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B200 TUTORIAL WEEK TWO By the end of the Environments module you should be able to: • recognise key phenomena in business environments • use appropriate models and concepts to analyse them • recognise and interpret the values underlying different analyses of business environments • understand the complex relationship between the behaviour of businesses and their environments • identify some of the methods businesses adopt for dealing with their environment. The Economy • This area of environments is covered by your study of Chapters 4, 5, 6, 8 and 9. Chapter 4 Conservative Governments and the economy by Wilks. • This chapter relates closely to the UK economic and political scene. • The traditional goals of economic policy were fourfold: low inflation, high growth, low unemployment and trade balance. • Wilks distinguishes between macro-economic policy (deals with structure, behaviour, national economy as a whole and focus on national income, unemployment, inflation, investment and international trade)) and micro-economic policy (the management of markets and industries within the economy, (where the individuals, households and firms make decision to allocate limited resources in market) • Wilks associates successful economic performance with an absence of Government interference in corporate business decision making. He prefers microeconomic policy because of liberal view of economy. • Also Wilks’ approve of privatization and asserts the role of company autonomy (freedom) as a key to the UK relatives economic success during the period. Four major policies were implemented since 1981 by the conservative governments: 1) The privatization and deregulation of the utilities (firms) 2) The "inward investment" policy that succeeded in attracting best companies in the world to UK. 3) Help and encourage small businesses to start, expand, and innovate. 4) Improve the qualification and productivity of workers by training and education. Also, there are some factors that help to made more efficient corporation: introduce tax law, reduction of labour regulation and remove of exchange control. Chapter 5 Finance Unbound by Hutton. • His work is a critical analysis of “right wing” free market economics. • He criticises the Conservative Government’s policies. • After II WW there are some changes happened around the world, change in currency exchange, lower export and import, less global demand for goods and services. • He believes on Keynesian economic (discuss later – government rule) • The economic growth during 1980 – 1990 period was explosion in credit availability, and increase in consumer spending which followed by deregulation of UK banks and industries. • Hutton felt that this type of growth was temporary – and was a “privatisation” of the cycle of “boom and bust” economics characterised by harsh recessions (previously driven by fluctuations in Government spending). Open Questions • How would you compare and contrast the views of Wilks and Hutton? • Which do you agree with? Why? Chapter 6 The Management of UK Economy by Coates • This chapter looks at a clear model of the economy known as the circular flow of income model. • Key terms are aggregate demand and the multiplier effect. • The chapter considers Keynesian economics in more detail and cover monetarism. We want to understand how to make sense of complicated pattern of government policy and economic performance? The model of economy help us to understand how economy exchange between householders and firms. Household supply workers to firms, firms supply goods and services to householders. The circular flow of income, or simply the circular flow, is a simple economic model showing the relationship between money income and spending for the economy as a whole Circular Flow of Income Model • There are many different examples of this model – see pages 56 – 58 of the reader. See diagrams 6.1, 6.2, 6.3, 6.4, 6.5 Government economy policy has some objectives: high & stable employment, rising living standard, price stability, and healthy balance of payment. See diagram 6.6 The government can use different ways to influence economic performance: taxes, expenditure by use of funds generated by taxes, interest rates, exchange rate, ….others On the other hands, Keynes said, the government can improve the economy through increase flow of demand (increase aggregate of demand) in the economic system, the expansion will be through but not begin with: •Encourage export •increase consumer demand so the firms will sell more and employ more staff but the consumer demand will increase when •investment goods will improve and expand which occur through •government injection and stimulation. Which should begin with. (MPC) Agregate demand • Following the examples in the text book pages 56-58: • Agreggate demand = c (consumer demand) + I (investment demand) + g (Government spending + x (revenue from exports) – m (revenue spent on imports) • Keynes argues that the task of increasing agregate demand fell to Government. The Multiplier Effect The Simple Multiplier Process. (mpc=marginal propensity to consume) • The marginal propensity to consume (MPC) refers to the increase in personal consumer spending (consumption) that occurs with an increase in disposable income (income after taxes and transfers). For example, if a household earns one extra dollar of disposable income, and the marginal propensity to consume is 0.65, then of that dollar, the family will spend 65 cents and save 35 cents. • Monetarism is a school of thought with a belief that the • • • • • prime task of Government was to control the supply of money. Monetarists believe that control of the money supply is key to price stability, economic growth and full employment. A set of views concerning the determination of national income and monetary economic. It focus on the supply of goods and demand for money as the primary means by which economic activities regulated. This theory focus on money supply and on inflation as effect of the supply of money being longer than the demand for money. The monetarists broadly criticized the Keynesian economy They are linked to the liberal stance that prefers private economic activity to public regulation. Chapter 8 Living without borders by Rastogi Rastogi identifies the main cause of globalisation as the growth in volume of investment which is now conducted internationally. This is supported by the development of new technology which first makes the capital funds needed for investment easier to transfer across the world. It then helps financial decision makers calculate profit if the investment is successful and even the probability of its success or failure. His interpretation of the economy is that it is increasingly dominated by a growing financial sector. Rastogi’s view. • Rastogi is a Vice President of a leading international banking corporation. • His view is a liberal supply-side view. • Rastogi does not take full account of the influence of Governments in the global economy. • Rastogi uses a single model of the economy to predict the future (determinism). Rastogi’s assumptions • Everyone will have equal access to funds, equal access to market information and that everyone will behave with the same type and degree of rationality. • BUT in reality the market would be heavily influenced by those with the most funds, the best access to market information and ability to work out financial outcomes easily (large corporate organisations). There are 3 majors forces in financial markets have caused a truly global market to form: 1- increase in international capital flows because of staff towards deregulation (free) of trade and financial market around the world. 2- Explosive advance in technology lead to tremendous (huge) growth in the scale and complexity of financial market. 3- financial management innovation have produced number of derivatives and extraordinary number of innovations. Open economics, growth of technology and the innovation in financial markets lead to build on each other and drive further growth. Of course these trends effecting the financial market players as following: 1) Savers: who are the providers of funds or credit in the economy. Their primary goal is to minimize risk-adjusted return while preserving their capital. 2) Institutional investors: such as banks funds managers, insurance companies. Their objective is to maximize risk-adjusted returns companies – their objective is to maximize risk-adjusted returns for the savers who use their services, based on a state of investment objective. 3) Users of funds: corporations, governments, and individuals use funds to finance real investment and current consumption. Their objective is to minimize their cost of capital within acceptable risk parameter. 4) Broker / Dealer Intermediaries: they are all the go – between transferring funds from savers to users of funds. The play the role of financial counselor, create new financial products Borderless world help growth of financial market and members. How?? The rate of return will improve for savers because of better risk return relationship, lower management expenses and reduce transaction costs , People become more educated in financial market, institutions and funds try to be unique and differentiate them self by tracking specific industries or provide special financial technique. But there are some barriers affect borderless world and slow the globalization of financial market : legal systems, taxes differences, and not all countries have free market ! Chapter 9 Global cooperation or rival trade bloc? By Junne • Junne rejects the inevitable onset of the global economy. He widens the debate by examining potential scenarios for the development of regional or supranational trading blocs. • Junne constructs 3 possible scenarios based on established research. • We can conclude that (according to Giddens in Chapter 1) Junne is a sceptic – he asserts that ‘globalisation’ in the liberal economic sense of the word does not describe what is happening. Instead he examines the forces that drive particular countries into global trading which help maintain a world of separate economies with definite boundaries. Junne’s scenarios • The past 3 decades have seen a significant shift toward deregulation of trade and financial markets around the world resulting in increased capital flows. • Explosive advances in computing and communication technology have provided the platform for tremendous growth in the scale and complexity of financial markets, thereby meeting the need for international flows. • Significant innovation in financial management have produced an unprecedented number of innovations in securitization and derivatives. We will examines whether the world will continue to move towards a liberal , multilateral world trade system or will fail apart into rival trade blocs? CPB (Central Planning Bureau) Scenarios (Liberal Scenario) Balanced Growth Global Crisis (problem) Entire world will tend to innovate, introduce many technologies expand and grow economically for a long time to come. Growth and Prosperity to all nations lead to be more open and Cooperation. US and European economies are unable to cooperate with economic problems result in economic recession and stagnation (failed). Far east economic Will innovate and grow successfully. Global Shift Scenario Europe Renaissance (growing) Asia and Japan will adopt free market, USA will increase productivity. European integration favours business and Economic growth, Asia countries will Cooperate with Europe while Us will flatters. BRIE (Berkeley Round table on the International Economy) Managed Multilateralism Powers between government & liberal In the same nation Regional Rivalry (competitive) Protectionist behavior, and restrictive measures will be adopted instead of collaboration and coordination between great powers Benign Regionalism Nations and regions live separately from each others. Amsterdam Scenarios Managed Multilateralism New technology lead to New economy growth and Increase nation trade. Regional Rivalry (competitive) Slow economic growth combine with Highly confliction relation among Trading blocs. Greening of business Worldwide development, Economic restructured to be Less environment harmful. Activities • Activity 4 (page 20 of the Study Guide) • Activity 6 (page 25 of the Study Guide) READING TO BE COMPLETED BY NEXT WEEK • Please read pages 18 – 22, 25 - 27 of the Study Guide to refresh your study of Chapters 4, 5, 6, 8, and 9. • Please read Chapters 10, 12, 14 and 15 of the Text book before the next tutorial (NB you do not need to read Chapters 11 or 13 – these are optional readings).