3.7.5 Analysing the external environment to assess opportunities and threats: economic change Flashcards
What are the economic factors?
- GDP
- Taxation
- Exchange rates
- Inflation
- Discal and monetary policy
- More open trave v protectionism
What is GDP (Gross domestic products)?
A measure of economic activity (Total value of a countries output) over a given period of time.
What is the difference between GDP and real GDP?
- GDP is nominal (existing in name only)
- Real GDP means theat the effects of inflation has been removed
What is direct and indirect tax?
Taxes that firms pay in the UK
What is corporation tax?
A form of direct taxation, which is a tax on trading profits made by a business over the course of their financial year as well as any profit from investment and disposal of assets
What is value added tax?
This is a form of indirect taxation, collected by businesses for the government. It is a tax placed on the sale of goods abd services- a typer of ‘consumption tax’
What factors are included in the business cycle?
- Boom
- Recession
- Slump
- Recovery
What are some causes of the business cycle?
- Changes in business confidence
- Periods of inventory building and debuilding (christmas/halloween)
- Irregular patterns of expenditure on consumer durables
- Confidence in banking sector
What is exchange rates?
The rate between two distinct countries
What is currency demand?
Demand from currancy comes from a need to purchase the currency of a particular economy
What are the sources of demand for currency demand?
- Exports of goods
- Exports of services
- Inflows of foreign investments
- Speculative demand
- Official buying of sterling by the bank of england
What is currency supply?
Supply of curency comes from economic agents needing to demand oversea currency in exchange for their demand
What are the sources of demand for currency supply?
- Imports of goods
- Imports of services
- Outflows of foreign investments
- Speculative selling
- Official seeling of sterling by the bank of england
What is free floating exchange rates?
- Rates determined by market demand and supply
- No government intervention
- Businesses must be concerned how the ER may change when international sales and material imports occur
- If pound is weak, its good for exporters but bad for importers
What is managed exchanged rates?
- Government may seek to influence market value of currency
- Intervention is done by the bank of england
- Provides stability for business but means they neither benefit or lose out
What is fully fixed exchange rates?
- Central target for the exchange rate
- No fluctuations permitted
What is inflation?
A measure of how much the price of goods and services have gone up over time
What is consumer price index (CPI)?
- The main measure of inflation
- The government has set the bank of england a target for inflation of 2%
- The target is to achieve a sustained period of low & stable inflation
- Low inflation is also known as a price stability
What is the effect of inflation on consumers?
- As price rises (inflation) money loses its value and people lose confidence in money as the value has reduced
- When inflation is out of control- prices increases lead to higher wage demand as people try to maintain living standards
- Consumers on fixed income lose out
What are the positive effects of inflation on business?
- Industry-wide price rises enable revenue to grow
- Growing revenue + constant gross margin = higher gross profit
- Makes using debt as a source of finace cheaper in real terms
What is government policies? Give examples.
Economic policies that are te actions taken by the government in order to meet their economic objectives
* Fiscal policies
* Monetary policies
What are the negative effects of inflation on businesses?
- If costs are rising due to inflation, a business may not be able to pass them onto consumers (PED)
- Inflation can disrubt business planning and lead to lower investment
- Rising inflation means higher interest rates- reducing economic growth and lead to a recession
What are the fiscal policies?
- Expansionary- Aiming to increase economic activity by borrowing more than the government gets in tax and using it to inspire growth
- Contractionary- Aiming to decrease economic activity by spending less than the government gets in tax and use it to slow economic growth
- Neutral- They’re trying to balance the books and spend what it taxes
What is monetary policies?
- Refers to availabbility of money, credit and prices of credit
- Every month, the MCP meets to look at economy and the governments policy to set the interest rate
What policies did the government introdue to improve the supply of goods and services?
- Privatisation
- Nationalisation
- Freeing up labour laws
- Immigration
- Educationa and training
- Transport infrastructure
What is protectionism?
Involves any attempt by a country to impose restrictions on the open trade in goods and services
What is the main point of protectionism?
To cushion domestic businesses and industries from oversea competition and prevent the outcome resulting solely from the interplay of free market forces of supply and demand
What is open trade?
This involves the removal or reduction of barriers to international trade
What are the main forms of protectionism?
- Tarrifs: Tax that raises price of imported products
- Quotas: Volume limits on the level of imports allowed or limit to the value of imports permitted into a country in a given time period
- Export subsides: A payment to encourage domestic production by lowering costs
- Domestic subsides: Government help dor domestic businesses facing ginancial problems
Why do governments protect (protectionism)?
- Develops new trade advantages
- Improves the balance of trade
- Response to dumping
- Employment protection
- Desire to increase government revenue
What is globalisation?
The process through which an increasingly free flow of ideas, people, goods, service, and capital leads to integration of economies and societies
What is the main driver of globalisation?
Businesses as multinationals was to increase sales, pilot, and shareholder value; and the government wants to encourage domestic firms to expand further
What does globalisation involve?
- An expansion of trade in goods and services between countries
- The development of global brands
- Shifts in production
- Increased labour migration
What are some drivers of globalisation?
- Rising living standards
- Less protectionism
- Lower transport costs
- Digital communication
- Diverging consumer cultures
- Market liberalisation
What are the advantages of globalisation?
- Opportunities for trade and investment overseas
- Access to cheaper goods and services
- Lifted milions out of poverty
- More competition
- Bigger exports markets
- Opportunity to live, study, and travel oversea
What are the disadvantages of globalisaion?
- Increased unemployment for firms that lose demand to lower cost competition
- Rising income and wealth inequality
- Surge of inward migration has brought economic and social tension
- Environmental damage
- Globalisation of brands can lose cultural diversity
What are some features of less developed economies?
- Low incomes and levels of productivity
- Higher dependency of export incomes
- Distant from technological frontiers
- Lower access to advances country markets
- Higher tariffs and other import controls
- Weakness in infrastruction. E.g. telecommunications, transport
What are potential opportunities for businesses from emerging economies?
- Have relatively high rates of econmic growth
- Have seen rapid growth of a ‘middle class’ with rising disposable income, that simulates demand
- Suitable location for international operations. E.g. location for production, sell into domestic markets
What are potential challenges for businesses from emerging economies?
- Many domestic businesses are pursuing expansion into developed countries
- Business in emerging economies is not straightforward- increased risk of theft, etc
