3.7.5 Analysing the external environment to assess opportunities and threats: economic change

Question 1

What are the economic factors?

Answer 1

• GDP
• Taxation
• Exchange rates
• Inflation
• Discal and monetary policy
• More open trave v protectionism

Question 2

What is GDP (Gross domestic products)?

Answer 2

A measure of economic activity (Total value of a countries output) over a given period of time.

Question 3

What is the difference between GDP and real GDP?

Answer 3

• GDP is nominal (existing in name only)
• Real GDP means theat the effects of inflation has been removed

Question 4

What is direct and indirect tax?

Answer 4

Taxes that firms pay in the UK

Question 5

What is corporation tax?

Answer 5

A form of direct taxation, which is a tax on trading profits made by a business over the course of their financial year as well as any profit from investment and disposal of assets

Question 6

What is value added tax?

Answer 6

This is a form of indirect taxation, collected by businesses for the government. It is a tax placed on the sale of goods abd services- a typer of ‘consumption tax’

Question 7

What factors are included in the business cycle?

Answer 7

• Boom
• Recession
• Slump
• Recovery

Question 8

What are some causes of the business cycle?

Answer 8

• Changes in business confidence
• Periods of inventory building and debuilding (christmas/halloween)
• Irregular patterns of expenditure on consumer durables
• Confidence in banking sector

Question 9

What is exchange rates?

Answer 9

The rate between two distinct countries

Question 10

What is currency demand?

Answer 10

Demand from currancy comes from a need to purchase the currency of a particular economy

Question 11

What are the sources of demand for currency demand?

Answer 11

• Exports of goods
• Exports of services
• Inflows of foreign investments
• Speculative demand
• Official buying of sterling by the bank of england

Question 12

What is currency supply?

Answer 12

Supply of curency comes from economic agents needing to demand oversea currency in exchange for their demand

Question 13

What are the sources of demand for currency supply?

Answer 13

• Imports of goods
• Imports of services
• Outflows of foreign investments
• Speculative selling
• Official seeling of sterling by the bank of england

Question 14

What is free floating exchange rates?

Answer 14

• Rates determined by market demand and supply
• No government intervention
• Businesses must be concerned how the ER may change when international sales and material imports occur
• If pound is weak, its good for exporters but bad for importers

Question 15

What is managed exchanged rates?

Answer 15

• Government may seek to influence market value of currency
• Intervention is done by the bank of england
• Provides stability for business but means they neither benefit or lose out

Question 16

What is fully fixed exchange rates?

Answer 16

• Central target for the exchange rate
• No fluctuations permitted

Question 17

What is inflation?

Answer 17

A measure of how much the price of goods and services have gone up over time

Question 18

What is consumer price index (CPI)?

Answer 18

• The main measure of inflation
• The government has set the bank of england a target for inflation of 2%
• The target is to achieve a sustained period of low & stable inflation
• Low inflation is also known as a price stability

Question 19

What is the effect of inflation on consumers?

Answer 19

• As price rises (inflation) money loses its value and people lose confidence in money as the value has reduced
• When inflation is out of control- prices increases lead to higher wage demand as people try to maintain living standards
• Consumers on fixed income lose out

Question 20

What are the positive effects of inflation on business?

Answer 20

• Industry-wide price rises enable revenue to grow
• Growing revenue + constant gross margin = higher gross profit
• Makes using debt as a source of finace cheaper in real terms

Question 21

What is government policies? Give examples.

Answer 21

Economic policies that are te actions taken by the government in order to meet their economic objectives
* Fiscal policies
* Monetary policies

Question 21

What are the negative effects of inflation on businesses?

Answer 21

• If costs are rising due to inflation, a business may not be able to pass them onto consumers (PED)
• Inflation can disrubt business planning and lead to lower investment
• Rising inflation means higher interest rates- reducing economic growth and lead to a recession

Question 22

What are the fiscal policies?

Answer 22

• Expansionary- Aiming to increase economic activity by borrowing more than the government gets in tax and using it to inspire growth
• Contractionary- Aiming to decrease economic activity by spending less than the government gets in tax and use it to slow economic growth
• Neutral- They’re trying to balance the books and spend what it taxes

Question 23

What is monetary policies?

Answer 23

• Refers to availabbility of money, credit and prices of credit
• Every month, the MCP meets to look at economy and the governments policy to set the interest rate

Question 24

What policies did the government introdue to improve the supply of goods and services?

Answer 24

* Privatisation * Nationalisation * Freeing up labour laws * Immigration * Educationa and training * Transport infrastructure

Question 25

What is protectionism?

Answer 25

Involves any attempt by a country to impose restrictions on the open trade in goods and services

Question 26

What is the main point of protectionism?

Answer 26

To cushion domestic businesses and industries from oversea competition and prevent the outcome resulting solely from the interplay of free market forces of supply and demand

Question 27

What is open trade?

Answer 27

This involves the removal or reduction of barriers to international trade

Question 28

What are the main forms of protectionism?

Answer 28

* Tarrifs: Tax that raises price of imported products * Quotas: Volume limits on the level of imports allowed or limit to the value of imports permitted into a country in a given time period * Export subsides: A payment to encourage domestic production by lowering costs * Domestic subsides: Government help dor domestic businesses facing ginancial problems

Question 29

Why do governments protect (protectionism)?

Answer 29

* Develops new trade advantages * Improves the balance of trade * Response to dumping * Employment protection * Desire to increase government revenue

Question 30

What is globalisation?

Answer 30

The process through which an increasingly free flow of ideas, people, goods, service, and capital leads to integration of economies and societies

Question 31

What is the main driver of globalisation?

Answer 31

Businesses as multinationals was to increase sales, pilot, and shareholder value; and the government wants to encourage domestic firms to expand further

Question 32

What does globalisation involve?

Answer 32

* An expansion of trade in goods and services between countries * The development of global brands * Shifts in production * Increased labour migration

Question 33

What are some drivers of globalisation?

Answer 33

* Rising living standards * Less protectionism * Lower transport costs * Digital communication * Diverging consumer cultures * Market liberalisation

Question 34

What are the advantages of globalisation?

Answer 34

* Opportunities for trade and investment overseas * Access to cheaper goods and services * Lifted milions out of poverty * More competition * Bigger exports markets * Opportunity to live, study, and travel oversea

Question 35

What are the disadvantages of globalisaion?

Answer 35

* Increased unemployment for firms that lose demand to lower cost competition * Rising income and wealth inequality * Surge of inward migration has brought economic and social tension * Environmental damage * Globalisation of brands can lose cultural diversity

Question 36

What are some features of less developed economies?

Answer 36

* Low incomes and levels of productivity * Higher dependency of export incomes * Distant from technological frontiers * Lower access to advances country markets * Higher tariffs and other import controls * Weakness in infrastruction. E.g. telecommunications, transport

Question 37

What are potential opportunities for businesses from emerging economies?

Answer 37

* Have relatively high rates of econmic growth * Have seen rapid growth of a 'middle class' with rising disposable income, that simulates demand * Suitable location for international operations. E.g. location for production, sell into domestic markets

Question 38

What are potential challenges for businesses from emerging economies?

Answer 38

* Many domestic businesses are pursuing expansion into developed countries * Business in emerging economies is not straightforward- increased risk of theft, etc