Details Flashcards
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Impact of currency depreciation
Exporters: Benefited, as their goods become cheaper for foreign buyers.
- Importers: Disadvantaged, as foreign goods become more expensive
Impact of currency appreciation
Exporters: Disadvantaged, as their goods become more expensive for foreign buyers.-Importers: Benefited, as foreign goods become cheaper.
Exchange Rates
The exchange rate is the price of one currency in terms of another
Multinational Companies (MNCs)
Multinational companies (MNCs) are firms with operations (production or services) in more than one country. Examples include Shell, McDonald’s, and Nissan.
Why Do Firms Become Multinationals
- Lower Production Costs 2. Access to Raw Materials: 3. Proximity to Markets 4. Avoiding Trade Barriers 5. Market Expansion and Risk Diversification: 6. Competitive Pressure
Advantages of MNCs to a Host Country:
- Job creation for local workers.
- Increased GDP and economic growth.
- Introduction of new technology and production methods.
- Reduced imports and potential for increased exports.
- Higher tax revenue for the government.
- Greater product choice for consumers.
Disadvantages of MNCs to a Host Country:
- Jobs created are often low-skilled, while skilled positions go to foreign workers.
- Exploitation of workers through low wages and poor working conditions.
- Local firms may struggle to compete and may be forced out of business.
- Depletion of scarce, non-renewable resources.
- Repatriation of Profits: Profits may be sent back to the MNC’s home country, reducing local tax revenue.
- Influence on Government: Large MNCs may pressure governments for financial incentives or favorable policies.
Protectionism
Protectionism refers to government policies that protect domestic industries from foreign competition using trade barriers such as tariffs and quotas.
Effects of Protectionism:
- Reduces the quantity and increases the price of foreign goods, making domestic products more competitive. - Limits free trade and globalization
Arguments against Protectionism:
- Free trade advocates argue that consumers should have access to imported goods, and domestic firms should focus on producing goods where they have a competitive advantage. - This approach improves global living standards by promoting efficiency and specialization.
Globalization
Globalization refers to the increase in worldwide trade, movement of people, and capital flows between countries.
Reasons for Globalization:
- Free Trade Agreements
- Improved Transport and Communication
- Industrialization in Developing Countries
Advantages of Globalization:
- Businesses can expand into new foreign markets, increasing sales and profits.
- Companies can set up production units in countries with cheaper labor and materials.
- Importing goods from foreign countries can be more profitable than producing them domestically.
- Access to cheaper raw materials and components from foreign suppliers.
Ethical Decisions
Ethical decisions are based on a moral code, meaning “doing the right thing.”
Benefits of Ethical Decisions:
- Increased popularity of the business’s products among customers.
- Favorable treatment from the government in disputes or demands.
- Avoidance of pressure group threats.
Challenges of Ethical Decisions:
- Ethical decisions can be costly, as businesses may lose out on cheaper, unethical opportunities.
Sustainable Development
Sustainable development refers to economic growth that does not compromise the living standards of future generations.
Pressure Groups:
These are organizations or groups that aim to influence business and government decisions. - If a business acts irresponsibly, pressure groups can organize consumer boycotts or take other actions.
Government Regulations
Governments can pass laws to restrict harmful business activities, such as prohibiting factories in areas of natural beauty
Pollution Permits
Licenses that allow firms to pollute up to a certain limit. These are expensive, encouraging firms to reduce pollution.
Taxes
Levied on polluting goods and services to discourage harmful practices.
Externalities
A business’s decisions and actions can significantly affect its stakeholders. These effects are called externalities.
Private costs
Costs incurred by the business for an activity. - Examples: Costs of building the factory, hiring employees, purchasing machinery, and running production.
Private Benefits:
Gains received by the business from an activity. - Example: Revenue generated from the sale of produced goods
External Costs
Costs borne by society (outside the business) due to the business’s activity. - Examples: Noise pollution, air pollution causing health issues, loss of land (e.g., farmland).
- External Benefit
: Gains enjoyed by society due to the business’s activity. - Examples: New jobs for residents, increased tax revenue for the government, regional development, and improved infrastructure (e.g., new roads)
Social Costs
Private Costs + External Costs
Social Benefits
Private Benefits + External Benefits
Social Responsibility
Social responsibility refers to business decisions that benefit stakeholders other than shareholders, such as workers, the community, suppliers, banks, etc
The Business/Trade Cycle
An economy does not always experience consistent economic growth. Instead, it goes through phases known as the business or trade cycle, which includes the following stages: 1. Growth: 2. Boom 3. Recession 4. Slump 5. Recovery
- Growth:
- GDP is rising, unemployment is falling, and living standards improve. - Businesses expand production, earn higher profits, and invest in growth.
- Boom:
- GDP reaches its peak, and excessive spending leads to rapid inflation. - Business costs rise, and firms become concerned about maintaining profitability.
- Recession:
- GDP begins to fall due to high prices, reduced demand, and lower spending. - Firms cut back production to maintain profitability, leading to rising unemployment.
- Slump:
- GDP is very low, prices fall (deflation), and unemployment reaches high levels. - Many businesses close due to insufficient demand, and the economy suffers
- Recovery:
- The government intervenes to boost demand and spending, moving the economy from a slump back to growth
Economic Objectives
Governments aim to achieve specific economic objectives to ensure stability and growth. The absence or neglect of these objectives can negatively impact the economy and businesses.
Government Aims
- Maintain Economic Growth: Achieve Price Stability: Reduce Unemployment: 4. Maintain Balance of Payments Stability: 5. Reduce Income Inequality/ Achieve Effective Income Redistribution:
Government Economic Policies
Governments use various policies to influence economic conditions: 1. Fiscal Policy: 2. Monetary Policy 3. Supply side policies
Ethical Dilemmas that business faces
- Employing children.
- Offering or accepting bribes.
- Associating with individuals or organizations with poor reputations
