Transcript ###External Influences 1 - PowerPoint Presentation###

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External Influences
The Macro-Economy
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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
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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%?
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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)
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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
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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)
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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
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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
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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
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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 £
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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
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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
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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
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External Influences – The Macro-Economy
The Business Cycle:
Output
Potential Growth
Boom
Growth
Actual Growth
Slowdown
Excess capacity –
Recession
Time
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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.
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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:
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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
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