3.7.5 economic factors / Fiscal and monetary policies / trade and protectionism / globalisation Flashcards
What is an exchange rate
The price of one currency expressed in terms of another
When do exchange rates change
Fluctuations in demand for a currency, economic growth and interest rates
What happens if pound increases in value
Pound strengthens - the pound can buy more euros, fewer pounds are needed to buy one euro
What happens if pound weakens in value comparrison to the dollar
You can get fewer dollars for your dollar / more pounds are needed to buy one dollar
Link with business decision making on international markets and exchange rates
Business may choose to target a specific international market when the exchange rate is favourable
What may importers do when exchange rates are fluctuating
May switch international suppliers when Exchange rates are less favourable
Stockpile raw material and products when exchange rates are strong
What may exporters do when exchange rates are fluctuating
Lower prices to limit the impact of strong currency
Increase promotion in foreign markets when currency is weak
When will government use monetary and fiscal policies
When they want to influence economic activity in order to maintain growth and limit negative factors such as high levels of inflation, unemployment and negative externalities of growth.
What is a monetary policy
Policy to adjust the amount of money in circulation and therefore influence spending and economic activity. Main form of monetary policy are interest rates - cost of borrowing and reward of saving
What do monetary policies generally include
Manipulating interest rates
Influencing the exchange rate
Quantitative easing
Forward guidance
Impact of high interest rates on business activity
Consumer and business spending falls
Inflation falls
Stronger £
Impact of low interest rates on business activity
Consumer and business spending rise
Inflation may rise
Weaker £
What does fiscal policy involve
Involves government spending and taxation as a means of controlling economic activity
What is the budget balance
The difference between government income (mainly taxes) and expenditure in a fiscal year
Expansionary fiscal policy?
Reduces direct and indirect tax to increase disposable income (increases borrowing)
INcrease spending in areas such as health and education. Spending stimulates demand for businessses and creates jobs. Budget deficit may rise
Contractionary fiscal policy
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
What are supply side policies and and what do the policies include
A range of measures intended to improve the efficiency and effectiveness of free markets
Policies include:
Manipulating the labour market - training, free movement of labour, tax cuts for low income households
Privatisation - transferring organisations to state ownerships to encourage competition
Reducing ‘red tape’ and regulations - making it easier for businesses to operate
What does protectionism involve
Protecting domestic businesses and home industries against foreign competition and limiting the number of imports in a country
What does free trade encourage and how may consumers benefit
Encourages specialisation which leads to greater efficiency and lower prices - also a key factor in reducing poverty
Why may protectionism be looked badly upon and what may it cause
Protectionism can have an impact on poverty levels, prices may be high as there is less competition within a market. May provoke retaliation from other trading partners (countries).
Factors affecting exports?
Soft loans
Subsidies
State procurement
What are soft loans
generous loan agreements offered to exporting businesses to help them compete in foreign markets
What are subsidies
Grants given to support exporting businesses so they can lower their prices in order to compete internationally
What is state procurement
Favouring domestic businesses as suppliers over foreign competition
Factors affecting imports
Technical barriers
Quotas
Tariffs
What are technical barriers
Such as rules and regulations governing the standard of products entering the country
What are quotas
Physical limits set on the number of units that are able to enter a country
Tariffs
Tax on imports increases price of imported goods - raises government income and makes domestic businesses more competitive
Risks of protectionism
May force businesses to use more expensive suppliers and therefore making them less competitive
May also encourage businesses to move abroad to avoid trading barriers
Why might a government choose to impose protectionism strategies
In order to protect domestic industries and businesses from negative impact of competition from foreign firms
What is globalisation and what does it involve
The process by which the world us becoming increasingly interconnected as a result of massively increased trade and cultural change.
Involves the movement of worldwide markets
What does the process of globalisation allow for a business to do
Enter new markets Access new skills Resources and expertise New technology Experience of international businesses and industries
Benefits of greater globalisation
Support/encouragement by government and businesses
Lower costs of transportation and better infrastructure
Improved communications technology
Society becoming more culturally aware
Reduction in trade barriers
Forth in international trading blocks
What multinational companies have encouraged globalisation (what does it encourage)
Toyota, McDonalds and HSBC - encourages the movement of labour between countries
What are emerging markets
Low income countries that are experiencing rapid rates of growth
Opportunities from globalisation
New markets - opportunities 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 and advantage of size
Threats of globalisation
Competition - home markets can be targeted by foreign competitors
Downward pressure on prices - cheaper materials and labour may forces prices down and therefore loss of potential profits
Threats of takeover - some businesses will face takeover pressure from foreign competition looking to enter the market
Economic risk - inflation and recession in other countries
Political risks - developing countries have less stable political systems and government
Name two strategies that might be used when entering global markets
Strategic alliances - look for partnerships with international businesses that have experience operating in foreign markets
Strategic takeover - acquire brands and businesses that international customers trust
