Chapter 7 (part 2)

Question 1

What is the PESTEL framework?

Answer 1

Pestel analysis is a framework of macro-environmental factors which can be used in strategic management.

Question 2

What does the PESTEL acronym stand for?

Answer 2

Political
Economic
Social
Technological
Environmental
Legal

Question 3

PESTEL: What does Political mean?

Answer 3

For example, the steps the Government take to intervene in an economy, such as taxation or provision of merit goods

Question 4

PESTEL: What does Economic mean?

Answer 4

Factors such as interest rates, exchange rates, inflation

Question 5

PESTEL: What does Social mean?

Answer 5

This is more cultural issues, such as the age of the population or the health-consciousness of the population.

Question 6

PESTEL: What does Technological?

Answer 6

This obviously encompasses technical factors, such as the degree of mechanisation, the speed of technological change.

Question 7

PESTEL: What does Environmental?

Answer 7

For example, climate change or weather

Question 8

PESTEL: What does Legal?

Answer 8

This is law and regulation, such as employment or health and safety law.

Question 9

What do index number series show?

Answer 9

They show the relative or percentage changes over time.
They compare the price in one period to the price in another period called the base year.

Question 10

Index numbers: What is a base year

Answer 10

The base year is always 100, the base year should be a typical time period with no unusual or extreme circumstances. The base year is often the earliest period when the index series is calculated.

Question 11

What is the formula for a simple price index?

Answer 11

=100 * P1/P0

P1 = Price in current year
P0 = Price in base year

In 20NN, prices were N% higher than in 20NN

Question 12

What is the formula for a quantity index?

Answer 12

-Similar to a price index with a focus on volumes rather than prices

= 100 * Q1/Q0
Q1 = volume in current year
Q0 = volume in base year

In 20NN, volumes were N% higher than in 20NN

Question 13

What is a weighted index number?

Answer 13

Where a number of different items are being considered, - it may be useful to give weightings to those items, in terms of the relative importance of that item.
The greater the weighting, the more important the item

Question 14

What is the formula for a weighted relative price/quantity index?

Answer 14

=SUM(WP1/P0)/SUM(W)100

Weighted price index = P1 etc and can often use quantity as the weighting factor

Weighted quantity index = Q1 etc and can often just use weighting as the weighting factor

Question 15

What is a chain base index number?

Answer 15

When the base year moves forward each year so that each index is measured relative to the previous year.

still P2/P1*100 to give an index of 103 etc

Question 16

What is ‘rebasing an index’?

Answer 16

An index can be rebased in any year, so that any comparisons are made to that particular year.

This just means you are changing the year that is 100

value/new base *100 = rebased price index

This is sometimes known as ‘splicing’ an index

Question 17

What is a ‘balance of payments’ in simple terms?

Answer 17

It is the economic transactions between residents of a country and the rest of the world.
The balance of payments account is simply a statement of those transactions over a given period

Question 18

What does the standard balance of payments classification comprise of?

Answer 18

1) The current account
2) the capital account
3) the financial account

Question 19

What is the current account comprised of?

Answer 19

1) Trade in goods (visible balance)
2) Trade in services
—including insurance and other financial services
3) Investment incomes (dividends and interest) - primary income
4) Net transfers (e.g. international aid) - secondary income

Question 20

What is the capital account comprised of?

Answer 20

1)Transfer of ownership of non-current assets
2)Sale or transfer of patents, copyrights, leases and other transferable contracts

Question 21

What is the financial account

Answer 21

-Net balance of flows of foreign direct investment   
-Net balance of portfolio flows
——- (e.g. a UK investor purchasing a non-controlling stake in an overseas company)
-Financial derivatives
——–(financial instruments whose value derives from some underlying asset, for example share options)
-Reserve assets
———-(foreign financial assets controlled by financial authorities such as Central Banks, e.g. gold, foreign exchange reserves etc.

Question 22

What does the balance of payments balance to?

Answer 22

They should balance to 0

Question 23

When economists talk about a surplus or deficit in balance of payments, what are they therefore referring to?

Answer 23

a surplus or deficit in the current account only

A ‘trade surplus/deficit’ is only the trade in goods and not services that is being referred to

Question 24

Balance of payments: How does a deficit arise?

Answer 24

-When the country is IMPORTING more goods and services than it is EXPORTING

-There will be more £ being sold by UK indiv/firms to buy FX than vice versa

Question 25

Balance of payments: If deficit happens frequently, what are the potential implications?

Answer 25

-Central bank may use its FX reserves to buy £ in order to support the £ and create a financial account. Not a long term solution as reserves can run out.
-Country may look to sell more of its assets to foreign owners (eg shares in UK businesses)
-Pressure on the £ to weaken/depreciate (supply of £ will be greater than the demand).
—A policy to reduce the XR may actually help to restore a more favourable balance of payments position

Question 26

Balance of Payments: What causes a deficit

Answer 26

UK goods not offering value for money
—-Consider policies to encourage better efficiency/quality (supply side) or protetectionist policies to support UK businesses

A booming UK economy creates an extra demand for imports as UK consumers buy not only more UK goods but also more foreign goods.
—Dampen UK demand - increase taxes or reduce government spending

If £ is expensive (high XR) then customers find overseas goods cheaper and foreign buys find UK more expensive
–Reduce XR subject to the J curve effect.

Question 27

Balance of payments:

Question 28

Balance of payments:

Question 29

Balance of payments:

Question 30

Balance of payments:

Question 31

Balance of payments:

Question 32

Balance of payments:

Question 33

Balance of payments:

Question 34

Balance of payments:

Question 35

What is free trade?

Answer 35

Free trade refers to the ability for companies in different countries to buy and sell goods from each other without intervention (e.g. tariffs or other trade barriers)