m) Reconsider their creditor policy.

IMPACT/EFFECTS OF INFLATION:

Effect Of Deflation:a) Consumer delay purchasing hoping that price would fall further.b) The firms unwilling to commit funds to further investment as price falls.c) Businesses will hold stocks to reduce their working capital needs & also reduce orders for suppliers.d) Businesses with long-term liabilities will discourage borrowing to invest.

Does This Mean Deflation Is Better

Unemployment is when the worker is willing to work but is unable to find a suitable job.

UNEMPLOYMENT

CYCLICSTRUCTURAL FRICTONAL

Gov. Policy Towards The Causes Of Unemployment

a) Cyclical unemployment is an unemployed due to lack of aggregate demand bought about the trade cycle. The aggregate demand consists of consumption, investment, government expenditure & net exports.

Solution:  Government use macroeconomic policies to increase

the level of aggregate demand. It lower interest rates & indirect taxes.

Maintain competitive exchange rates.

TYPES OF UNEMPLOYMENT

b)Structural/Technical unemployment is an unemployment causes by demand for labour reduced & switching to machinery.

Solution:  Improve the mobility of labors.Retrain the workers.

TYPES OF UNEMPLOYMENT

c) Frictional unemployment is an unemployment when workers are temporarily removed while moving from one job to another.

Solutions: Improve job information.The government can create a part-time jobs to

unemployed workers.

TYPES OF UNEMPLOYMENT

More goods less consumption Support to un employed workers and families Social problems –crimesReduces demand of goodsLoss of income – lower living standardsSkills become out of date

THE COST OF UNEMPLOYMENT

Balance Of Payments (BOP) is a record of a country’s international transactions for a given of time period usually a year.

Deficit On Its BOP could result:  a fall in the value of its currency’s exchange rate.  a decline in the country’s reserves of foreign

currency. foreign investors unwilling to invest.

Exchange rate is the rate at which one currency can be exchanged for another currency.

Exchange rate Appreciation is when the value of the currency rises against that of another currency, then it is said to have APPRECIATED.

Exchange rate Depreciation is when one unit of currency buys fewer units of other currencies.

EXCHANGE RATE

The domestic fi rms that gain from an appreciation of the country’s currency are:

Importers of foreign raw materials, for whom the domestic currency cost of these imports will be fall ing. This increases their competitiveness.

Importers of foreign manufactured goods able to imports the product more cheaply.

The domestic fi rms that LOSE from an appreciation of the Pound (£) are:

Fall in demand from overseas goods & services because of the higher cost of products in terms of the foreign currency. Businesses locate overseas to avoid the higher exchange rate.

As appreciation makes imports cheaper, it will make domestic producer less competitive.

The domestic businesses that GAIN from a depreciation of sterling are:They can reduce their prices in overseas market.

The domestic businesses that LOSE from a depreciation are:Manufacturers who depend on imported suppliers of

material will suff er rise of cost & reduce competitiveness.

Retailers that purchase foreign suppliers may suff er rises of price & forced to find local suppliers.

Businesses that sell goods & services to the domestic market, it will make local producers less competitive because of there are competitors from other country. Consumer switch to imported goods.

a) Product design & innovation.b) Quality of construction & reliability.c) Effective promotion & extensive

distribution.d) Investment in trained staff & modern

technology.e) After sales service.

Intl Competitiveness—non Price Factors

Macroeconomic policies is a policies that are designed to impact on the whole economy. It influences the level of total or aggregate demand in the economy.

1. Exchange rate policy is a government policy to allow its exchange rate to float freely in consultation with its trading partners.

2. Fiscal policy is a government that whereby government alter their purchases of goods & services & taxes./A government policy to manage the level of aggregate demand in the economy by changing government spending or taxation.

MACROECONOMIC POLICIES

When government revenue is more than government expenditure. Chancellor announces an overall change in total tax revenues or total government expenditures plans wil l there be a macroeconomic eff ect that wil l be noticed by al l businesses.

2 major scenarios that the Chancellor likely to makes changes.

A) When the economy is in recession & unemployment is r ising.· This is the result of aggregate demand for domestic goods fal l ing below the output of industry.·  To increase aggregate demand. There are 2 ways:a) Increases in government expenditure plans.b) Reduce taxes to encourage increased spending by the consumers 7 fi rms.

FISCAL POLICY

B) When economy is booming Booming economy is likely to lead to both higher

inflation & a large account deficit. It results from excess aggregate demand.Solution is to reduce government expenditure levels

& increase taxes.Government find it easier to cut back on investment

spending than on current expenditure such as social security benefits.

FISCAL POLICY

Monetary policy is a policy implemented by a central bank to control credit & money supply in the economy. This policy help to control the level of spending in the economy.

Functions Of Monetary Policy:a) Increasing cash ratio to reduce money supply.b) Selling bonds to the public in he open market.c) Fixing new regulations for hire purchases to raise the down payment. This make credit more expensive.Impact Of Higher Rates:a) Businesses will experiences increases in interest payment. b) Businesses will reduce borrowing to further investment.c) Expensive consumer goods & demand for property will fall.d) Higher domestic exchange rates lead to an appreciation of the currency exchange rate.

MONETARY POLICY

Government need to be aware policies that could have negative effect: (Fiscal Policy) & (Monetary Policy)a) Higher rates of income tax imposed to

workers & managers.b) High rates of corporation tax will

discourage new investments & this will reduces the competitiveness of businesses.

c) High rates of interest will make the borrowing cost higher than foreign rivals.

Fiscal And Monetary Policy A Summary

a) Frequent appreciation & depreciation of a currency against others.· Fluctuating priced of imported raw materials.· Fluctuations in export prices & overseas competitiveness, which lead to unstable levels to demand.· Uncertainty over profi ts to be earned from trading abroadb) Diff erent exchange rates adds to the cost of fi rms trading overseas in 3 ways:· Diff erent price lists printed & frequently updated.· Take out the risk of dealing in diff erent currencies.· Currencies converted into the domestic currency.c) Diffi cult to make cost comparisons when fi rms are planning to purchase goods from abroad.d) Currency continues to fl oat, foreign investment could be lost to common currency.e) Business strategy may have to adapt to the country remaining outside the common currency.

Exchange Rate Policy Claimed Drawbacks To Floating Rates.

Exchange rate policy - Claimed advantages of floating rates for not joining a common currency

Reasons:a) Central bank could keep its status as the interest-

setting authority by not joining the common currency.b) Replacing the currency with a common currency

lead to common tax policies.c) Allow exchange rate to find its own level & will not

use economic policies to keep it at one level.d) Conversion costs could be substantial in terms of

dual pricing.

Exchange Rate Policy- Claimed Advantages Of Floating Rates For Not Joining A Common

Currency

Low rate of income tax

Low rate of corporation tax

Increasing labour market flexibility and labour productivity

Government Policy ,Economic Effi ciency And Business Competitiveness

Income elasticity of demand is

A) Normal goods - The income elasticity is positive & between 0 & 1.

This means that when consumer incomes rise, the demand for these goods may also increase but by a smaller proportion . E.g.: Basic foods.

B) Luxury goods - The income elasticity is positive & greater than 1.When consumer incomes rise, the demand will rise by an even greater proportion because consumers may already be suffi cient quantities of normal goods.

C)  Inferior goods - The income elasticity is negative.Demand for these products will decline following an increase in consumer incomes but will rise when consumer incomes are reduced. E.g.: Second-hand goods, poorer cuts of meat.  Thus, the producers may actually gain during a recession &

experience a decline in sales when the economy is growing

INCOME ELASTICITY CLASSIFIED FOR 3 CLASSES OF GOODS

Market failure is the situation where a market does not effi ciently allocate resources to achieve the greatest possible good.

A)  Market failure 1: External Cost (Pollution from manufacturing process)Aff ected stakeholder group & their solution:Consumer - They are forced to buy environmentally

damaging goods.  Government & local authorities will be forced to take

the issue seriously by pressure groups.Workers concerned about their own health 7 job

security if bad publicity leads to a decline in sales.

Market Failure

B)  Market failure 2: Labour trainingAff ected stakeholder group & their solution: Consumer - Scarcity of qualifi ed staff may reduce consumer

service lead to higher prices. Government - Lack of skilled staff will limit the

international competitiveness of industry. Government pay for more training courses.

Shareholders - Potential profi ts will be lost.

C)  Market failure 3 - Monopoly producers (keep higher prices)Aff ected stakeholder group & their solution: Consumer - Lack of choices, restricted supplies & high

prices. Consumer can use Internet to choose from a wider range of suppliers.

Government - High prices & lack of competitiveness. Government use competition policies. Investigate & act against monopoly practices.

Market Failure