11: The economic environment of business and finance Flashcards
Name the two economic environments that affect business?
The macroeconomic environment
- national influences
- global influences
The microeconomic environment
What is the macroeconomic environment?
compromises firstly the national economy and also global economy
encompasses the overall conditions of a country’s economy, including factors like inflation, unemployment, and interest rates, which businesses and investors must consider when making decisions
What is GDP and give some examples of those who purchase the output?
Gross Domestic Product: equals the amount of expenditure incurred by those who purchase the output
- consumers (households)
- government
- foreign buyers
The government has several functions within the national economy: (4)
- acts as the producer of certain goods
- acts as the purchaser of final goods
- invests by purchasing capital goods
- makes transfer payments from one section of the economy to the other
What is disposable income with respect to a consumer in the national economy?
Income avaliable to individuals after payment of personal taxes. It may be consumed or saved
Total spending or consumption by households is affected by which six influences?
- changes in disposable income
- changes in the distribution of wealth
- government policy
- development of new major products
- interest rates
- price expectations
The role of the saver in the national economy: Which three influences affect savings?
- Level of income
- Interest rates and the cost of credit (rising interest rates becomes more attractive to save)
- Long-term savings (these savings might be less likely to vary with income than demographic)
What is the business cycle/trade cycle?
The continual sequence of rapid growth in GDP, followed by a slowdown in growth and then a fall.
Growth then comes again, and when this has reached a peak, the cycle turns once more
What are the four main phases of the business cycle?
A. recession
B. depression
C. recovery
D. boom!
What happens in a recession?
- consumer demand falls
- investment projects undertaken but look unprofitable
- orders cut
- inventory levels reduced
- business failures occur
- business unable to sell their goods
- general price levels begin to fall
- economic outlook appears poor
What happens in a depression?
Absence of any stimulus for demand
What happens in a recovery?
- output, employment, income all begin to rise
- business expectations more optimistic
- investment more readily undertaken
- rising level of demand through increased production and hiring unemployed labour
- average price slowly rising
What happens in a boom!?
- capacity and labour will become fully used
- further rise in demand
- production increase
- business will be profitable
- expectations for the future appear optimistic
What is inflation?
An increase in price levels generally, and a decline in the purchasing power of money
What is deflation?
Falling prices generally, which is normally associated with low rates of growth and recession
Why is inflation an issue? (5)
Redistribution of wealth
- outstanding amounts ‘lose’ real value with inflation
Balance of payment effects
- exports become relatively expensive and imports cheap
Price signalling and ‘noise’
- influences allocation of resourcing in an economy
Wage bargaining
- wage demand increase with inflation
Consumer behaviour
- people may stockpile goods fearing price increase later
- causes shortages for other people
What are the two types of inflation and explain them
Demand pull inflation:
- price rises resulting from a persistent excess of DEMAND over supply
Cost push inflation:
- price rises resulting from an increase in COSTS of production
Name the two types of causes for demand-pull inflation:
Fiscal:
- increase in government spending or reduction in tax will raise demand in an economy
Credit:
- if levels of credit extended to customers increase, expenditure likely to rise
To achieve economic growth and control inflation, what two macroeconomic policies do the government use?
Influencing overall demand in the economy (aggregate demand) via
- monetary policy
- fiscal policy: policy on spending and taxation
What are the effects of a rise in interest rates?
- Companies will reduce inventory levels as the cost of having money tied up rises
- Households will reduce or postpone consumption in order to reduce borrowings
What is quantitative easing?
A form of expanisonary monetary policy which involves the central bank buying existing government bonds and corporate bonds as a way of adding liquidity to the financial system
A tool that has been used by many advanced economies, including the UK, to alleviate the treat of recessions
Quantitative easing works as follows: (3)
(a) Bank of England creates electronic cash and uses this to buy government and corporate bonds from banks
(b) The price of bonds rises leading to a fall in the yield of the bonds
(c) The low yields on bonds also reduces interest rates, which reduces the cost of borrowing by businesses
What is meant by fiscal policy?
The government’s policies on government spending, taxation and borrowing
What are some examples of supply-side, macroeconomic policies?
- more involvement in private sector
- reduction in taxes increases incentive to supply
- increasing flexibility in the labour market by curbing power of trade unions
- increasing competition through deregulation and privitisation of utilities
- abolition of exchange controls and allowing the free movement of capital (across borders without restriction)
