3.7.5 Flashcards
what is the exchange rate
the price of one currency expressed in terms of another. The exchange rates change due to fluctuations in demand for a currency, economic growth and interest rates.
£1.00 = $1.20 -> £1.00 = $1.10
If the pound increases in value against other currencies it is said to STRENGTHEN.
The pound can buy more euros, or fewer pounds are needed to buy one euro.
£1.00 = A$2.05 -> £1.00 = A$1.46
If the pound decreases in value against other currencies it is said to
WEAKEN.
The pound buys fewer Australian dollars, or more pounds are needed to buy one Australian dollar.
Businesses will try to avoid uncertainty when exchange rates are
volatile - may set an agreed rate for future transactions
A business may choose to target a specific
international market (or economy) when the exchange rate is favourable.
importers
may switch international suppliers when the
exchange rate is less favourable
stockpile raw material and products when
currency is strong.
exporters
lower prices to limit the impact of a strong currency
increase promotion in foreign markets when currency is weak.
what is inflation
Inflation is the general rise in prices over time. A low rate of inflation can be managed by businesses but a high rate of inflation will increase costs and reduce demand.
what is deflation
Deflation is a fall in prices as measured by CPI. Deflation is relatively rare in the UK. Short-term falls can boost sales for businesses. Prolonged deflation can have severe consequences for businesses as consumers postpone purchases whilst waiting for prices to fall further.
what happens when there is high inflation
- Businesses may increase prices to pass costs on to consumers or may decide to absorb the cost rises.
- Businesses will look to reduce internal costs to protect profits.
- Price rises may fuel further inflation.
what happens where there is low inflation
- Businesses feel confident in a stable economic environment.
- Businesses may look to invest and grow.
what happens when there is deflation
- Businesses may struggle to pay debts - assets may have to be sold to pay off debts if deflation persists.
- Low demand may lead to redundancies and rationalisation.
A government will use fiscal and monetary policy to influence
economic activity in order to maintain growth and limit negative factors such as high levels of inflation, unemployment and the negative externalities of growth.
what is the monetary policy
This is the policy to adjust the amount of money
in circulation and therefore influence spending and economic activity. The main form of monetary
policy is interest rates - the cost of borrowing money and the reward for saving.
monetary policy generally includes
- manipulating interest rates
- influencing the exchange rate
- quantitative easing
- forward guidance.
impact of interest rate (high %)
- consumer and business spending falls
- inflation falls
- stronger £
impact of interest rate (low%)
- consumer and business spending rises
- inflation may rise
- weaker £
what is fiscal policy
involves government spending and taxation as a means of controlling economic activity.
The difference between government income (mainly taxes) and expenditure in a fiscal year is known as
the budget balance.
expansionary fiscal
Reduces direct and indirect tax to increase disposable income. Increases borrowing (PSNCR).
Increases spending in areas such as health and education. Spending stimulates demand for businesses and creates jobs. Budget deficit may rise.
contractionary fiscal
Reduces spending in areas such as health and education. Pressure on inflation slows. Budget deficit may fall or reach a surplus.
Increases direct and indirect taxes to slow down growth and reduce the budget deficit.
taxation
income tax, national insurance payments, VAT, corporation tax, customs and excise duties
government expenditure
- infrastructure, human capital, goods, services
A range of measures intended to improve the
Protectionism
efficiency and effectiveness of free markets.
Policies include:
- manipulating the labour market - training, free
movement of labour, tax cuts for low incomes - privatisation - transferring organisations (or part) to state ownership to encourage competition
- reducing ‘red tape’ and regulations - making it easier for businesses to operate.
what is protectionism
involves protecting domestic business and home industries against foreign
competition and limiting the number of imports
into a country.
open trade can benefit what
all countries by
creating opportunities for growth and economic
prosperity.
free trade encourages
specialism, leading to greater efficiencies and lower prices.
It is also a key factor in reducing poverty in many countries.
why is protectionism criticised
may provoke a retaliation from trading partners.
factors affecting exports - protectionism
Soft loans - generous loan agreements offered to exporting businesses to help them compete in foreign markets.
Subsidies - grants given to support exporting businesses so that they can lower their prices in order to compete internationally.
State procurement
- favouring domestic businesses as suppliers over foreign competition.
factors affecting imports - protectionism
Technical barriers - such as rules and regulations governing the standard of products entering the country.
Quotas - physical limit set on the number of units that can be imported into a country.
Tariffs - tax on imports increases price of imported goods. Raises government income and makes domestic businesses more competitive.
risk with protectionism
protectionism may force businesses to use more expensive domestic suppliers, therefore making them less competitive. It may also encourage businesses to move abroad to avoid trading barriers.
what is globalisation
process by which the world is becoming increasingly interconnected as a result of massively increased trade and cultural exchange. Globalisation involves the movement towards
worldwide markets.
The process of globalisation allows businesses to
enter new markets, access new skills, resources and the expertise, technology and experience of international businesses and industries.
benefits of greater globalisation
lower costs of transportation and better infrastructure
* improved communications technology
* society becoming more culturally aware
* reduction in trading barriers
growth in international trading blocs.
multinational companies
Globalisation has also been driven by large multinationals such as Toyota, McDonalds and HSBC. Not only do they standardise their products and make them available all over the world, they also influence governments and make the process of globalisation more possible. Globalised corporations also encourage the movement of labour between countries.
what are emerging markets
Emerging markets are low income countries that are experiencing high rates of growth, e.g. the BRIC countries. Emerging markets hold significant potential for UK and European businesses in terms of resources, labour and market growth.
opportunities of globalisation
new markets - opportunity for businesses to move into new markets or operate on a global scale
cheaper resources - access to raw materials
labour - cheaper labour and access to skills
economies of scale - growth of business leads to an advantage of size.
threats of globalisation
competition - home markets can be targeted by foreign competitors
downward pressure on prices - cheaper materials and labour may force prices down and therefore potential profits
threat of takeovers - some businesses will face takeover pressure from foreign competitors looking to enter the market
economic risks - inflation and recession in other countries
political risks - developing countries have less stable political systems and government.
strategies for global markets
Effective use of CSR - avoid damaging local cultures and traditions.
Global vs. local - standardise the product to gain economies of scale or make slight tweaks to meet the specific needs of a local market
Strategic alliances - look for partnerships with international businesses that have experience operating in foreign markets.
Strategic takeovers - acquire brands and businesses that international customers trust.
