7.5 Economic change

Question 1

What factors in the economic environment can affect a business’ strategic and functional decision making

Answer 1

• Gross Domestic Product
• Taxation
• Exchange rates
• Inflation
• Government policies
• Trade

Question 2

What is GDP

Answer 2

The value of goods and services produced by a country during a certain period

Question 3

Why does GDP affect a business’ strategic and functional decision making?

Answer 3

Growth in GDP is likely to coincide with an increase in demand which businesses must respond to
e.g in a GDP boom, a business may make a strategic decision to diversify and enter a new market

Question 4

What is taxation

Answer 4

The tax paid by businesses on any profits made

Question 5

Why does taxation affect a business’ strategic and functional decision making?

Answer 5

Increased taxation will reduce profit after tax which can affect strategic investment decisions
If there is less money left over to invest, then the business is likely to have to prioritise better

Question 6

What are exchange rates

Answer 6

The value of one currency expressed in terms of another currency

Question 7

Why does exchange rates affect a business’ strategic and functional decision making?

Answer 7

Affects the decision making process of a business which imports from or exports to a country with a different currency
e.g if Lidl imports goods from Spain, and the £ weakens against the euro, the price of imports will increase in £. This will affect the decisions made about order quantities and selling prices

Question 8

What is inflation

Answer 8

The general increase in price levels and the reduction in the real value of money

Question 9

Why does inflation affect a business’ strategic and functional decision making?

Answer 9

Rising costs may mean that a business has to increase its prices to maintain its profits at the same level

Question 10

What are the 2 types of government policies

Answer 10

• Fiscal policy
• Monetary policy

Question 11

What is fiscal policy

Answer 11

The use of government expenditure and taxation to influence demand

Question 12

Why does the fiscal policy affect a business’ strategic and functional decision making?

Answer 12

Changes in government expenditure and taxation can increase or decrease demand which businesses may need to respond to

Question 13

What is monetary policy

Answer 13

The controlling of money supply and interest rates to control economic activity

Question 14

Why does monetary policy affect a business’ strategic and functional decision making?

Answer 14

Increasing interest rates may affect business decision making as consumers may increase their savings and therefore decrease spending which can affect demand for a business’ products

Question 15

What is open trade and protectionism

Answer 15

The ability of countries to trade either with or without barriers to trade

Question 16

What do protectionist measure reduce

Answer 16

International trade which can affect a business importing and exporting goods and services

Question 17

What is globalisation

Answer 17

The increasing trend for individual markets to become unified and worldwide

Question 18

Advantage of globalisation

Answer 18

Offers businesses opportunities to expand and target international markets

Question 19

Disadvantage of globalisation

Answer 19

Increases competition for local businesses and this can reduce market share and sales revenue

Question 20

Advantages of targeting emerging economies

Answer 20

• Helps to extend the product life cycle
• Offer businesses new markets which can increase sales volume
• Offer businesses increased access to labour resources often at a reduced cost compared to the labour market in the business’ home country

Question 21

What do Transnational Corporations help with

Answer 21

Helps globalisation to spread and also take advantage of the economic liberalisation that has come with globalisation

Question 22

Why do TNC’S use glocalisation (globalisation & localization)

Answer 22

To help spread globalisation.
- They adapt their products to the needs of local consumers
e.g Mcdonalds serving McVeggie and McSpicy Paneer in India

Question 23

An example of a TNC reflecting laws

Answer 23

BMW makes right-hand drive cars for the UK because we drive on the left whereas in Germany, cars are left hand drive

Question 24

What do TNC’s often benefit from with glocalisation

Answer 24

The development of new markets:
as countries develop and their populations have higher disposable incomes to spend on ‘luxury’ items. TNC’s are able to access new markets and sell their products in these countries

Question 25

The benefit of economic liberalisation for TNC’s

Answer 25

They take advantage of the removal of barriers to trade to earn more profit to increase their market share

Question 26

The benefit of Outsourcing and Offshoring for TNC’s

Answer 26

Able to maximise their profits by minimising the costs of producing their goods

Question 27

Examples of TNC’S that use offshoring

Answer 27

• BT: outsource some of its call centre work to India to benefit from lower labour costs. The large English-speaking population of India means that it is possible to have the call-centres of a British TNC in another country
• NIike: produces all of its trainers in various locations abroad. China has the most factories but there are also production plants in Thailand, South Koreas, Vietnam and India

Question 28

If the pound depreciates against the Euro, what will happen to goods imported from Germany in the UK

Answer 28

They will get more expensive

Question 29

What are examples of protectionist policies

Answer 29

• Tariffs
• Quotas

Question 30

Explanation of interest rates

Answer 30

• Either charged on consumers’ borrowing on mortgages or earned on savings held with banks
• People with more savings want high interest rates = earn more on their savings
• Whereas borrowers want lower rates + reduces interest have to pay to the financial institutions that lent them money

Question 31

Explanation of interest rates in the UK

Answer 31

• The bank of England uses monetary policy to control inflations and stabilise the economy
• Main tool is Bank Rate = the interest rate that the BoE offers to financial institutions
• This rate affects the rate that banks offer the public
• Interest rates low = people spend more vice versa

Question 32

Analysis for individuals who are saving

Answer 32

• Interest rates decrease = receive smaller reward = incentive to save is lower (particularly true if interest rate is lower than inflation)
• Inflation higher than interest rates = amount of real goods with savings fall over time = lower interest rates encourage to spend disposable income
• Increased demand for luxury goods

Question 33

Analysis for individuals who are borrowing

Answer 33

• Low interest rates = borrow money and pay back a relatively small charge = credit more affordable = feel wealthier
• Luxury businesses = positive = more likely to spend money.
• The car industry promotes using credit when buying a car = lower interest rates makes more affordable = interest payments lower
  = Consumer inclines to purchase, like to purchase a more extravagant brand