PESTEL factors Flashcards
Economic
What is meant by changes in the economic environment
Economic change refers to the fluctuations in national and international macroeconomic variables, such as economic growth (GDP), unemployment, inflation and exchange rates
Economic
All economic variables can ….
Have a significant impact on businesses strategic and functional decisions. This impact can include opportunities and threats
Economic
The 5 economic factors
- Economic growth
- Unemployment
- Inflation
- Exchange rates
- Government economic policy
Economic
What is economic growth
The total value of all goods and services an economy (country) can produce
Economic
What is GDP
The total output of an economy over a period of time
Economy
Define The economic cycle
A phenomenon whereby GDP fluctuates around its underlying trend, following a regular pattern. Rises and falls may over time follow a regular pattern
Economy- The economic cycle
What are the 4 stages to the cycle
- Recession
- Recovery
- Boom
- Slowdown
Economy-key terms
Define The recovery
When ecominc growth becomes positive after a recession
Economy- key terms
Define The boom
When the rate of economic growth exceeds the potential growth of GDP (the output gap is narrowed)
Economy- key terms
Define The slowdown
When economic growth begins to fall and approach 0
Economy- key terms
Define The recession
When the rate of economic growth becomes negative and real GDP actually falls (real GDP falls in 2 consecutive quarters)
Economy
Define the output gap
The difference between actual and potential (trend) GDP growth
Economy- output gap
What is a positive output gap
If actual exceeds potential growth
Economy- output gap
4 facts about output gap
- If actual exceeds potential growth- a positive output gap
- If actual output is below potential output then the country has capacity- a negative output gap
- Indicates little of no capacity
- Likely to generate inflationary pressures
Economy- output gap
When is there a negative output gap
-If actual output is below potential output then the country has capacity- a negative output gap
Economy- Fiscal policy
Define the fiscal policy
The use of taxation and public spending to achieve macro economic targets
Economy- Fiscal policy
4 facts about the fiscal policy
- Usually in each year the government spends more than its tax income
- This is referred to as a budget or fiscal deficit
- the government has to borrow to pay for this deficit
- Each year this additional borrowing is added to the national debt
Economy
What are the 4 types of taces in the UK
- Income tax
- National insurance
- VAT
- Excise duties
- Corportaion tax
Economic
What is a freely floating exchange system
- how does the value of the currency find its way around
- what will the value of the currency be determined by
- The value of a currency is allowed to find its own way to equilibrium without any Government intervention
- The value of the currency will be determined by market forces of demand and supply
What determines an exchange rate in a ‘freely floating’ exchange rate system?
Supply and demand
A strong pound is is …
Good for importers, bad for exporters
A weaker pound is …
Good for exporters, bad for importers
2 advantages of inflation for a business
1) Real assets become worth more
2) The real value of money owed is eroded
advantages of inflation for a business
1) Real assets become worth more (3)
- e.g. the value of property and stock that a firm owns will increase
- this will improve a firms balance sheet
- as a result firms may find it easier to raise finance from banks and shareholders
advantages of inflation for a business
2) The real value of money owed is eroded (2)
- Firms with large borrowings benefit as fixed terms repayments become more easily covered by inflationary rises in income and profit
- This can mean that periods of high inflation could be a good time for a business to expand
Inflation- 2 other impacts for a business
- Businesses may increase prices to pass costs onto consumers or may decide to absorb cost rises
- May decide to reduce internal costs to protect profits
4 Disadvantages of inflation for a business
- it is harder for a business to plan …
- companies producing premium goods…
- inflation can damage …
- damage to …
1) It is harder for a business to plan when inflation is high- they need stable prices to make accurate sales forecasts
2) Companies producing premium goods may experience lower sales as consumers switch to cheaper alternatives
3) Inflation can damage profitability- especially for firms with fixed price contracts that take a long time to complete e.g. house building
4) Damage to industrial relations
2 Benefits of low stable inflation
- Business feels more confident- planning/ long term strategic decisions easier to make
- May look to invest and grow
What is deflation
A fall in the average price level measured by the CPI
What will happen in a period of deflation
-In a period of deflation low demand (consumers will put off purchases) may lead to redundancies and rationalism
Define unemployment
The number of people able, available and willing to find work and actively seeking work- but not employed
What is the unemployment rate
Define and formula
The % of the labour force who are out of work
The unemployed
__________________
X100
Labour force
What are the 4 main types of unemployment
- Seasonal
- Structural
- Frictional
- Cyclical
What is seasonal unemployment
Regular seasonal changes in employment/ labour demand
What is structural unemployment
Arises from the mismatch of skills and job opportunities as the pattern of labour demand in the economy changes
What is frictional unemployment
Transitional unemployment due to people moving between jobs
What is cyclical unemployment
Caused by a fall in aggregate demand leading to a decline in GDP and employment
Business implications of rising/ high unemployment (4 problems)
- spending
- staff insecurity
- skills
- social problems
- Lower consumer spending = lower demand for income elastic
- Unemployment creates insecurity in the workforce; potentially a cause of lower morale and de-motivation
- Danger of lost skills for industries as a whole
- Business may be impacted by social problems associated with high unemployment
Business implications of rising/ high unemployment (4 advantages)
- demand
- supply of labour
- recruitment
- staff turnover
- Demand for inferior goods (lower price, quality) may increase
- Greater supply of labour- potentially lower wage/ salary levels
- Recruitment becomes easier- there should be more applicants for each vacancy
- Lower staff turnover- employees less likely to be able to find other jobs, or want to move in an uncertain economic climate
What does monetary policy involve
Altering the base (policy) interest rate or the supply of money in the economy
Monetary policy
What do many economists consider
They consider that the manipulation of exchange rates is a form of monetary policy, given that exchange rates are affected by changes in interest rates
Monetary policy
Since 2009 what has been used
Quantitative easing has been used to increase the money supply
What does Monetary policy aim to influence
The growth of output (GDP), and jobs (unemployment)
The base rate of interest is set by …
The Bank of England’s monetary policy committee (MPC)
Why is the bank of england independent (3)
- it increases the credibility of policies
- firms and consumers will have more confidence in the Governments actions
- therefore more likely to invest
How many members does the MPC consist of
9 members- 5 from the Bank of England and 4 external members appointed by the Chancellor
-it is chaired by the Governor of the bank of england
What are interest rates
The reward for saving and the cost of borrowing expressed as a percentage of the money saved or borrowed
What are the 5 different types of interest rates operating within the external environment
-Interest rates on savings in bank and other accounts
-borrowing interest rates
-mortgage interest rates
-credit card interest rates and pay day loans
-
