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http://www.bized.co.uk External Influences The Macro-Economy Copyright 2007 – Biz/ed http://www.bized.co.uk External Influences – The Macro-Economy • The Macro-economy: – The production and exchange process of the whole economy as opposed to individual markets within the economy – Businesses affected by changes in the macro–economy and by government policies Copyright 2007 – Biz/ed http://www.bized.co.uk External Influences – The Macro-Economy • Government Macro-economic objectives: – Control of inflation – 2.0% – Maintain full employment – all who want a job can get one! – Control of balance of payments – Stability of exchange rate – Maintain steady economic growth -> 2-2.5%? Copyright 2007 – Biz/ed http://www.bized.co.uk External Influences – The Macro-Economy • Inflation: a general rise in the price level over a period of time • Measured by: – RPI – Retail Price Index – RPIX = RPI – mortgage interest payments – RPIY = RPIX – indirect taxes and local authority tax – HICP – Harmonised Index of Consumer Prices (From November 2003) Copyright 2007 – Biz/ed http://www.bized.co.uk External Influences – The Macro-Economy • HICP – Internationally comparable measure of inflation adopted by all EU countries – Geometric rather than arithmetic mean – Does not include: housing costs, buildings insurance, mortgage costs – Does include: university accommodation fees, tuition fees, stock broker charges – Weights determined by expenditure by private households AND all private visitors to UK, and residents of institutional households Copyright 2007 – Biz/ed http://www.bized.co.uk External Influences – The Macro-Economy • Full Employment • Policies designed to help those who want to work get work: – Strong economy – National Minimum Wage and changes to welfare benefits – ‘New Deal’ and ‘Employment Zones’ – Investing in education and training – Investing in diversity Source: Adapted from ‘Towards full employment in a modern society’, Department for Work and Pensions, 2001 (http://www.dwp.gov.uk/fullemployment/pdf/NewDealall.pdf) Copyright 2007 – Biz/ed http://www.bized.co.uk External Influences – The Macro-Economy • Balance of Payments: • A record of the trade between the UK and other countries – Imports – visible and invisible – purchase of goods and services from other countries which result in payments being made abroad – Exports – visible and invisible – the sale of goods and services to other countries which results in payments being received from those countries Copyright 2007 – Biz/ed http://www.bized.co.uk External Influences – The Macro-Economy • Balance of Payments: – Ease with which businesses can sell products abroad – Impact on business costs from imports – Impact on competition from imports and exports Copyright 2007 – Biz/ed http://www.bized.co.uk External Influences – The Macro-Economy • Exchange Rates – The rate at which one currency can be exchanged for another – e.g. £1 = €1.72, £1 = $1.68 – Influences the perceived prices of imports and exports and therefore costs and competitiveness Copyright 2007 – Biz/ed http://www.bized.co.uk External Influences – The Macro-Economy • Exchange Rates: – Effects on Business: • Appreciation – value of £ against other currencies rises, e.g. £1 = €1.72 to £1 = €1.75 – Exports harder to sell abroad - foreign traders have to give up more of their currency to get same amount of £ - export prices appear to rise – Imports appear to be cheaper – buyer in UK gets more foreign currency for every £ Copyright 2007 – Biz/ed http://www.bized.co.uk External Influences – The Macro-Economy • Depreciation – value of £ against other currencies falls, e.g. £1 = $1.68 to £1 = $1.60 – Exporters benefit – foreign traders get more £ for their currency – export prices appear to fall – Importers – have to give up more £ to get same amount of foreign currency – appears import prices have risen • Precise effect of both depends on Price Elasticity of demand for imports and exports Copyright 2007 – Biz/ed http://www.bized.co.uk External Influences – The Macro-Economy • Economic Growth: • Measured by Gross Domestic Product (GDP) – the value of output of goods and services in the economy over a period of a year – Measured by adding up total incomes (Y) or total expenditure (E) or total output of industry – In theory all should be the same! – Appropriate growth levels in UK too high - economy overheating, too low - economy stagnating, resources unemployed – Actual growth of 2–2.5% seen as being sustainable Copyright 2007 – Biz/ed http://www.bized.co.uk External Influences – The Macro-Economy • Economic Growth – Effects on business: • Low growth – business sales low, profit margins tight, excess capacity, orders reduced, excess stock, redundancies • High growth – business sales rising quickly, profits rising, skill shortages, inflationary pressure on prices, capacity squeezed, stocks running down Copyright 2007 – Biz/ed http://www.bized.co.uk External Influences – The Macro-Economy The Business Cycle: Output Potential Growth Boom Growth Actual Growth Slowdown Excess capacity – Recession Time Copyright 2007 – Biz/ed http://www.bized.co.uk External Influences – The Macro-Economy • Government Policies: • Fiscal Policy – influencing economic and noneconomic objectives through variations in public income and expenditure (tax revenue, borrowing and government spending) • Affects all aspects of business activity – regulations, infrastructure – roads, transport, etc, health and safety, support for industry, business taxation, employment laws and taxes – income tax and national insurance contributions, pension contributions, etc. Copyright 2007 – Biz/ed http://www.bized.co.uk External Influences – The Macro-Economy • Monetary Policy: • Changes in the rate of interest to help control the level of expenditure in the economy and therefore the level of inflation • In hands of the Monetary Policy Committee – (MPC) of the Bank of England • Significant effects on business activity: Copyright 2007 – Biz/ed http://www.bized.co.uk External Influences – The Macro-Economy • Rising Interest Rates: – Likely to depress consumer spending – Increases the cost of borrowing – impacts on investment decisions – Increases existing loan costs – the more highly geared the greater the impact – Affects exchange rate – could impact on sales abroad (exports) or cost of imported resources • Falling rates have the opposite effect Copyright 2007 – Biz/ed