7.5 Economic change Flashcards
What factors in the economic environment can affect a business’ strategic and functional decision making
- Gross Domestic Product
- Taxation
- Exchange rates
- Inflation
- Government policies
- Trade
What is GDP
The value of goods and services produced by a country during a certain period
Why does GDP affect a business’ strategic and functional decision making?
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
What is taxation
The tax paid by businesses on any profits made
Why does taxation affect a business’ strategic and functional decision making?
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
What are exchange rates
The value of one currency expressed in terms of another currency
Why does exchange rates affect a business’ strategic and functional decision making?
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
What is inflation
The general increase in price levels and the reduction in the real value of money
Why does inflation affect a business’ strategic and functional decision making?
Rising costs may mean that a business has to increase its prices to maintain its profits at the same level
What are the 2 types of government policies
- Fiscal policy
- Monetary policy
What is fiscal policy
The use of government expenditure and taxation to influence demand
Why does the fiscal policy affect a business’ strategic and functional decision making?
Changes in government expenditure and taxation can increase or decrease demand which businesses may need to respond to
What is monetary policy
The controlling of money supply and interest rates to control economic activity
Why does monetary policy affect a business’ strategic and functional decision making?
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
What is open trade and protectionism
The ability of countries to trade either with or without barriers to trade
What do protectionist measure reduce
International trade which can affect a business importing and exporting goods and services
What is globalisation
The increasing trend for individual markets to become unified and worldwide
Advantage of globalisation
Offers businesses opportunities to expand and target international markets
Disadvantage of globalisation
Increases competition for local businesses and this can reduce market share and sales revenue
Advantages of targeting emerging economies
- 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
What do Transnational Corporations help with
Helps globalisation to spread and also take advantage of the economic liberalisation that has come with globalisation
Why do TNC’S use glocalisation (globalisation & localization)
To help spread globalisation.
- They adapt their products to the needs of local consumers
e.g Mcdonalds serving McVeggie and McSpicy Paneer in India
An example of a TNC reflecting laws
BMW makes right-hand drive cars for the UK because we drive on the left whereas in Germany, cars are left hand drive
What do TNC’s often benefit from with glocalisation
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
The benefit of economic liberalisation for TNC’s
They take advantage of the removal of barriers to trade to earn more profit to increase their market share
The benefit of Outsourcing and Offshoring for TNC’s
Able to maximise their profits by minimising the costs of producing their goods
Examples of TNC’S that use offshoring
- 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
If the pound depreciates against the Euro, what will happen to goods imported from Germany in the UK
They will get more expensive
What are examples of protectionist policies
- Tariffs
- Quotas
Explanation of interest rates
- 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
Explanation of interest rates in the UK
- 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
Analysis for individuals who are saving
- 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
Analysis for individuals who are borrowing
- 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
