Topic 2 - Economic Environment

Question 1

Define economics

Answer 1

The study of how society manages its resources.

Question 2

Define microeconomics

Answer 2

The study of how households and firms make decisions and how they interact in markets.

Question 3

Define macroeconomics

Answer 3

The study of economy-wide phenomena, including inflation, unemployment and economic growth.

Question 4

Name six economic factors affecting business

Answer 4

Inflation, labour market conditions, debt, income distribution, balance of payments, human development

Question 5

Define factor conditions and provide examples

Answer 5

A nation’s resources e.g. labour, natural resources, capital, technology, entrepreneurship and advanced workforce skills

Question 6

Define demand conditions and what influences demand conditions?

Answer 6

The nature of home-market demand for specific products and services. Demand conditions are influenced by composition, size, growth and internationalisation.

Question 7

Name four elements of an economic environment

Answer 7

Factor and demand conditions, growth, humans development and economic factors affecting business

Question 8

Name two indicators of market potential

Answer 8

Gross national income (GNI) and gross domestic product (GDP)

Question 9

What is gross national income?

Answer 9

GNI is the total income received by the country from its residents and businesses regardless of whether they are located in the country or abroad. GNI includes money received from overseas sources such as foreign direct investment and economic development aid.

Question 10

What is gross domestic product?

Answer 10

GDP is the total market value of all finished goods and services produced within a country in a set time period.

Question 11

What indicates a recession?

Answer 11

Two quarters of negative growth.

Question 12

What is horizontal and what is comparative analysis?

Answer 12

Horizontal analysis – analysing one thing in one country over time
Comparative analysis – comparing different countries

Question 13

How is economic growth measured?

Answer 13

Economic growth is measured as a percentage change in GPD and GNI. Change in GDP is the usual measure for growth and change in GNI is a measure of growth potential,.

Question 14

What is the foreign exchange effect?

Answer 14

Economic indicators are usually calculated in USD and exchange rate fluctuations can distort calculations. Purchasing power parity is used to correct distortions.

Question 15

What is purchasing power parity?

Answer 15

The notion that in the long run exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services.

Question 16

What is the last of one price?

Answer 16

o Identical goods will have the same price in different markets assuming no transaction costs
o Purchasing power of different currencies is equalised for a given basket of goods

Question 17

Describe the economic factor of inflation

Answer 17

Inflation is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over some period of time. It is measured by CPI.

Question 18

What is the relationship between inflation and interest rates?

Answer 18

Inflation influences interest rates. Interest rates are usually slightly higher than inflation (CPI).

Question 19

Name four aspects of labour market conditions

Answer 19

Unemployment rates, labour laws, working conditions, skill levels

Question 20

What is the difference between internal and external debt?

Answer 20

Internal - held by domestic residents

External - held by foreign creditors

Question 21

Define balance of payments

Answer 21

The balance of payments (BOP) is a statement of all transactions made between entities in one country and the rest of the world over a defined period of time.

Question 22

What is the difference between current account and capital account?

Answer 22

Current account - country’s net income over a period of time (exports less imports)
Capital account - net change of assets and liabilities during a particular year

Question 23

How does human development affect the economy?

Answer 23

Increases in human development ultimately increase consumption and economic activity.

Question 24

What three things does the UN Index measure?

Answer 24

Longevity – life expectancy
Knowledge – literacy
Standard of living – PPP per capita

Question 25

What is the difference between nationalisation and privatisation?

Answer 25

Nationalisation: private to state owned ownership
Privatisation: state ownership to private ownership

Question 26

What is a market economy?

Answer 26

o Resources owned & controlled by private sector
o Consumer sovereignty - right of consumers to decide what to buy
o Prices determined by supply & demand, not government

Question 27

What is a command economy?

Answer 27

o Economic activity determined by central government plan
o Government owns and controls all resources
o Prices & production determined by government

Question 28

What is a mixed economy?

Answer 28

Some degree of government ownership & control

Question 29

How do markets transition from a command economy to a market economy?

Answer 29

o Liberalising economic activity, prices, market operations, reallocation of resources, privatisation of property
o Establishing legal & institutional infrastructure
o Developing instruments for macroeconomic stabilisation & budget constraint

Question 30

How can transitioning to a market economy be advantage to international business?

Answer 30

• Access to new markets
• Offloading old technology OR
• Leap-frogging old technology
• Market for skills
• Considerable cultural and political risks