The Economic Environment for Business

Question 1

What is Macroeconomic policy and what are it’s main objectives?

Answer 1

Macroeconomic policy is the management by the government of the economy to influence it’s performance and behaviour. It is focused on 5 objectives:

• Economic Growth - positive changes in national income YoY
• Inflation - Kept at a low rate.
• Unemployment - Kept low with stable levels of employment.
• Balance of Payments - Cost of imports and Exports balance
• Appropriate distribution of income and wealth. - this will vary depending on political views.

Question 2

How might the main objectives of Macroeconomic policy come in to conflict?

Answer 2

It is generally established that Government policy cannot positively effect all objectives at the same time as the influence of a positive change for one objective will have a negative impact on one or more others…

For Example

Unemployment falls, so more people are working and earning money, aggregate demand increases. This has an effect on price stability, prices increase also known as inflation. Demand may also exceed supply within the domestic market, more imports are bought in so balance of payments shift.

Aggregate demand = total demand for goods and services in the economy.

Question 3

How does macroeconomic policy affect the business sectors planning and decision making?

Answer 3

ME policy effects economic activity, business planning and decisions in two broad forms:

• Level of Aggregate demand -
  
  • Does the business need to invest to increase output levels - capital projects
  • Are current staffing levels sufficient to meet demand
  • Overall output - sourcing of raw materials, Overheads act.
• Costs -
  
  • Monetary policy - changes to interest rates affecting availability of credit, availability of investors return levels for projects.
  • Exchange rates - increase/decrease, affecting costs of imports and exports.
    
    • Fiscal policy (Taxation) Employer costs for employees, Tax relief on R&D ect.

Question 4

What is Monetary policy, what does it influence and how does it do so?

Answer 4

Monetary policy influences the overall monetary conditions in the economy:

• Volume of Money in supply (increases to this are known as Quantative Easing). Increases here are assumed to:
  
  • Increase expenditure within the economy
  • This may then increase output or prices, of course it may also increase levels of imports.
• Price of Money - Rate of interest (set by bank of England) Changes to the interest rates can have the following effects:
  
  • Increased Interest rates - higher savings less spending.
  • lower levels of borrowing also reducing investment.
  • Higher levels of capital transfer from foreign markets impacting exchange rates
  • Reducing interest rates would essentially have the opposite effect.

Governments can only change one of these factors, and it tends to be interest rates as quantitive easing has generally proven to be ineffective.

Question 5

What is Fiscal policy and how can it be used to achieve Macro economic policy targets?

Answer 5

Fiscal policy essentially is the manipulation of Government budget to affect Aggregate demand and economic activity.

It uses Government Borrowing, spending and taxation to influence the behaviour of individuals and businesses .

• Borrowing - The government may borrow money when the budget is in deficit (long term borrowing) or to help manage cash flows (Short term) This can result in “Crowding out” meaning that financing through long or short term borrowing is less available.
• Spending - levels of expenditure, in relation to taxation and borrowing can serve to increase/decrease economic activity.
• Taxation - Often used to promote wider objectives such as Green policy. Excessive taxation can serve as a depressor to economic activity.

Question 6

Why does competition policy exist?

Answer 6

Competition policy is a form of Government regulation in place to ensure that market places operate in a competitive manner which is beneficial to the consumer.

Good levels of competition within a market place should:

• Encourage innovation - to drive revenue and improve efficiency businesses need to develop new products and processes.
• Drive sustainable and fair pricing practices - eliminating prices being set at levels to discourage new business in market places.

In some market places the nature of the business and necessary economies of scale require that a monopoly or close to one exist e.g. Utilities companies

Question 7

How does Government assistance interact with business planning and decision making?

Answer 7

Government assistance is a further tool that can be utilised to encourage specific behaviour inline with Macro Economic policy.

Assistance will include grants and subsidies accessible through meeting stringent requirements, the types available to a business will potentially influence business decisions such as:

• Relocation - as part of regeneration plans for specific areas.
• Launch of new products or increased production - Increased employment and training of labour force.
• Focus on specific areas of research and development.

Question 8

What do Green policies offer to businesses?

Answer 8

Green policies essentially push companies to consider negative effects of potential projects as part of the planning and decision making process.

Projects which have negative effects will likely incur higher costs as a result by way of:

• Unfavourable or Punitive taxation rates, or just lack of access to favourable tax rates.
• Increased costs relating to reparations/making good after environmentally damaging projects.

Question 9

What is Corporate Governance regulation and how does it interact with business processes?

Answer 9

Corporate Governance seeks to:

• Manage Risks -
  
  • Through Transparency in the appointment and remuneration process for directors.
  • Establishing risk control procedures
• Protect Stakeholders -
  
  • Appointment of Non Executive directors
  • Establish Audit and Remuneration sub committees, led by NED’s
  • Ensure the business operates in an ethical manner
  • Separation of management and supervisory functions.

Question 10

What are the two types of inflation and how are they categorised?

Answer 10

Demand-Pull - Excess demand, enabling businesses to increase prices and expand profit margins. i.e. people have more money so more people want to buy and will pay a higher price.

Cost-Push - High production costs, increasing independently of demand. These increased costs my be “pushed” on to the consumer by way of increased prices.

Question 11

How will changes in interest rates impact the exchange rates for GBP?

Answer 11

A fall (or no increase in the exchange rate) would make the currency less favourable to investors resulting in:

• Lower capital investment coming in to the country
• Capital investment moving from the country to more locations with more favourable rates.
• This will weaken the pound against other currencies meaning that when selling GBP let other currency is obtained, however if selling out foreign currency to GBP more value will be obtained.

Increases in interest rates will make the currency more favourable to investors resulting in:

• Increased capital investment coming in to the company.
• Existing capital investment more likely to stay in country.
• Pound will strengthen against other currencies, great when buying Foreign currency, not great when buying GBP.