6. External Influences on Business issues

Question 1

stages of the business cycle

Answer 1

Growth– when GDP is rising, unemployment is falling and there are higher living standards in the country. Businesses will look to expand and produce more and will earn high profits.

Boom– when GDP is at its highest and there is too much spending, causing inflation to rapidly rise. Business costs will rise and firms will become worried about how they are going to stay profitable in the near future.

Recession– when GDP starts to fall due of high prices, as demand and spending falls. Firms will cut back production to stay profitable and unemployment may rise as a result.

Slump– when GDP is so low that prices start to fall (deflation) and unemployment will reach very high levels. Many businesses will close down as they cannot survive the very low demand level. The economy will suffer.

Question 2

Gross Domestic Product (GDP)

Answer 2

the total value of output of goods

and services in a country in one year.

Question 3

recession

Answer 3

when there is a period of falling GDP.

Question 4

Impact on businesses of changes in employment levels, inflation and Gross Domestic Product (GDP)

Answer 4

• Changes in employment: Affect the ability of a business to recruit new employees and incomes of customers. If unemployment increases, it is easier to recruit employees as more people to choose from. Income levels have fallen thus sales of business decrease. Business that sell cheaper products can increase sales
• Rising inflation results in business costs increasing. Prices of products increase, fall of sales of the business. rising prices of essential products mean customers have less income available to purchase non-essential products
• Increasing GDP means the economy is growing, business benefit from increase sales as less unemployment and people have more income to buy products, However difficult to recruit new employees if unemployment starts to fall.

Question 5

Government economic objectives

Answer 5

• Low inflation
• Low unemployment
• Economic growth
• Balance of payments between imports and exports

Question 6

Low Inflation

Answer 6

Inflation: the increase in the average price level of goods and services over time.
The problems faced with high inflation:
-Workers wages will not buy as many goods as before, Peoples Real incomes will fall. Real income:the value of income, and it falls when prices rise faster than money income.
-Prices of goods produced in the country will be higher that other countries, Thus people will buy foreign food instead, Jobs in the country will be lost
-Businesses unlikely to expand and create more jobs in near future, living standards likely to fall.
Therefore, by having low inflation it encourages businesses to expand and make it easier for country to sell its goods and services abroad

Question 7

Low unemployment

Answer 7

-Unemployed people dont produce any goods or services. Total level of output will be lower than it could be
-Government pays unemployment benefit to those without jobs, high unemployment will cost the government a lot of money, which cannot be spent on other things such as schools or hospitals.
Therefore, low unemployment helps increase output of country and improve workers living standards.

Question 8

Economic growth

Answer 8

Economic growth means living standards of the population is likely to increase. When GDP falls it causes:

• As output falls, fewer workers needed thus unemployment occurs
• Average living standards of people fall, as number of goods and services they can afford to buy in one year will decline.
• Business owners will not expand their business as people will have less money to spend on products they make.

Question 9

Balance of payments

Answer 9

Records the difference between a country’s exports and imports

Question 10

Exports

Answer 10

Are goods and services sold from one country to another

Question 11

Imports

Answer 11

Goods and services bought in by one country from other countries

Question 12

Exchange rate

Answer 12

The price of one currency in terms of another, ex: 1 Pound : $1.5

Question 13

Exchange rate Depreciation

Answer 13

The fall in the value of a currency compared with other countries.

Question 14

Fiscal policy

Answer 14

Any change by the government in tax rates or public sector spending.

Increasing government spending and reducing taxes will encourage more production and increase employment, driving up GDP growth.

Question 15

Monetary policy

Answer 15

Change in interest rates by the government of central bank.

Increasing interest rates will discourage investments and consumption, causing employment and GDP to fall

Question 16

Supply-side policies

Answer 16

Both the fiscal and monetary policies directly affect demand, but the policies that influence supply are very different. It can include:

• Privatisation: selling government organizations to private individuals- will increase efficiency and productivity that increase supply as well encourage competitors to enter and further increase supply.
• Improve training and education: governments can spend more on schools, colleges and training centres so that people in the economy can become better skilled and knowledgeable, helping increasing productivity.
• Increased competition: by acting against monopolies (firms that restrict competitors to enter that industry/having full dominance in the market- and reducing government rules and regulations (often termed ‘deregulation’), the competitive environment can be improved and thus become more productive.

Question 17

Social responsibility is when a business decision benefits stakeholders other than shareholders i.e. workers, community, suppliers, banks etc.

Answer 17

When a business decision benefits stakeholders other than shareholders i.e. workers, community, suppliers, banks etc.

Very important when coming to environmental issues. Businesses can pollute the air by releasing smoke and poisonous gases, pollute water bodies around it by releasing waste and chemicals into them, and damage the natural beauty of a place and so on.

Question 18

WHY BUSINESSES WANT TO BE ENVIRONMENT- FRIENDLY

Answer 18

• Sense of social responsibility, as their activities are contributing to global warming and pollution
• Using up scarce non-renewable resources (rainforest wood and coal) will raise their prices in the future, so businesses won’t use them now
• Consumers are becoming socially-aware and are willing to buy only environment friendly products.
• Governments, environmental organisations, even the community could take action against the business if they do serious damage to the environment

Question 19

WHY BUSINESSES DO NOT WANT TO BE ENVIRONMENT-FRIENDLY

Answer 19

• It is expensive to reduce and recycle waste for the business. Expensive machinery and skilled labour will be required by the business – reducing profits.
• Firms will have to increase prices to compensate for the expensive environment-friendly methods used in production- higher prices mean lower demand.
• High prices can make firms less competitive in the market and they could lose sales
• Businesses claim that it is the government’s duty to clean up pollution

Question 20

Private Costs

Answer 20

• Costs paid for by the business for an activity.
• Examples: costs of building the factory, hiring extra employees, purchasing new machinery, running a production unit etc.

Question 21

Private Benefits

Answer 21

• Gains for the business resulting from an activity.

- Example: the extra money made from the sale of the produced goods etc.

Question 22

External Costs

Answer 22

• Costs paid for by the rest of the society (other than the business) as a result of the business’ activity.
• Examples: machinery noise, air pollution that leads to health problems among near residents, loss of land (it could have been a farm land before) etc.

Question 23

External Benefits

Answer 23

• Gains enjoyed by the rest of the society as a result of a business activity.
• Example: new jobs created for residents, government will get more tax from the business, other firms may move into the area to support the firm-helping develop the region, new roads might be built that can be enjoyed by residents etc.

Question 24

Social Costs

Answer 24

Social costs = Private Costs + External Costs

Question 25

Social Benefits

Answer 25

Social Benefits = Private Benefits + External Benefits

Question 26

Sustainable Development

Answer 26

Development which does not put at risk the living standards of future generations. Examples:

• Using renewable energy- so that resources are conserved for the future
• Recycle waste
• Use fewer resources
• Develop new environment-friendly products and processes- reduce health and climatic problems for future generations

Question 27

Pressure groups

Answer 27

Groups of people who act together to try and force businesses or governments to adopt certain policies.

Question 28

Consumer boycotts

Answer 28

When a consumer decides not to buy products from businesses that do not act in a socially responsible way.

Question 29

If a business is seen to behave in a socially irresponsible way

Answer 29

• Can conduct consumer boycotts (encourage consumers to stop buying their products) and take other actions. Can result in a bad reputation for the business that can affect it in future endeavours, so the business will give in to the pressure groups’ demands.
• Government can also pass laws that can restrict business decisions such as not permitting factories to locate in places of natural beauty.
• There can also be penalties set in place that will penalize firms that excessively pollute. Pollution permits are licenses to pollute up to a certain limit. These are very expensive to acquire, so firms will try to avoid buying the pollution permit and will have to reduce pollution levels to do so. Firms that pollute less can sell their pollution permits to more polluting firms to earn money. Taxes can also be levied on polluting goods and services.

Question 30

Ethical Decisions

Answer 30

Based on a moral code. Sometimes referred to as doing the right thing.

Taking ethical/’right’ decisions can make the business’ products popular among customers, encourage the government to favour them in any future disputes/demands and avoid pressure group threats. However, these can end up being expensive as the business will lose out on using cheaper unethical opportunities.

Question 31

Globalisation

Answer 31

Term used to describe increases in worldwide trade and movement of people and capital between countries.
How globalization has occurred are:

• Increasing number of free trade agreements– these are agreements between countries that allows them to import and export goods and services with no tariffs or quotas.
• Improved and cheaper transport (water, land, air) and communications (internet) infrastructure
• Developing and emerging countries such as China and India are becoming rapidly industrialized and so can export large volumes of goods and services. This has caused an increase in the output and opportunities in international trade, allowing for globalisation

Question 32

Free trade agreements

Answer 32

Exist when countries agree to trade imports/exports with no barriers such as tariffs and quotas

Question 33

Advantages of globalisation

Answer 33

• Allows businesses to start selling in new foreign markets, increasing sales and profits
• Can open factories and production units in other countries, possibly at a cheaper rate (cheaper materials and labour can be available in other countries)
• Import products from other countries and sell it to customers in the domestic market- this could be more profitable and producing and selling the good themselves
• Import materials and components for production from foreign countries at a cheaper rate.

Question 34

Disadvantages of globalisation

Answer 34

• Increasing imports into country from foreign competitors- now that foreign firms can compete in other countries, it puts up much competition for domestic firms. If these domestic firms cannot compete with the foreign goods’ cheap prices and high quality, they may be forced to close down operations.
• Increasing investment by multinationals in home country- this could further add to competition in the domestic market (although small local firms can become suppliers to the large multinational firms)
• Employees may leave domestic firms if they don’t pay as well as the foreign multinationals in the country- businesses will have to increase pay and conditions to recruit and retain employees.

Question 35

Protectionism

Answer 35

When a government protects domestic businesses from foreign competition using tariffs and quotas.