Transcript Business Environment - Colbourne College

BUSINESS ENVIRONMENT
Lecturer: Judith Robb-Walters
Lesson5
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Business Environment
LO 1: Understand the nature of the national
environment in which businesses operate
September – November 2014
THE BASIC SYLLABUS
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Understand the organisational purposes of
businesses.
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- Understand the nature of the national
environment in which business operates.
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Understand the behaviour of organisations in
their market environment.
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-Be able to assess the significance of the global
factors that shape national business activities.
LEARNING OBJECTIVES
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At the end of the class, students should be able
to:
Assess the impact of fiscal and monetary policy
on business organisations and their activities
OVERVIEW
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“The way to stabilize the economy is to
stabilize the price level, and to do that the
government’s central bank must lower interest
rates when prices tend to rise and raise them
when prices tend to fall.”
(John Maynard Keynes 1883-1946)
UK ECONOMY - SIZE
GDP, or Gross Domestic Product, is arguably the
most important of all economic statistics as it
attempts to capture the state of the economy in
one number. Gross Domestic Product (GDP) is
the total value of all goods and services produced
in an economy. It can also be looked at as the
total value added of every business in an
economy.
 Quite simply, if the GDP measure is up on the
previous three months, the economy is growing.
If it is negative it is contracting.
 And two consecutive three-month periods of
contraction mean an economy is in recession.
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UK ECONOMY - SIZE
GDP can be measured in three ways:
 1) Output measure: This is the value of the goods
and services produced by all sectors of the
economy; agriculture, manufacturing, energy,
construction, the service sector and government
 2) Expenditure measure: This is the value of the
goods and services purchased by households and
by government, investment in machinery and
buildings. It also includes the value of exports
minus imports
 3) Income measure: The value of the income
generated mostly in terms of profits and wages.
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UK ECONOMY - SIZE
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The equation used to calculate GDP is as follows:
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GDP = Consumption + Government Expenditures + Investment +
Exports - Imports
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The components used to calculate GDP include:
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Consumption:
-- Durable goods (items expected to last more than three years)
-- Nondurable goods (food and clothing)
-- Services
Government Expenditures:
-- Defense
-- Roads
-- Schools
UK ECONOMY - SIZE
Investment Spending:
 -- Nonresidential (spending on plants and
equipment), Residential (single-family and multifamily homes)
 -- Business inventories
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Net Exports:
 -- Exports are added to GDP
 -- Imports are deducted from GDP
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GROSS NATIONAL PRODUCT
 GNP
stands for Gross National Product,
which is the combined value of all the final
goods and services produced in a country
during an accounting year, including net
factor income from foreign countries.
 GNP
can be calculated using the following
formula:
 GNP=
GDP + Net factor income from abroad
UK ECONOMY
STRUCTURE
 The
UK is the 6th largest economy
in the world in 2012 according to
GDP (current prices) and the 8th
largest in the world according to
GDP(PPP). The UK is also a member
of the G7 (now expanding to the G8
and G20), the EU and the OECD
(Organisation for Economic
Cooperation and Development).
UK ECONOMY STRUCTURE
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Although the UK economy faced another major
setback during the 2008 global financial crisis,
the UK government has implemented austerity
measures in order to reduce its global debt as
well as facilitate for long-term economic growth.
These plan aims to lower London's budget deficit
from over 11 percent of GDP in 2010 to nearly 1
percent by 2015. However this has since been
revised by the government to 2018.
UK ECONOMY - POPULATION
Population statistics describe the demographic
characteristics of the UK population. These
include statistics on the size and geographic
distribution of the population, on the factors
driving population change (births, deaths and
migration) and on topics such as families and
older people.
 Population and migration statistics are used by
government for planning, monitoring and
resource allocation and are of interest to a wide
range of other users including commercial
companies, special interest groups, academia and
the general public.
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• UK ECONOMY - POPULATION
 Changes
in society – in particular levels of
mobility – mean producing population and
migration statistics has become
increasingly challenging. ONS is leading a
substantial cross-government programme
of work to improve population and
migration statistics.
 Products are available via the topic pages
listed. Note that Population Estimates by
Ethnic Group are listed under 'Population
Estimates
UK ECONOMY LABOUR FORCE
 Labour
market statistics measure
different aspects of work and jobs and
provide an insight into the economy. The
statistics cover people’s participation in
the labour force, working patterns and the
types of work they do. The statistics also
show any earnings and benefits they
receive.
 Labour market statistics are designed to
reflect the various aspects of labour
market activity in the UK.
UK ECONOMY- LABOUR FORCE
 Labour
market statistics measure many
different aspects of work and jobs and
provide an insight into the economy. They
are also very much about people,
including:
 their participation in the labour force
 the types of work they do
 earnings and benefits they receive
UK ECONOMY - GROWTH
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Economic growth measures the change in real
GDP. The Plan for Growth, published alongside
Budget 2011, and as part of Autumn Statement
2011, announced a programme of structural
reforms to remove barriers to growth for
businesses and equip the UK to compete in the
global race. These reforms span a range of
policies including improving UK infrastructure,
cutting red tape, root and branch reform of the
planning system and boosting trade and inward
investment.
UK ECONOMY - GROWTH
In order to achieve the government’s 4 ambitions
for growth:
 1.Creating the most competitive tax system in
the G20
 2. Encouraging investment and exports as a
route to a more balanced economy
 3. Making the UK the best place in Europe to
start, finance and grow a business
 4. Creating a more educated workforce that is the
most flexible in Europe
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UK ECONOMY - INFLATION
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Inflation is a rise in the price of goods and services we buy
The annual rate of inflation shows how much higher or lower
prices are compared with the same month a year earlier. It
indicates changes to our cost of living
So if the inflation rate is 3% in January, for example, prices
are 3% higher than they were 12 months earlier. Or, to look at
it another way, we need to spend 3% more to buy the same
things
We compare this to the annual change recorded in the
previous month to get an idea of whether price rises are
getting bigger or smaller
If the annual rate has risen from 3% to 4% from one month to
the next, prices are rising at a faster rate
If the rate has fallen - say from 3% to 2% - prices of the things
we buy are still higher, but have not increased by as much
If the percentage rate is negative - for example, -1% - then
prices are 1% cheaper than a year ago
UK ECONOMY - INFLATION
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The figures are compiled by the Office for National
Statistics. The inflation rate is calculated every month by
looking at the changes in prices of 700 goods and services
in 150 different areas across the UK.
This is known as the basket of goods and is regularly
updated to reflect changes in the things we buy. Hence the
recent inclusion of tablet computers and Twilight books
and the exclusion of casserole dishes and photo printing
services.
There are two main measures: the Consumer Prices Index
(CPI) and the Retail Prices Index (RPI). These are, in
effect, two baskets comprising different goods and services,
and different methods are used to calculate them. There
are many differences, but the biggest is that RPI includes
housing costs such as mortgage interest payments and
council tax, whereas CPI does not.
BALANCE OF PAYMENTS
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The Balance of Payments is the record of a country’s
transactions / trade with the rest of the world.
The balance of payments consists of:
1.Current Account (trade in goods, services +
investment incomes + transfers)
2.Capital Account / Financial Account (capital and
financial flows, net investment, portfolio investment)
Errors and omissions. It is hard to collect all data so
some is missed out.
In theory there should be a balancing between capital
and current / financial account. If there is a current
account deficit, there should be a surplus on the
capital / financial account.
BALANCE OF PAYMENTS
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UK Current Account
The UK current account deficit wa s£20.7 billion in
Quarter 3 2013, up from a revised deficit of £6.2
billion in Quarter 2 2013. The deficit in Quarter 3
2013 equated to 5.1% of GDP at current market
prices, up from 1.5% in Quarter 2 2013 (page updated
8th Jan. 2014) In 2012, the UK’s current account
deficit was £59.8 billion.
Components of Current Account
Trade in goods
Trade in services
Total income (e.g. investment income)
Total current transfers
UK CURRENT ACCOUNT
FROM
JAN 2013
REASONS FOR A CURRENT ACCOUNT DEFICIT
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1. Overvalued exchange rates. Countries in the Eurozone
which became uncompetitive (e.g. Greece, Portugal and
Spain) experienced large current account deficits. This is
because an overvalued exchange rates means exports are
more expensive, but imports are cheaper. This encourages
domestic consumers to buy imports. It also makes it hard
for exporters because they are relatively uncompetitive.
2. High Consumer Spending. If there is rapid growth in
consumer spending, then there tends to be an increase in
imports causing a deterioration in the current account. For
example, in the 1980s boom, we saw a fall in the savings
rate and a rise in UK consumer spending; this caused a
record current account deficit. The recession of 1991 caused
an improvement in the current account as import spending
fell.
REASONS FOR A CURRENT ACCOUNT
DEFICIT
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3. Unbalanced Economy. An economy focused on
consumer spending rather than investment and
exports will tend to have a bigger current account
deficit.
4. Competitiveness. Related to the exchange rate
is the general competitiveness of firms. If there is
a decline in relative competitiveness, e.g. rising
wage costs, industrial unrest, poor quality goods
– then it is harder to export causing a
deterioration in the current account.
BALANCE OF TRADE
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The difference between a country's imports and
its exports. Balance of trade is the largest
component of a country's balance of payments.
Debit items include imports, foreign aid, domestic
spending abroad and domestic investments
abroad. Credit items include exports, foreign
spending in the domestic economy and foreign
investments in the domestic economy. A country
has a trade deficit if it imports more than it
exports; the opposite scenario is a trade surplus.
BALANCE OF TRADE
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The UK's trade deficit narrowed in December to its smallest
since July 2012, but manufacturing growth was weaker than
expected, Office for National Statistics (ONS) figures show.
An increase in oil, chemical and aircraft exports helped the
trade deficit in goods to fall by more than £2bn to £7.72bn, the
ONS said.
Fewer imports of aircraft and ships also boosted the figures, it
said.
Manufacturing output rose by 0.3% in December, less than the
0.6% predicted. The wider measure of industrial output rose
by 0.4% in the month. However, the ONS said the weakerthan-expected growth was not enough to change the estimate
of GDP growth in the fourth quarter of 2013, which was 0.7%.
When services were included, the overall trade deficit
narrowed to £1bn in December. This was down from a deficit
of £3.6bn the month earlier and also the smallest deficit since
July 2012.
EXCHANGE RATES
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Exchange rates are extremely important for a trading economy such
as the UK. There are several reasons for this, including:
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Exchange rates represent a cost to firms, which arises when
commission is paid on the exchange of one currency for another.
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Exchange rate changes create a risk to those firms that hold assets in
currencies other than Sterling.
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Exchange rates affect the price of exports, which form a significant
part of aggregate demand, and the price of imports, and hence the
balance of payments.
The Monetary Policy Committee of the Bank of England will often
take the exchange rate into account when setting short term interest
rates, hence changes in the exchange rate have another transmission
route into the economy, via their effect on interest rates.
MEASURING EXCHANGE RATES
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Exchange rates can be measured in two ways:
1.Bi-lateral rates:- A bilateral rate is the rate of
exchange of one currency for another, such as £1
exchanging for $1.50.
 2.Multi-lateral rates:- A multilateral rate is the
value of a currency against more than one other
currency. Economists calculate multi-lateral
rates to understand what is happening to the
exchange rate, on average. This is achieved by
using an index that reflects changes in one
currency against a basket of other currencies.
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TRADING PARTNERS
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The UK is the 7th leading importer and the 12th
leading exporter in the world. Accordingly, the UK
holds a massive trade deficit with the rest of the
world, second only to the US. In 2012, UK imports
were worth $646 billion with exports valued at only
$481 billion.
In recent years, the UK has run the largest trade
deficits with Norway, Germany, China, Hong Kong
and Netherlands. This is mainly due to increase in
demand of consumer goods, a drop in UK
manufacturing and a decline in local oil and gas
production. Over the past 12 months, the deficit has
been flat, damping hopes that rising demand for UK
goods and services will spur an economic recovery.
TRADING PARTNERS
Since 2010, Britain began trying to rebalance its
economy more towards exports and away from a
reliance on domestic consumption after the
financial crisis. But progress has been slow,
despite a roughly 20 percent fall in the value of
sterling since 2008.
 Economists have warned of a possible balance of
payments crisis unless the UK can reduce its
persistent over-spending. Without an adjustment
that either reduces imports or pushes up exports,
investors may become wary of putting their funds
in the UK.
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PUBLIC FINANCES
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Public finance is part of the field of economics, and
primarily concerned with activities that involve the
government and how it allocates resources and
spends money. A narrower term for this type of
financial study would be government finance, with
the broader term being public economics. How
resources are acquired and used, and how stable the
economy is on a macroeconomic level are all
important to people who study public finance. This
branch of economics focuses more on the proper role
of a government in society. The theory is that
government would not be needed if private enterprise
allocated everything to everyone fairly.
TAXATION
Government collects revenue in the form of
taxation is system that is used by Government to
collect revenue to pay for Goods and Services.
There are two types of taxation : 1. Direct:-are paid directly to the Exchequer by
the individual taxpayer – usually through “pay as
you earn”. Tax liability cannot be passed onto
someone else
 2.Indirect:-include VAT and a range of excise
duties on oil, tobacco, alcohol. The supplier can
pass on the burden of an indirect tax to the final
consumer – depending on the price elasticity of
demand and supply for the product.
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GOVERNMENT BORROWING
Money borrowed by the government through
issuance of securities, bonds and bills. The
government borrows money to make up the
difference between revenues and expenditures.
The money comes from lenders within the
country and from foreign lenders.
 In the UK national debt is the total amount of
money the British government owes to the
private sector and other purchasers of UK gilts.
 Public sector net debt (PSND ex) was £1,432.3
billion in August 2014, an increase of £96.7
billion compared with August 2013. equivalent to
77.4% of gross domestic product.
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BUSINESS BEHAVIOUR
 Two
main classes of investment are: (1) Fixed income investment such as
bonds, fixed deposits, preference shares.
 (2) Variable income investment such as
business ownership (equities), or property
ownership. In economics, investment
means creation of capital or goods capable
of producing other goods or services..
Return on investment (ROI) is a key
measure of an organization's performance.
OBJECTIVES
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Business objectives allow an organization to
define its goals and direction. A company uses
strategy and tactics at every level of its operation
to achieve its objectives. These define the way a
company allocates its resources and the
strengths, weaknesses and opportunities it may
have. Companies usually do not alter their
objectives once they are implemented, unless
changes in circumstances arise. Setting a clear
course for the organization is key to its success.
RISK AWARENESS
In today’s economic climate, risk management is
a concept that, for a host of reasons, is high on
the priority of boardrooms in private and public
 organisations alike across the world. Risk takes
many forms besides financial – operational,
compliance, strategic, environmental, health and
safety… the list is almost endless.
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COST OF CAPITAL
The cost of capital is the rate of return that
providers of capital demand to compensate them
for both the time value of their money, and risk.
 The cost of capital is specific to each particular
type of capital a company uses. At the highest
level these are the cost of equity and the cost of
debt, but each class of shares, each class of debt
securities, and each loan will have its own cost.
 It is possible to combine these to produce a single
number for a companies cost of capital, the
WACC.
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COST OF CAPITAL
The cost of capital of a security is used to value
securities, as the cost of capital is the appropriate
discount rate to apply to the future cash flows
that security will pay. For this reason, models
that estimate the cost of capital, such as CAPM
and arbitrage pricing theory, are regarded as
valuation models.
 Conversely, the cost of capital of a security can be
calculated from the market price and expected
future cash flows. This approach makes sense,
when, for example, calculating a WACC
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CONSUMER BEHAVIOUR
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One "official" definition of consumer behavior is "The
study of individuals, groups, or organizations and the
processes they use to select, secure, use, and dispose
of products, services, experiences, or ideas to satisfy
needs and the impacts that these processes have on
the consumer and society." Although it is not
necessary to memorize this definition, it brings up
some useful points:
Behavior occurs either for the individual, or in the
context of a group (e.g., friends influence what kinds
of clothes a person wears) or an organization (people
on the job make decisions as to which products the
firm should use).
CONSUMER BEHAVIOUR
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Consumer behavior involves the use and disposal of
products as well as the study of how they are
purchased. Product use is often of great interest to
the marketer, because this may influence how a
product is best positioned or how we can encourage
increased consumption. Since many environmental
problems result from product disposal (e.g., motor oil
being sent into sewage systems to save the recycling
fee, or garbage piling up at landfills) this is also an
area of interest.
Consumer behavior involves services and ideas as
well as tangible products.
The impact of consumer behavior on society is also of
relevance. For example, aggressive marketing of high
fat foods, or aggressive marketing of easy credit, may
have serious repercussions for the national health
and economy.
PROPENSITY TO SAVE
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Propensity to save,in economics, the proportion of
total income or of an increase in income that
consumers save rather than spend on goods and
services. The average propensity to save equals
the ratio of total saving to total income; the
marginal propensity to save equals the ratio of a
change in saving to a change in income. The sum
of the propensity to consume and the propensity
to save always equals one.
PROPENSITY TO SPEND
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The marginal propensity to consume is the change in
consumer spending arising from a change in disposable
income. If for example your disposable income rises by
£5,000 and you choose to spend £3000 of this on extra
goods and services, then the mpc is £3000/£50000 or 0.66. If
you chose instead to spend only £2500 of the increase in
income, then the mpc would be 0.5.
Many factors determine consumption – including the
following:
A change in interest rates – a cut in interest rates lowers
the cost of servicing the debt on a mortgage and thereby
increase the effective disposable income of homeowners
A change in household wealth – for example a sustained
fall in house prices causes a decline in personal sector
wealth and spending as homeowners have less housing
equity available to borrow
PROPENSITY TO SPEND
A change in consumer confidence (animal spirits)
for example, fears of rising unemployment and
expectations of higher taxes will hit consumer
sentiment and spending
 A reduction in the supply of credit: One of the
features of the credit crunch has been a large fall
in the availability of credit for households and
businesses – “risk-averse” banks have become
less willing to lend and if they do, the rate of
interest on the loan has increased. The supply of
mortgage finance has contracted and would-be
homebuyers now need to find a bigger deposit
before getting a home loan.
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TASTE AND PREFERENCES
 Consumer
preference for a product
can make or break a company. If
consumers generally like a product,
it can stay around for years and sell
millions of copies. However, if
consumers do not like the product, it
could disappear very quickly if the
company cannot figure out how to fix
the problem.
REVIEW QUESTIONS
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1.Inflation is
A) an increase in the prices of key items such as food and
gasoline.
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B) a sustained rise in the general level of prices in the economy.
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C) an excessive growth in the quantity of money in circulation.
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D) what happens when you fix a flat tire.
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2. The balance of payments is divided into two major accounts,
the:
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A)current account and the capital account.
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B)current account and the reserve account.
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C)trade account and the capital account.
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D)current account and the trade account.
REVIEW QUESTIONS
3. The fall in value of one currency relative to
another is:
a)
a strengthening of a currency.
b)
an appreciation of a currency.
c)
a depreciation of a currency.
d)
a floating of the currency.
FURTHER READING
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Policy paper Plan for Growth From:HM TreasuryFirst
published:20 March 2013
Economic Growth UK by Tejvan Pettinger on January
2, 2014
http://www.investopedia.com/
investorwords.com
http://economicsonline.co.uk/
What Is Public Finance? Written By: Michi Beck
Last Modified Date: 03 September 2014
Direct & Indirect Taxation -Author: Geoff Riley
What Is a Business Objective? - By Jason Chavis, eHow
Contributor
FURTHER READING
http://www.accaglobal.com/
 http://moneyterms.co.uk/
 Lars Perner, Ph.D.-Marshall School of Business
 University of Southern California
 http://www.britannica.com/
 What Is a Consumer Preference? - By Kayleigh
Apicerno
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FURTHER READING
John Maynard Keynes: The Concise Encylopedia
of Economics
 http://www.bbc.com/
 http://moneyterms.co.uk/gdp/
 Definition of Gross National Product (GNP) - By
Mike Moffatt
 Gross National Product (GNP) By:
EconomyWatch Date: 13 October 2010
 UK Economic Structure By: EW World Economy
Team
 www.statistics.gov.uk/hub/population
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