Download Unit 1.12 - Economic Threats

BUSINESS AND
MANAGEMENT
MODULE 1
BUSINESS
ORGANIZATIONS &
ENVIRONMENT
Economic Opportunities & Threats
 Refers
to large scale economic
factors affecting the economy as a
whole
– Government policies
– Attitudes and actions in foreign
countries
– Business and consumer confidence
Macroeconomic Objectives
 Governments
objectives:
tend to have four
– Control inflation
– Economic growth
– Reduce unemployment
– Acceptable international trade balance
Controlled Rate of Inflation
A
continual rise in the general prices
of the economy
 Most countries regard a low or
sustainable inflation rate as a
necessity for achieving the other
economic objectives
 There are two main causes of
inflation
Demand Pull Inflation
 Caused
by excessive aggregate
demand in the economy
– Any factor that causes a rise in
consumption, investment, government
spending or trade will lead to an
increase in aggregate demand
 If
consumer confidence is high, this
encourages people to spend money,
and firms to spend money on
production
Cost Push Inflation
 Caused
by higher production costs
leading to a rise in prices (assuming
firms want to maintain their profit
margins)
– Union wage increases
– Material costs
– Affects of climate on crops
Controlling Inflation

By limiting demand-pull and cost-push
factors
– Domestic government might raise taxes to
control the amount of consumption in the
economy
– It could subsidize local businesses to reduce
costs of production
– Could pursue “supply-side policies” that
improve the productive capacity of the
economy (investment in health care/education
etc)
– Exercise 10 – Zimbabwe’s Inflation Problems
Unemployment
 Measures
the proportion of a
country’s workforce not in
employment
 Influenced by aggregate demand –
as production is high, unemployment
will be low
 Economic costs of unemployment
affect both the government and
society
Unemployment Solutions
 Demand-side
policies
– Directly target increasing the level of
aggregate demand
 Reducing
taxes or increasing government
spending
 Reducing interest rates
 Supply-side
policies
– Increase the level of aggregate supply
– Tend to be more permanent policies
Types of Unemployment
Frictional – time lapse between leaving
one and finding another
 Seasonal – caused by seasonal change
 Technological – losing a job to automation
 Regional – analysis of different areas
(urban vs rural)
 Structural – a particular industry suffers
 Cyclical – recessionary unemployment;
affecting everyone

Economic Growth
 Refers
to an increase in a country’s
economic activity over time
 Measured by the change in total
output known as the GDP
 Changes in the economic pattern are
typically known as cycles
 There are several key phases
The Business Cycle
GDP ($)
Trend line
Peak
Recession
Recovery
Economic
Activity
Slump
Time
Trading Cycle

Peak – economic activity is at its highest level
– Consumer spending and investment is high; low
unemployment; good cash flow

Recession – dip in level of economic activity for
two successive quarters
– Declining aggregate demand; falling exports and lower
investment

Slump – bottom of a recession (last decline
stage)
– High unemployment and low levels of consumer
spending; poor cash flow and high bankruptcy rates

Recovery – level of GDP starts to rise again
– Consumption, spending and investment begin to rise
Mini Case Study
Case Study – ASOS
Source: Jones, Hall, Raffo, Business
Studies 3rd Edition, Unit 3, page 37
Coping with a Recession

Cost reduction
– Efforts to cut utility bills; cheaper
warehousing; staff reductions

Price reduction
– Influence consumer spending

Non-pricing strategies
– Repackaging, special offers, after-sales care

Branding
– Consumers maintain loyalty to a brand even
during recessionary times; price elasticity

Outsourcing
– Lower production costs overseas can help
maintain a businesses profit level
Barriers to Economic Growth

Lack of infrastructure
– Basic electricity, roads, hospitals etc
Lack of technical knowledge
 Rapid population growth

– High net birth results in too many mouths to
feed, which may hinder economic development

High foreign debt repayments
– Countries are obliged to meet interest and
debt repayments first leaving little for
domestic growth
Balance of Payments
A
record of a country’s money
inflows and outflows (over a specific
time)
 Made up of a capital account and
current account
– Current
 Export
and import earnings and
expenditures
– Capital
 Government
services, foreign currency etc
Current Account
 Visible
trade balance
– International trade in tangible goods
(oil, steel cars etc)
 Invisible
trade balance
– Intangible goods such as banking,
distribution and insurance
Exchange Rates
Measures the value of one currency in
terms of another foreign currency
 A higher rate (appreciation of currency)
means that export prices will be relatively
higher, thereby reducing competitiveness
 A lower rate (depreciation of currency)
means that domestic firms that import
raw materials will suffer from having to
pay higher prices
 Governments try to protect the balance of
payments by adjusting exchange rates
(through interest rate changes)

– Exercise – Exchange rates
Protecting Against Currency
Fluctuations
Large fluctuations in exchange rates can
create difficulties for businesses
 Cannot accurately forecast import
requirements (costs)
 International deals may be postponed
until currency fluctuations are minimized
 Protectionism

– Government policy used to safeguard domestic
business
– Involves tariffs or quotas for example
Examples of Protectionism

Tariffs
– Form of tax placed on imported products; gives
domestic goods a slight advantage

Quotas
– Quantitative limits that prevent too many foreign
products entering a country

Subsidies
– Payments made by government to a domestic business
as a form of aid

Embargos
– Physical bans on international trade with certain
countries

Standards
– Imposition on strict standards (health and safety) on
certain imported products