Transcript File

Unit 1.5
External Environment
Introduction
► This
chapter assesses the importance of
external influences on business performance
and decision-making.
► Businesses depend for their survival on
understanding and responding to external
factors that are beyond their control.
► Many of the factors are ‘constraints’
because they may limit the nature of
decisions that business managers can take.
Introduction
► The
legal requirements imposed by
governments, on environmental pollution for
example, are one of the most obvious
constraining influences on business activity.
However, external influences can also
create opportunities and enable a business
to become even more successful –
introducing new technology in advance of
rival firms is one example.
Internal Factors
►Are
the constraints and
opportunities (facing a business
in the attempt to achieve its
aims and objectives) within a
firm’s own control
Internal Factors (Constraints)
► Example:
 Finance – most firms lack sufficient sources of
finance
 People – poor working relations, poor
communications can harm a firm’s ability to
achieve its objectives
 Marketing – firms might not have attractive
marketing campaigns as their rivals
 Production – firm may lack the resources or
expertise
External Factors (Constraints)
►Are
those issues which either
restrict or aid the performance
of a business but are beyond
its control.
PEST ANALYSIS
► PEST
= Political, Economic, Social and
Technological opportunities and threats of
the external environment within which
businesses operate
► These factors affect all businesses in the
economy and are beyond the control of any
individual organization
► Mainly used at the start of a strategy review
process
PEST analysis issues
► POLITICAL
 Government legislation (employment law,
consumer protection rights, copyright,
trademark regulations) define the boundaries
within which businesses can operate
► ECONOMIC
 Inflation, unemployment, economic growth and
international trade
 Consumer and business confidence also affect
the level of economic activity
PEST analysis issues
► SOCIAL
 Social, cultural and demographic changes can
also present opportunities and threats
► TECHNOLOGICAL
 Advances in technology and work processes
(such as the microchip revolution or the
introduction of just-in-time stock control
system) have improved the efficiency of
businesses
Variations of PEST
►STEP
– more optimistic name
►PESTLE
analysis
 Legal and Environmental
►STEEPLE
 Ethical opportunities and threats
Steps to carry out a PEST analysis
►Brainstorm
external factors likely to
affect the business
►Discuss these factors to decide which
ones are most likely to have a significant
impact on the business and hence its
strategy
►Summarize the information in a PEST
analysis template to further the
development of business strategy
PEST Analysis
►
http://www.youtube.com/watch?feature=player_embedded&v=eGLFVj
s1Zak#t=194
PEST Analysis is useful for four main reasons:
► It
helps you to spot business or personal
opportunities, and it gives you advanced warning
of significant threats.
► It reveals the direction of change within your
business environment. This helps you shape what
you're doing, so that you work with change, rather
than against it.
► It helps you avoid starting projects that are likely
to fail, for reasons beyond your control.
► It can help you break free of unconscious
assumptions when you enter a new country,
region, or market; because it helps you develop an
objective view of this new environment.
A simplified example of a PEST
analysis which examines some of
the opportunities and threats of
foreign businesses operating in
India
PEST analysis of multinationals
operating in India
► POLITICAL
 Political reform in India will encourage better
trade relations with other nations.
 Legislation is less stringent than in developed
nations, thereby placing fewer constraints on
business activity.
 Regarded as less politically stable compared
with many other countries in the region.
 Poor enforcement of patents and copyrights
might discourage technology transfer to India.
PEST analysis of multinationals
operating in India
► ECONOMIC
 Huge growth potential in financial markets.
 Significant economic growth and rising disposable
incomes (spending power) in India.
 Improved infrastructures and market opportunities in
Mumbai and New Delhi.
 Relatively low costs of production (average wage rates
are still very low).
 Infrastructure and economic stability are less attractive
than in other countries such as China.
 The vast majority of the Indian population is still very
poor.
PEST analysis of multinationals
operating in India
► Social
 Potential market of over 1.2 billion people (the
second most populous country in the world and
expected to overtake China as the most
populated nation by 2050).
 Well-educated English-speaking workforce.
 Large yet increasing discrepancies in income
and wealth distribution.
 Language barriers in rural cities and/or a clash
of national cultures.
PEST analysis of multinationals
operating in India
► Technological
 Growing number of technologically aware
population (huge opportunities for firms
providing products such as mobile
phones, personal computers and internet
services).
 Technologies are easily copied due to a
lack of appropriate legislation.
Key advantage of PEST analysis
► Simple
to use
► If the overall opportunities of a decision
outweigh the threats, then a business is
likely to pursue that option
► The analysis helps managers to be thorough
and logical in their analysis of the external
opportunities and threats faced by the
business
► PEST promotes a proactive and forward
thinking rather than static views based on
gut feelings
Social and Cultural
Opportunities and Threats
► The
attitude of society towards a wide range of
different issues (business ethics, social welfare,
women, religion or animals) will affect what
good and services are provided in the economy.
► Demographic
changes in developed nations,
such as a more educated and flexible workforce
alongside an aging population, have affected
recruitment practices, marketing strategies and
the products provided by businesses.
Review question 1.5.1
Page 68
Comment on how the
demographic changes below may
present both opportunities and
threats to a business:
1.
2.
3.
4.
Growing number of self-employed people.
Increasing number of single parent
families.
Parents choosing to have fewer children
and at a later stage in their lives.
More people graduating with university
degrees.
Growing number of
self-employed people
Increasing number of single
parent families
Parents choosing to have fewer
children and at a later stage
in their lives
More people graduating with
university degrees
Technological
Opportunities and Threats
► Technology
has affected all aspects of
business functions
► Internet




affected:
Human resources in recruitment process
Marketing (e-commerce – trading in internet)
Finance – annual reports online
Operations Management – access to
benchmarking data
Technological
Opportunities and Threats
►Internet
presents opportunities for
businesses:
 Speed of access to information
 Reducing language and cultural barriers
 Reduced cost of production
Technological
Opportunities and Threats
►Internet
presents threats for
businesses:
 Price transparency – customers can easily
compare the prices of different businesses
without leaving their home or office
 Online crime – hackers, online banking and
credit card fraud
 Higher cost of production – maintenance and
training costs
 Reduced productivity – access personal email
and social networking during working hours
Technological
Opportunities and Threats
► Other
opportunities:
 New working practices – working from home,
video conferencing, e-commerce, advertising in
the internet
 Increased productivity and efficiency gains –
use of robots / machines, automation
 Quicker product development time – CAD/CAM
allowed businesses to produce prototypes
quickly and cost-efficiently
Technological
Opportunities and Threats
► Other
opportunities:
 New products and new markets – technology is
a source of innovation and brings about new
products in the market
 The creation of jobs – increased need for
maintenance and technical support
Technological
Opportunities and Threats
► Other
Threats:
 Technology is not always reliable or secure
 It can be costly
 Shorter product life cycle
 Automation has led to job losses in primary and
secondary sector industries
Technological
Opportunities and Threats
► Factors
to consider when adopting or
implementing technology in the workplace:
 Costs
 Benefits
 Human relations
 Recruitment and training
Review question 1.5.2
NINTENDO AND APPLE
Page 70
Nintendo’s Wii games console and Apple’s iPod are
huge hits with customers. Nintendo’s games console
appeals to new market segment such as women and
the elderly. Demand is high in Asia, Europe and the
USA helping Nintendo to outsell its two nearest
rivals, the Xbox 360 and PlayStation 3. In April
2007, announced the sale of its 100 millionth iPod,
making it the most successful music player in
history. Some 300 million iPods were bought within
the first ten years of its launch.

Explain how the technological environment
can present opportunities for hi-tech firms
such as Nintendo and Apple.
The technological environment can
present a host of opportunities for hitech firms which include:
► The
ability to produce more sophisticated
consoles, games and other gadgets (such as
the iPod) to appeal to a larger and wider
market
► Quicker product development times;
essentially in fast-paced industries where
products may have a short product life cycle
The technological environment can
present a host of opportunities for hitech firms which include:
► Marketing
opportunities are enhanced with
the use of improved technology, e.g.
purchasing music online through iTunes
► Any other relevant factor that is explained
Rubric
► 3-4
marks: there is good explanation of
how the technological environment can
provide opportunities to organizations.
Examples are used and there is relevant
application to hi-tech firms.
► 1-2 marks: a vague answer that lacks detail
and / or depth. There may be little, if any,
application. Award 1 mark for a list of
factors.
Economic
Opportunities and Threats
► Economic
environment refers to the largescale economic factors affecting a nation as
a whole, such as the condition of foreign
trade and the levels of business and
consumer confidence.
► Government’s 4 key macro-economic goals:




Controlled inflation
Economic growth
Reduced unemployment
Healthy international trade balance
Economic
Opportunities and Threats
► Controlled
rate of inflation
 Inflation is the continual rise in the general level
of prices in the economy
 Causes of inflation:
►Demand
Pull Inflation – caused by excessive
aggregate demand in the economy
►Cost Push Inflation – caused by higher cost
production leading to a rise in prices so that firms
can maintain their profit margins
Introduction to inflation
► http://www.youtube.com/watch?v=7rpvxZp
hZZc
Gold Standard
► http://www.youtube.com/watch?v=LdyHso5
iSZI
Definitions
► INFLATION
is a sustained increase in the
AVERAGE PRICE LEVEL of goods and services in a
nation.
► DEFLATION occurs when the AVERAGE PRICE
LEVEL of goods and services decreases over time.
► KEY
WORDS in the definition is the AVERAGE
since inflation does not measure changes in
relative prices of particular goods.
Inflation
► INFLATION
 Causes the value of money to decrease
 Makes money less valuable
 Reduces purchasing power
 Encourages households and firms to
spend now rather than postponing
spending until the future when prices are
higher
Demand-pull and Cost-push Inflation
► http://www.youtube.com/watch?v=XU33RPl
EioU
GDP
► http://www.youtube.com/watch?v=yUiU_xR
PwMc
DEMAND-PULL INFLATION
LRAS
PL
SRAS
P1
P0
AD1
AD0
Y0
Y1
YFE
Real
GDP
DEMAND-PULL INFLATION
LRAS
PL
SRAS
PE
P1
P0
ADE
AD1
AD0
Y0
Y1
YFE
Real
GDP
DEMAND-PULL INFLATION
LRAS
PL
SRAS
P2
PE
P1
AD2
P0
ADE
AD1
AD0
Y0
Y1
YFE Y2
Real
GDP
DEMAND-PULL INFLATION
LRAS
PL
SRAS
P3
P2
PE
AD3
P1
AD2
P0
ADE
AD1
AD0
Y0
Y1
YFE Y2 Y3
Real
GDP
COST-PUSH INFLATION
LRAS SRAS2
PL
SRAS1
P1
PE
AD
Y1
YFE
Real
GDP
+
Aggregate Demand
Chapter 12
+
Macroeconomic Objectives
 Economic
Growth
 A steady rate of increase of national output
 Employment
A
low level of unemployment
 Price
Stability
 A low and stable rate of inflation
 External
Stability
 A favorable balance of payments position
 Income
Distribution
 An equitable distribution of income
+ Aggregate Demand and Supply
Introduction

http://www.youtube.com/watch?v=hTWPrWmPJS0&list=PLF2
A3693D8481F442
+
Aggregate Demand
Is
the total demand for the goods
and services of a nation at a
given price level and at a given
period of time.
Is
the total demand for a nation’s
goods and services from
domestic households, firms, the
government and foreigners.
+
Components of AD

1) Consumption (C) – includes the durable and nondurable goods and services purchased by private
individuals and households

2) Investment (I) – refers to spending by firms and
households

3) Government spending (G) – spending on government
purchases, which includes salaries for workers as well as
capital goods spending

4) Net Exports (X-M) – count all exports as an inflow and
thus an increase in GDP while subtracting imports as an
outflow and a decrease in GDP.

AD = C + I + G + (X – M)
Average
Price Level
P1
P2
AD
0
Y1
Y2
National Output
(real GDP)
+
AD slopes downwards for 3
different reasons
 The
Net Export
Effect
 As price level falls
in a particular
country, goods and
services produced
in that country
become more
attractive to foreign
consumers.
 The Wealth
Effect
 High price levels
reduce the
purchasing power
 The
Interest Rate
Effect
 High interest rates,
quantity demanded
decreases
+
Determinants of AD or
shifts in the AD curve
A
change in the price level leads to a
movement along a nation’s AD curve and
a change in the national output
demanded.
 AD
will shift if any of its four components
changes.
 Each
components has its own
determinants that may cause it to
increase or decrease.
+
What causes changes in
CONSUMPTION?
 Changes
in INCOME
 Income is the most significant determinant
of consumption
 As income rise people have more money
to spend on goods and services, so
consumption increases
 Growing economy => national income
rising => increase in consumption =>
increase in aggregate demand
+
What causes changes in
CONSUMPTION?
 Changes
in INTEREST RATES
 Rise in interest rates (price of borrowed
money) will likely lead to less borrowing =>
consumption will fall => fall in AD
 Rise in interest rates makes saving more
attractive; people would prefer to put extra
money in the bank to earn money
 A fall in interest rates will lead to an increase
in consumption, ceteris paribus, as it
becomes more attractive to borrow money to
spend on durable goods and services.
+
What causes changes in
CONSUMPTION?
 Changes
in WEALTH
 Income is the money that people earn.
Wealth is made up of the assets the
people own.
 2 factors that can change the level of
wealth:
1. Change in house prices
2. Change in the value of stocks and
shares
+
What causes changes in
CONSUMPTION?
 HOUSEHOLD
INDEBTEDNESS
 Household debt is the amount of money
owed by a household to lenders
 In the short run, an increase in consumer
debt allows households to increase
consumption at each level of household
income.
 In the long run, debts must be paid back,
which is only achieved through reduction
in future consumption.
+
What causes changes in
CONSUMPTION?
 Changes
in EXPECTATIONS/CONSUMER
CONFIDENCE
 If people are optimistic about their economic
future then they are likely to spend more now
 High consumer confidence is likely to lead to
increased consumption
 Economists regularly measure consumer
confidence and put the information together
in the form of a “consumer confidence index”
or “consumer sentiment index”
What causes changes in
CONSUMPTION?
1.
Changes in INCOME
2.
Changes in INTEREST RATES
3.
+
Changes
in WEALTH
4.
Changes in
EXPECTATIONS/CONSUMER
CONFIDENCE
5.
HOUSEHOLD INDEBTEDNESS
+
What causes changes in
INVESTMENT?
 INTEREST
RATES
 If interest rates are high, then firms may
prefer to put their retained profits in the bank
to earn higher returns on savings rather than
use them to invest
 Decrease in interest rates will
 decrease the incentive to save
 decrease the cost of borrowing
 likely to lead to an increase in borrowing
 likely to result in an increase in the level of
investment
+
What causes changes in
INVESTMENT?
 Changes
in the level of NATIONAL
INCOME
 Increase in national income leads to an
increase in consumption
 This will encourage firms to invest in new
plant and equipment to meet the increase
in demand
 Investment accelerates when national
income rises
+
What causes changes in
INVESTMENT?
 BUSINESS
CONFIDENCE/EXPECTATIONS
 Future prices
 Technology
 Business taxes
 Inventories
 Degree of excess capacity
What causes changes in
INVESTMENT?
1.
INTEREST RATES
2.
NATIONAL INCOME
+
BUSINESS
CONFIDENCE/EXPECTA
TIONS
3.
What causes changes in
GOVERNMENT SPENDING?
•
•
Government spending will rise:
1. Government made commitment to
financially support a given industry
+
•
2. Government to correct market
failure
•
3. A new education or health policy
might require increased public
spending on schools or hospitals
+
What causes changes in
NET EXPORTS?
 INCOMES
ABROAD
 Household income in trading nations is a
major determinant of a nation’s net
exports
 Ex. U.S. and Canada (trading partners)
 As income in the U.S. fall, Canada’s
exports fell
+
What causes changes in
NET EXPORTS?
 TASTES
AND PREFERENCES OF
CONSUMERS
 Once a country’s producers have
developed a strong reputation in the
global marketplace, that country can
count on steady demand from abroad for
its output
 Demand abroad is an important objective
of government and multinational
corporations
+
What causes changes in
NET EXPORTS?
 EXCHANGE
RATES
 Weak currency is likely to contribute to a
country’s net exports
 Weaker currency makes the output
cheaper to consumers abroad
 Weaker currency makes foreign products
less desirable to domestic consumers &
may lead to growth in domestic household
consumption
+
What causes changes in
NET EXPORTS?
 PROTECTIONISM
 Government
actions and policies that
restrict or restrain international trade,
often done with the intent of protecting
local businesses and jobs from foreign
competition.
 Typical methods of protectionism are
import tariffs, quotas, subsidies or tax cuts
to local businesses and direct state
intervention.
What causes changes in
NET EXPORTS?
•
1. INCOMES ABROAD
•
2. TASTES AND PREFERENCES
OF
+ CONSUMERS
•
3. EXCHANGE RATES
•
4. PROTECTIONISM
+
Aggregate Supply
+
Aggregate Supply (AS)
Is
the total amount of goods
and services that all the firms
in all the industries in a
country will produce at every
price level in a given period
of time
+
Aggregate Supply (AS)
AS
curve illustrates the
relationship between the
average price level in a nation
and the total output of the
nation’s producers.
+
Aggregate Supply (AS)
There
are 2 competing
theories on the possible
response of a nation’s
producers to changes in the
price level, depending on how
prices and wages in an
economy change following a
change in AD.
+
Keynesian vs. Neo-classical
+
Fear the boom and bust

http://www.youtube.com/watch?v=d0nERTFo-Sk
+
Keynesian Curve
• When price level
rises from P1 to P2,
producers are
responsive to the
higher price
• Increase their ouput
from Y1 to Yfe (fullemployment output)
• AS is relatively
elastic when the
nation is producing
relatively low level
of ouput
+
Neo-classical curve
• A change in the average
price level of the nation’s
goods from P1 to P2 has
no effect on the level of
output
• Regardless of price level,
nation’s producers will
always produce at the level
of output at which all the
nation’s resources are fully
employed
+
Full Employment (FE) national
output
 Yfe
refers to nation’s full employment level
of output
 It
is the level of output of goods and
services achieved when a nation is
producing at or near its potential by
employing all available land, labor and
capital
A
nation achieving Yfe is producing either
on or near its PPC, enjoy a low rate of
unemployment and a stable price level
(economy could be considered strong and
healthy)
+
Full Employment (FE) national
output
LRAS
curve is vertical at the full
employment level of output
SRAS
curve slopes upward
(highly elastic below full
employment and becomes highly
inelastic beyond full employment
output)
+
SRAS
• At low levels of
aggregate output,
the curve is fairly
flat.
• As the economy
approaches
capacity, the
curve becomes
nearly vertical.
• At capacity, the
curve is vertical.
Short-run
+
Short-run
is defined as the
period of time when the
prices of the factors of
production do not change
The
period of time over which
the level of wages in a nation
are fixed. Also known as
“fixed wage” period.
+
SRAS is horizontal at levels of
output below full employment
PL
LR
AS
SR
AS
• Equilibrium
=> AD = AS
PE
AD1
YFE
Real
+
SRAS is horizontal at levels of
output below full employment
PL
LR
AS
PE
SR
AS
• At YFE, the nation
experiences very low
unemployment, stable
prices (meaning low
inflation), nation’s
resources are being used
efficiently and near their
full capacity towards the
production of G&S
AD1
YFE
Real
+
SRAS is horizontal at levels of
output below full employment
LR
AS
PL
SR
AS
• A fall in AD, small
decrease in price level,
large decrease in output
P
P
E1
AD2
Y1
YFE
Real
AD1
+
SRAS is horizontal at levels of
output below full employment
LR
AS
PL
SR
AS
P
P
E1
AD1
AD2
Y1
YFE
Real
• At Y1, decrease in AD
caused by a decrease in
any of the components of
AD, causes a fall in price
level (from PE to P1)
• As PL falls, firms respond
by reducing output and
laying off workers
• In the SR, the decrease in
the PL is proportionally
smaller than the decrease
in the equilibrium output
+
SRAS is horizontal at levels of
output below full employment
LR
AS
PL
P
P
E1
P2
SR
AS
AD1
AD2
Y2
Y1
YFE
AD3
Real
• At Y2, as AD continues to
decrease, firms must
reduce employment and
output
• Reduce in AD caused the
PL and output to decrease
• Due to elasticity below
employment level, decline
in output is proportionally
greater than the decline in
the PL
+ SRAS is horizontal at levels of
output below full employment
LR
AS
PL
SR
AS
PE
P1
P2
AD1
AD3
Y2
Y1
YFE
AD2
Real
• At Y2, as AD continues
to decrease, firms must
reduce employment and
output
• Reduce in AD caused
the PL and output to
decrease
• Due to elasticity below
employment level,
decline in output is
proportionally greater
than the decline in the
PL
+
Short – Run: Level of output below
full employment
 The
decline in the short-run equilibrium
output and employment resulting from a fall
in AD is explained by the fact that in the
short run, wages and prices are
downwardly inflexible.
 Firms
find it difficult or impossible to adjust
workers’ wages due to several rigidities
that exist in many countries’ labor markets.
+
Labor market rigidities that make
wages inflexible in the SR:
Worker
contracts
Minimum
wage laws
Wage
agreements with labor
unions
Government
regulations
+
In the SR:
C, I, G, (X-M)
AD
YFE
Employment
+
Shifts in Aggregate Supply
+ Causes of an increase in SRAS

Lower resource costs (ex. oil, minerals and other raw
materials)

Improvement in the productivity of land or capital

Reduction in the minimum wage

Government subsidies to producers

Investment tax credits (encouraging firms to invest in capital)

Reduction in trade union power

Better infrastructure

Better educated or more skilled workforce

Strong currency
+ Causes of a decrease in SRAS
 Increase
in resource costs (oil shocks,
energy shortages, higher food prices)
 Increase
in trade union power
 Increase
in the minimum wage
 Higher
business taxes
 Weaker
currency (makes imported raw
materials more expensive)
+
In Summary
Understanding
the interactions of AD
and AS in a nation’s economy helps
governments, households and firms to
respond better to fluctuations in the
level of economic activity, and gives
all stakeholders involved the ability to
understand the appropriate
responses to periods of
macroeconomic uncertainty or
prosperity.
Review question 1.5.3
Zimbabwe’s inflation problems
Page 71
Zimbabwe suffered immensely from the
impacts of hyperinflation for almost a decade,
with annual rates reaching 231,000,000
percent in July 2008. This meant that prices
of goods and services in the country were
more than doubling each week!
Back in June 2006, the country’s Reserve
Bank had issued new bank denomination –
the 100,000 Zimbabwean dollar note (less
than $1 at the time).
However, by January 2009 the government
had launched the 100 trillion Zimbabwean
dollar banknote (ZWD 100,000,000,000,000)!
It is estimated that 10.5 million Zimbabwean
(around 80% of the population) live below the
poverty line.
The Zimbabwean dollar was eventually
abandoned in favor of the US dollar as the
nation’s official currency. Economists warned
that the problem would continue to be a
major issue unless the government dealt with
the root causes of inflation.
Outline 3 factors that could have
caused inflation in Zimbabwe
► Cost-push
inflation
 Caused by soaring food prices
COST-PUSH INFLATION
LRAS SRAS2
PL
SRAS1
P1
PE
AD
Y1
YFE
Real
GDP
Outline 3 factors that could have
caused inflation in Zimbabwe
► Cost-push
inflation
 Caused by soaring food prices
► Zimbabwean
government printing more
money, thereby raising the money supply
and reducing its value
Depreciation: Supply increase
Price of USD in terms of EUR
EUR
SUSD
SUSD 1
.749
.66
DUSD
O
Qe
Q1
Q of USD
Appreciation: Supply decrease
Price of USD in terms of EUR
EUR
SUSD
SUSD 1
.80
.749
DUSD
O
Q1
Qe
Q of USD
Appreciation: Demand increase
Price of USD in terms of EUR
EUR
SUSD
.80
.749
DUSD 1
DUSD
O
Qe
Q1
Q of USD
Depreciation: Demand decrease
Price of USD in terms of EUR
EUR
SUSD
.749
.66
DUSD 1
O
Q1
Qe
DUSD
Q of USD
Outline 3 factors that could have
caused inflation in Zimbabwe
► Cost-push
inflation
 Caused by soaring food prices
► Zimbabwean
government printing more
money, thereby raising the money supply
and reducing its value
► Demand pull inflation
 Citizens getting large pay raises (due to
increasing cost of living), thereby creating pentup demand and higher prices
DEMAND-PULL INFLATION
LRAS
PL
SRAS
P1
P0
AD1
AD0
Y0
Y1
YFE
Real
GDP
Evaluate the impact of uncontrollable
inflation on the Zimbabwean economy
► Reduces
the international competitiveness
of the economy
 This will make it more difficult for Zimbabwe to
sell its exports, thereby hindering the country’s
economic growth
► The
level of national output is likely to
decline due to soaring costs of production
 This will have detrimental effects on the
employment level in the economy
Evaluate the impact of uncontrollable
inflation on the Zimbabwean economy
► Investment
(including foreign direct
investment) is likely to decline as business
confidence levels fall
 This will hamper future levels of economic
activity in Zimbabwe
► Standards
of living is likely to fall
 Causing further social and economic problems
for the poverty-ridden country
UNEMPLOYMENT
Economic
Opportunities and Threats
►A
high level of employment / reducing the
rate of unemployment:
 Types of unemployment (pg. 72)
 Policies to tackle the problems of
unemployment:
►Demand
Side Policies - increase the level of AD
►Expansionary Fiscal Policies - reduce taxes/increase
government spending
►Expansionary Monetary Policies - reduce level of
interest rates
►Supply-side Policies - increase the level of AS
UNEMPLOYMENT
 http://www.youtube.com/watch?v=_CdT
u1pk06w&list=PLF2A3693D8481F442
TYPES OF UNEMPLOYMENT
 http://www.youtube.com/watch?v=ZckA
N1KYB5I&list=PLF2A3693D8481F442
Meaning of unemployment
UNEMPLOYMENT
Is the condition of someone
of working age (16-64) who is
willing and able to work,
actively seeking employment,
but unable to find a job.
Unemployment rate (UR)
calculations:
 UR
= number of unemployed x 100
labor force
 Unemployment
rate is the percentage of
the total labor force in a nation that is
unemployed.
Labor Force
 It’s
the sum of EMPLOYED and UNEMPLOYED
persons aged 16-64 (age range may vary from
nation to nation)
 Persons
who are neither employed nor seeking
employment are not in the labor force




Retired persons
Students
Those taking care of children or other family
members
Others who are neither working nor seeking work
Labor force participation rate
(LFPR)
 Is
the proportion of the working-age population
that is either unemployed or employed. (Ratio of
the number of people in the labor force to the
entire working-age population of a nation.)
 LFPR
=
labor force
x 100
working age population
Labor force participation rate
(LFPR)
 LFPR
 If
=
labor force
x 100
working age population
the LFPR drops, it may be because
people have chosen to give up
searching for jobs or they have decided
to retire early or go back to school.
Labor force participation rate
(LFPR)
 LFPR
A
=
labor force
x 100
working age population
decline in LFPR can cause the
unemployment rate to understate the
true number of people out of work in a
nation.
Examples of people who
are part of the labor force
and who are not part of
the labor force
A
part-time retail sales clerk
who is also going to college
Part of the labor force
because she is employed
A
stay-at-home mother
NOT part of the labor force
because she is not employed
nor seeking employment
A
college graduate who
volunteers in a community
center
NOT part of the labor force
because although he is
working, he is not formally
employed nor is he seeking
employment
A
full-time nurse
Part of the labor force
because he is employed
A
factory worker whose plant
closed and who is applying for
jobs at other firms
Part of the labor force
because he is unemployed
A
discouraged worker who has
been looking for a job for 18
months but has given up the
job search
NOT part of the labor force
because he is no longer
seeking employment
An
engineer who goes back to
school to earn a teaching
degree
NOT part of the labor force
because he is not currently
seeking employment
A
recent college graduate
interviewing at different
companies for her first job
Part of the labor force
because she is
unemployed
Consequences of
unemployment
 Individual
consequences of
unemployment
Decreased
household income and
purchasing power
Increased
levels of psychological and
physical illness, including stress and
depression
Consequences of
unemployment
 Social
consequences of unemployment
Downward
employed
Increased
pressure on wages for the
poverty and crime
Transformation
of traditional societies
Economic consequences of
unemployment
1.
Lower level of AD
 Unemployment
lowers household’s
disposable income
 Reduces consumption
 Reduces level of demand and output in the
nation as a whole
 Leads to more unemployment
 Can pull the economy into a recession
Economic consequences of
unemployment
2.
Under-utilization of the nation’s resource
 Unemployment
means a nation is not fully
utilizing its productive resources
 Nation
with high unemployment is
producing within its PPC at a level below
that which is most beneficial to an
economy
Economic consequences of
unemployment
3.
Brain-drain
 Skilled
workers choosing to leave the
country with high unemployment if job
opportunities are abundant elsewhere
 This
further leads to a fall in the production
possibilities of the nation with high
unemployment
Economic consequences of
unemployment
4.
A turn towards protectionism and
isolationist policies
 Rise
of protective tariffs and quotas or
increased government spending on
subsidies for domestic producers
 Such
policies lead to a misallocation of
society’s scarce resources and in the long
run will make the nation less competitive in
global markets
Economic consequences of
unemployment
5.
Increased budget deficits
 High
unemployment reduces tax revenues
flowing to a government while increasing
public expenditures on financial support for the
unemployed
 Result
in decrease government spending on
public goods (infrastructures, education,
defense, healthcare) or an increase in
government borrowing to finance its budget
deficit
Economic consequences of
unemployment (T/F)
Higher
level of AD
FALSE
Lower level of AD
Economic consequences of
unemployment (T/F)
Over-utilization
of the
nation’s resources
FALSE
Under-utilization of the
nation’s resources
Economic consequences of
unemployment (T/F)
Brain-dead
FALSE
Brain-drain
Economic consequences of
unemployment (T/F)
A
turn towards protectionism
and isolationist policies
True
Economic consequences of
unemployment (T/F)
Decreased
budget deficits
FALSE
Increased budget deficits
Types of unemployment
Frictional
unemployment
Seasonal unemployment
Technological unemployment
Regional unemployment
Structural unemployment
Cyclical unemployment
Frictional Unemployment:
Occurs
when people change
jobs as there is usually a time
lag between leaving a job
and finding or starting
another. As this is temporary,
there is relatively little social
hardship. It is always present
in the economy.
Seasonal Unemployment:
Is
caused by seasonal
changes in demand for a
product
e.g. beach resorts tend to
suffer from a lack of tourists
during the winter months.
Technological Unemployment:
Results
in people losing
their jobs due to the
introduction of laborsaving (capital intensive)
technologies, which can
cause mass-scale
unemployment.
Regional Unemployment:
Refers
to the different
unemployment rates that
exist in different areas of a
country.
Remote rural areas tend to
have higher levels of
unemployment than busy
urban business districts.
Structural Unemployment:
Occurs
when the demand
for products produced in a
particular industry
continually falls.
The industry therefore
suffers from structural and
long-term changes.
Cyclical (demand-deficient)
Unemployment:
Is
caused by a lack of
aggregate demand in the
economy.
It is the most severe type of
unemployment as it tends
to affect each and every
industry (caused by a
recession).
Types of Unemployment
Description:
People who are in between jobs or
looking for their first job
Types of Unemployment
Description:
People who are in between jobs or
looking for their first job
Frictional Unemployment
Types of Unemployment
Description:
Workers unable to find work because
a reduction in private and public
spending reduces AD.
Types of Unemployment
Description:
Workers unable to find work because
a reduction in private and public
spending reduces AD.
Cyclical Unemployment
(Demand-Deficient)
Types of Unemployment
Description:
Workers who need to seek other work
between seasons.
Types of Unemployment
Description:
Workers who need to seek other work
between seasons.
Seasonal Unemployment
Types of Unemployment
Description:
Workers unable to find work because
their skills do not match those
demanded by firms.
Types of Unemployment
Description:
Workers unable to find work because
their skills do not match those
demanded by firms.
Structural Unemployment
Types of Unemployment
Description:
People losing their jobs due to the
introduction of labor-saving
technologies.
Types of Unemployment
Description:
People losing their jobs due to the
introduction of labor-saving
technologies.
Technological
Unemployment
Types of Unemployment
Description:
Refers to the different unemployment
rates that exist in different areas of a
country.
Types of Unemployment
Description:
Refers to the different unemployment
rates that exist in different areas of a
country.
Regional Unemployment
3 TYPES OF MACROECONOMIC TOOLS
• Fiscal Policy
• Monetary Policy
• Supply-side Policy
3 TYPES OF MACROECONOMIC TOOLS
• Fiscal Policy
• Government’s use of taxes and spending to
influence the overall level of AD in the economy
• Monetary Policy
• Is the process by which the monetary authority of
a country controls the supply of money
• Supply-side Policy
• Combination of government-led and free market
policies designed to increase the productive
capacity of the country
FISCAL POLICY
• http://www.youtube.com/watch?v=1qhJPqyJRo8
DEFINITION OF FISCAL POLICY
• Is a government’s manipulation of TAXES and
EXPENDITURES with the goal of increasing or
decreasing the level of aggregate demand (AD) in
an economy.
• Government spending can have powerful effects
on the economic activity in a nation
• Taxation can change the level of consumption and
investment
• Either aimed at reducing AD to reduce inflation or
increasing AD to reduce unemployment, FP is used
regularly by government to manage the overall
level of economic activity of a nation
EXPANSIONARY FISCAL POLICY
• Is a decrease in taxes and/or an
increase in government spending
aimed at increasing the level of
aggregate demand to close a
recessionary gap and move an
economy towards its full-employment
level of output
This will reduce unemployment
Move the economy towards full-employment level of
output during a recession
Expansionary Fiscal Policy
LRAS
SRAS1
Price level
AD1
P2
P1
AD2
Y1
YFE
Real gross domestic product
Copyright  2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia
9172
CONTRACTIONARY FISCAL POLICY
• Is an increase in taxes and/or an
decrease in government spending
aimed at decreasing the level of
aggregate demand to close an
inflationary gap and moving the
economy to its full-employment level
of output and price level stability
Reduces inflation
Slow down the economy
Contractionary Fiscal Policy
Price level
LRAS
SRAS1
P1
P2
AD1
AD2
YFE
Y1
Real gross domestic product
Copyright  2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia
9174
Intro to Money Market
 Macroeconomics policymakers have 2 general
tools to manage the level of aggregate demand
 Fiscal Policy – changing the levels of taxes and
government spending
 Monetary Policy – changing the supply of money
available in a nation
 Carried out by the central bank of each country
 Note the difference between central bank and commercial
bank
Central bank vs. Commercial bank
 Commercial banks
 are financial institutions whose main functions are
 to hold deposits for their customers (consumers and
firms)
 to make loans to their customers
 to transfer funds by check & electronically from one bank
to another
 to buy government bonds
Role of Central Banks
 Central bank
 Is the monetary authority of a country, which performs
the functions of issuing currency, managing the money
supply, and controlling interest rates
 2 largest economies
 European Union – The European Central Bank (ECB)
 United States – US Federal Reserve (the Fed)
 Independent from politics
 Head and governors are appointed by politicians to
fixed terms
Central Bank’s Responsibilities
 Banker to the government
 Banker to commercial banks
 Regulator of commercial banks
 Conduct Monetary Policy
Central Bank’s Responsibilities
 Banker to the government
 Holds the government’s cash/deposits
 Receives payments for the gov’t and
makes payments for the gov’t
 Manages the government’s borrowing
by selling bonds to commercial banks
and the public
 Acts as an adviser to the gov’t on
financial and banking matters
Central Bank’s Responsibilities
 Banker to commercial banks
 Holds deposits for commercial
banks
 Loans to commercial banks in
times of need
 Note: central bank does not act as
a banker to consumers and firms
Central Bank’s Responsibilities
 Regulator of commercial banks
 Central bank regulates and supervises
commercial banks, making sure they
operate with appropriate levels of cash &
according to rules that ensure the safety
of the financial system
 This is a very important function, because
the funds that commercial banks use to
make loans are the savings and other
deposits that consumers and firms deposit
with commercial banks
Central Bank’s Responsibilities
 Conduct Monetary Policy
 CB is responsible for monetary policy,
based on changes in the supply of
money or the rate of interest
 Usually responsible for the
determination of exchange rates
because of the close relationship
between interest rates and exchange
rates
Economic
Opportunities and Threats
► Economic
Growth:
 Increase in a country’s economic activity over
time
 Measured in terms of Gross Domestic Product
(GDP) – change in total output of the economy
per year
 See the trade cycle (pg. 72)
ECONOMIC GROWTH IN THE BUSINESS CYCLE
Recession
• Defined as 2 consecutive quarters of
declining national output
• If the economy contracts over a six-month
period, it is classified as a recession
• Impacts consumer and market confidence and
will cause less economic activity
• Fewer workers required to produce because
less output is demanded
• Raises fear of unemployment
• Policy makers will intervene to help the
economy
Trough
• Lowest point of a recession
• Nobody knows exactly when this is reached
• Economy, hopefully, will enter a recovery
period quickly (recovery – increase in GDP)
Expansion
• Economy grow beyond its previous
level of output
Peak
• Highest point of output before a
recession
ECONOMIC GROWTH
 Improved efficiency in the production process (better use of existing
resources)
 Enhancing the quality of factors of production which requires
investment in:
 Capital Goods – developing an economy’s infrastructure to aid
economic activity and competitiveness
 Education and Training – better educated and trained workforce
becomes a more productive and internationally competitive labor
force
 Health Technology – advances helps to ensure workers are healthy
and therefore more productive; also prevents workers having to
take time off work or retire early due to illness
ECONOMIC GROWTH
 Increased in the quantity of resources
 Discovering new sources of raw materials
 Changes in the labor force
 Changes in demography – a fall in the birth rate in developed
economies has led to an aging population and a smaller workforce.
Conversely, a ‘baby boom’ will lead to a larger workforce in the next
couple of decades.
 Changes in participation rates – gov’t. policies (such as lower rates of
income tax or reduced welfare payments) can boost the participation
rate.
 Changes in net migration – This refers to the difference between
IMMIGRATION (the number of people entering a country for work
purposes) and EMIGRATION (those leaving a country). If the net
migration figure is positive, then the size of the workforce will increase,
thereby helping to raise the productive capacity of the economy.
BARRIERS TO ECONOMIC GROWTH
 Lack of infrastructure (transport and communications networks)
 Countries without basic electricity, road networks, schools, hospitals
and housing will find it difficult to prosper
 Lack the technical knowledge and skilled labor force
 Essential resources for generating sustainable economic growth
 Rapid population growth
 High net birth rate will tend to find that there are too many
‘mouths’ to feed
 High foreign debt repayments
 Highly indebted poor countries are obliged to repay their huge
interest-bearing loans, with little left for domestic investment and
growth
Economic
Opportunities and Threats
► An
improvement in the balance of
payments:
 BoP is a record of a country’s money inflows
and outflows, per time period
 It records export earnings and import
expenditures
BOP
► Components:
►Current
account
►Capital account
►Financial account
► To
correct an imbalance on the BOP,
governments often attempt to alter their
exchange rates, which will have a direct
effect on businesses.
Exchange Rate
► The
exchange rate measures the value of
one currency in terms of foreign currencies.
► Appreciation – higher exchange rate means
that export prices will be relatively higher,
thereby reducing the exporter’s price
competitiveness.
► Depreciation – lower exchange rate means
that domestic firms that import raw
materials and components will suffer from
having to pay higher prices, thereby raising
their costs.
Depreciation: Supply increase
Price of USD in terms of EUR
EUR
SUSD
SUSD 1
.749
.66
DUSD
O
Qe
Q1
Q of USD
Appreciation: Supply decrease
Price of USD in terms of EUR
EUR
SUSD
SUSD 1
.80
.749
DUSD
O
Q1
Qe
Q of USD
Appreciation: Demand increase
Price of USD in terms of EUR
EUR
SUSD
.80
.749
DUSD 1
DUSD
O
Qe
Q1
Q of USD
Depreciation: Demand decrease
Price of USD in terms of EUR
EUR
SUSD
.749
.66
DUSD 1
O
Q1
Qe
DUSD
Q of USD
Consequences of continual & large
fluctuations in the foreign exchange
► Can create difficulties for businesses
 Business planning and forecasting become very
complex and impractical
►Businesses
may not be able to accurately forecast
export sales or costs of imported materials due to
exchange rate volatility
►International trade deals could be postponed until
the business can benefit from more favorable
movements in the exchange rate
► Governments
can set up international trade
barriers to correct any disparity in its BOP or
to protect their domestic industries.
Protectionism
►
Gov’t. policy used to safeguard domestic businesses from
foreign competitors.
 TARIFFS – tax placed on imported products, raising
their price
 QUOTAS – quantitative limits on the volume or value of
imports
 SUBSIDIES – payments made by a gov’t. to domestic
firms as a form of financial aid to reduce the cost of
production of domestic firms
 EMBARGOS – physical bans on international trade with
a certain country
 TECHNOLOGICAL & SAFETY STANDARDS – strict
administration and compliance costs in meeting
industrial and health & safety regulations imposed on
imports
Review question 1.5.4
Text handout
K&Q sell jeans in the UK. They
buy their jeans from an American
supplier and import 10,000 pairs
of jeans per month for a cost of
$30 each. K&Q then sell these to
their customers at a price of 30
GBP each.
Use the various exchange rates to
complete the table below for K&Q Jeans.
Exchange
Rate
UK 1 = $1.00
UK 1 = $2.00
UK 1 = $1.50
UK 1 = $2.50
UK 1 = $0.75
Purchase
Cost ($)
Purchase
Cost (GBP)
Sales
Revenue
(GBP)
Profit or Loss
(GBP)
Use the various exchange rates to
complete the table below for K&Q Jeans.
Exchange
Rate
Purchase
Cost ($)
Purchase
Cost (UK)
Sales
Revenue
(UK)
Profit or Loss
(UK)
UK 1 = $1.00
300,000
300,000
300,000
0
UK 1 = $2.00
300,000
150,000
300,000
150,000
UK 1 = $1.50
300,000
200,000
300,000
100,000
UK 1 = $2.50
300,000
120,000
300,000
180,000
UK 1 = $0.75
300,000
400,000
300,000
-100,000
Comment on the relationship
between changes in the exchange
rate and the level of profits.
► There
is a positive relationship between the
exchange rate and the level of profits for
K&Q Jeans.
► For example, when the exchange rate (for
sterling) rises from $1 to $2, the profit rises
from zero (break-even) to 150,000 GBP
since K&Q Jeans are able to purchase from
their US supplier at a lower rate.
By engaging in international trade,
explain two other costs that K&Q
Jeans might incur.
► Possible
answers with full explanation:
 Tariffs imposed on the import of US jeans
 Transportation costs for the jeans being shipped
in from the USA
 Insurance for the stock being transported from
overseas
Examine how a high exchange rate can
be both an opportunity and a threat to a
business such as K&Q Jeans.
►A
high exchange rate can create an
opportunity for K&Q Jeans because
 the costs of importing its stocks of jeans will fall
 K&Q will be able to purchase the same quantity
of stock for a lower cost
 K&Q profit margin will increase
Examine how a high exchange rate can
be both an opportunity and a threat to a
business such as K&Q Jeans.
►A
stronger currency can also present threats
 If the business exports its products
 Price of jeans sold overseas will automatically
increase
 K&Q’s exports will become less competitive
Environmental
Opportunities and Threats
► External
cost of production or negative
externalities – costs incurred by a third party in
a business transaction (cost borne by society or
the environment rather than by the buyer or
seller)
 Samples of external costs:
►Passive smoking
►Air pollution
►Noise pollution
►Packaging waste
►Global warming
Environmental
Opportunities and Threats
► Public
concerns and changes in social
attitudes about the environment have meant that
businesses are increasingly reviewing their
operations
 Firms that do not respect the environment face ruining
their reputation and long-term profitability
 If compliance cost are too high, then firms may choose
not to become more environmentally friendly
Environmental
Opportunities and Threats
► Changes
in weather
 Torrential rain or flooding will affect large number of
businesses
 Indian Ocean Tsunami (SE Asia 2004); Hurricane
Katrina (USA 2005); snow & icy conditions across
Europe (12/2010); floods in Australia (2011) caused
major havoc to businesses
 Extreme weather condition in Russia reduced its GDP by
over 1 percent in 2010
 Japan’s 9.0 earthquake (2011) cost the nation over
$15bn
 Some business might be able to exploit changes in the
season
Environmental
Opportunities and Threats
► Health
scares and epidemics
 SARS 2003 and bird flu (2006) in SE Asia caused turmoil
in the region with many businesses collapsing
 Mad cow disease (late 1990s), foot and mouth disease
(2001) and swine flu (2009) had similar effects in
Europe
Political
Opportunities and Threats
►A
government is said to adopt a laissez-faire
(don’t interfere) approach to managing the
economy if it does not intervene
significantly in business activity; this should
stimulate healthy competition and efficiency
► Government intervention takes place and
can present opportunities and threats to
businesses in the economy
► Fiscal and Monetary Policies
Fiscal Policy
► Uses
taxation and government expenditure
► 2 forms:
 Deflationary (contractionary) fiscal policy –
higher taxes and/or decrease in gov’t.
expenditures
 Expansionary fiscal policy – decrease in taxes
and/or increase in gov’t. expenditures
Direct Taxes
 Taxes imposed on people’s
income or wealth and on
firm’s profit
 Taxes that are paid directly
to the government by those
on whom they are imposed
 Example: Income tax and
Corporation tax
 Unavoidable because
individuals and firms have
to declare their full income
Indirect Taxes
 Taxes paid by households
through an intermediary
such as a retail store
 The intermediary then pays
the government
 Possibly avoidable – you
can choose not to buy the
goods and services
Types of Taxation Systems
 Proportional Tax
 Regressive Tax
 Progressive Tax
Proportional Tax
 A tax for which the percentage remains constant as
income increases
 Many countries are now promoting the idea of
proportional direct taxes or flat taxes
 The same percentage tax is paid at all levels of
income
Regressive Tax
Tax that decreases in percentage as income increases
Such a tax places a larger burden on lower income household than
it does on higher income earners since a greater percentage of a
poor household’s income is used to pay the tax than a rich
household’s
Most indirect taxes are regressive
Regressive Tax
Income of buyer $
Amount of tax paid $
% of income taxed
10,000
100
1%
50,000
100
0.2%
100,000
100
0.1%
 The higher-income consumer pays the same amount of tax as
the lower-income consumer
 Although they appear to be equitable since everyone pays the
same percentage of the price of the goods they consume, placing
a larger burden on those whose ability to pay is lower and a
smaller burden on the higher-income earners whose ability to
pay is greater
 Regressive taxes may be a good source of government revenue
and might discourage the consumption of demerit goods but
they can worsen income inequality
Progressive Tax
This is a tax for which the percentage paid in tax
increases as income increases
Is the most equitable of the 3 types of taxes a
government collects
Lower income households not only pay less tax, but
they pay a smaller percentage of their income in tax as
well
This is a hypothetical example where there are 4 tax
brackets
Taxable Income ($)
% to be paid as tax
0 – 10,000
0
10,001 – 25,000
30%
25,001 – 50,000
40%
50,001 and higher
50%
Progressive Tax
If someone earns $56,000 they will pay the following
tax:
 For the first $10,000 = 0
 For the next $15,000 = 4.5k (15k x .30)
 For the next $25,000 = 10k (25k x .40)
 For the next $6,000 = 3k (6k x .50)
 In total they would pay = 17,500
 On average they would be paying 31% tax (17,500 /
56,000)
Progressive Taxation Exercise
How much tax would they pay and what is their average
tax rate if they earned:
a) $7,000
b) $14,000
c) $28,000
d) $77,000
Taxable Income ($)
% to be paid as tax
0 – 10,000
0
10,001 – 25,000
30%
25,001 – 50,000
40%
50,001 and higher
50%
Common examples of taxes
Income tax
Corporate tax
Sales taxes
Capital gains tax
Inheritance tax
Excise duties
Customs duties
Stamp duty
Monetary Policy
► Designed
to control the amount of spending
and investment in an economy by altering
interest rates to affect the money supply and
exchange rates.
► Interest rates refers to the price of money,
both in terms of the price of borrowing money
and the return for saving money in a bank
account.
► If the economy is growing fast (overheating),
the gov’t. or central bank is like to raise
interest rates to combat the effects of inflation.
4 reasons businesses are charged
varying ‘RATES’ of interest
RISK – the greater the risk of a business defaulting
on a lone, the higher the interest rate
► ADMINISTRATION COSTS – the higher the admin.
costs involved in lending money to a business, the
higher the interest rate.
► TIME – the longer the period of a loan, the higher the
real interest rate tends to be due to opportunity cost
of money being lent out
► EXPECTATIONS – if the economy is expected to do
well, the it is likely interest rates will rise to dampen
the effect of inflation.
►
Interest Rates and Exchange Rates
► Positive
correlation – an increase in interest
rates tends to stimulate demand for its
currency since foreign investors are
attracted by better returns on their saving.
► Increase int. rates and appreciation of
currency cause the price of exports to be
relatively higher and likely to reduce the
demand for exports; can be damaging for
domestic businesses in the long run.
Legal Opportunity & Threats
► The
gov’t. imposes rules, regulations and
laws to ensure that the general public is
protected from the negative aspects of
business activity.
► Common legislation affecting businesses
include:




Consumer protection legislation
Employee protection legislation
Competition legislation
Social and environmental protection
Ethical Opportunities and Threats
► Business
ethics are the moral principles that
are, or should be, considered in business
decision making.
► Benefits of being socially responsible:
 They attract and retain good quality workers
 They attract new customers and retain existing
ones
 It generates good publicity and public relations
SWOT Analysis
► SWOT
= strengths, weaknesses,
opportunities and threats
► Is
a frequently used decision-making tool
► We
will discuss this topic next (unit 1.6)