Chapter 7 (part 2) Flashcards
What is the PESTEL framework?
Pestel analysis is a framework of macro-environmental factors which can be used in strategic management.
What does the PESTEL acronym stand for?
Political
Economic
Social
Technological
Environmental
Legal
PESTEL: What does Political mean?
For example, the steps the Government take to intervene in an economy, such as taxation or provision of merit goods
PESTEL: What does Economic mean?
Factors such as interest rates, exchange rates, inflation
PESTEL: What does Social mean?
This is more cultural issues, such as the age of the population or the health-consciousness of the population.
PESTEL: What does Technological?
This obviously encompasses technical factors, such as the degree of mechanisation, the speed of technological change.
PESTEL: What does Environmental?
For example, climate change or weather
PESTEL: What does Legal?
This is law and regulation, such as employment or health and safety law.
What do index number series show?
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.
Index numbers: What is a base year
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.
What is the formula for a simple price index?
=100 * P1/P0
P1 = Price in current year
P0 = Price in base year
In 20NN, prices were N% higher than in 20NN
What is the formula for a quantity index?
-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
What is a weighted index number?
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
What is the formula for a weighted relative price/quantity index?
=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
What is a chain base index number?
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
What is ‘rebasing an index’?
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
What is a ‘balance of payments’ in simple terms?
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
What does the standard balance of payments classification comprise of?
1) The current account
2) the capital account
3) the financial account
What is the current account comprised of?
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
What is the capital account comprised of?
1)Transfer of ownership of non-current assets
2)Sale or transfer of patents, copyrights, leases and other transferable contracts
What is the financial account
-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.
What does the balance of payments balance to?
They should balance to 0
When economists talk about a surplus or deficit in balance of payments, what are they therefore referring to?
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
Balance of payments: How does a deficit arise?
-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
Balance of payments: If deficit happens frequently, what are the potential implications?
-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
Balance of Payments: What causes a deficit
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.
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What is free trade?
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)
