Transcript Business Studies 20.3-20.10x

20.3 The economic environment
© Malcolm Surridge and Andrew Gillespie 2016
Inflation
• Inflation can be defined as a persistent rise in the price level and the
associated fall in the value of money.
• As long as wages are rising more than inflation things are perceived to
be ok.
How is Inflation Measured?
• Most countries use an indicator called the Consumer Price Index
• It is relatively new and measures the average monthly change in the
prices of goods and services purchased by the households in that
country.
The Causes of Inflation
• Many things can factor into inflation.
• Demand-Pull factors occurs when the demand for the country’s goods
and services exceed its ability to supply these products.
• Cost-Push factors happens when firms face increasing costs due to
rising wages or increasing costs of raw materials and components.
Demand-Pull Inflation
• Some times people blame the government for allowing firms and
businesses to have too much money to spend.
• Usually occurs at the boom stage of the business cycle.
• Governments combat against demand pull inflation by raising interest
rates.
Cost-Push Inflation
• Occurs when firms face increasing costs due to factors such as rising
wages and increasing costs of raw materials (inputs) and components.
• Inflation due to an increase in the price of imports. As the price of
imports increase, prices of domestic goods using imports as raw
materials also increase, causing an increase in the general prices of all
goods and services.
• Imported inflation may be caused by foreign price increases or
depreciation of a country's exchange rate.
Impacts of Inflation on Business
• Many business suffer falling sales in a period of inflation.
• People don’t want to spend when inflation is high and tend to save
when inflation is low due to uncertainty.
• Difficult to remain competitive if your country has high inflation
because you will have to pay a lot to get resources and pay labor.
The Impact of Government Anti-Inflationary
Policies
• Interest rates are the main weapon that a government has to control
inflation.
• Increase in interest rates reduces the possibility of demand-pull
inflation occurring. Consumers do not want to spend money, because
it costs more to get it.
• Restricting the power of trade unions – this decreases the chances of
cost-push inflation by restricting wage increases.
• What is a trade union?
20.4 The economic environment
© Malcolm Surridge and Andrew Gillespie 2016
Unemployment
• Unemployment remains one of the most important issues in most
countries.
• Countries never want to waste their resources and if they are not
using all their labor they are wasting resources that is negatively
affecting the country’s GDP.
– Okun’s Law: a 1
percent increase in
unemployment
results in a 2 percent
decrease in GDP.
Types of Unemployment
• Cyclical unemployment - is caused by the operation of the business
cycle rising in slumps and falling in booms.
• Frictional unemployment – exists because people may be temporarily
out of work between leaving one job and starting another.
• Structural unemployment – occurs due to fundamental changes in the
economy whereby some industries reach the end of their lives.
• Seasonal unemployment- Seasonal unemployment occurs when there
is a limited need for a type of work to be performed during a
particular period during the year based on factors like deadlines or
climate.
Structural Unemployment
• A longer-lasting form of unemployment caused by fundamental shifts
in an economy.
• Structural unemployment occurs for a number of reasons – workers
may lack the requisite job skills, or they may live far from regions
where jobs are available but are unable to move there.
• They may simply be unwilling to work because existing wage levels
are too low. So while jobs are available, there is a serious mismatch
between what companies need and what workers can offer.
• Structural unemployment is exacerbated by extraneous factors such
as technology, competition and government policy.
Cyclical Unemployment
• A factor of overall unemployment that relates to the cyclical trends in
growth and production that occur within the business cycle.
• When business cycles are at their peak, cyclical unemployment will be low
because total economic output is being maximized.
• When economic output falls, as measured by the gross domestic product
(GDP), the business cycle is low and cyclical unemployment will rise.
• Economists describe cyclical unemployment as the result of businesses not
having enough demand for labor to employ all those who are looking for
work. The lack of employer demand comes from a lack of spending and
consumption in the overall economy.
Seasonal Unemployment
• Seasonal unemployment: unemployment due to seasonal changes in
employment.
• The Labor Department reports seasonally adjusted unemployment
rates for every month.
• Unemployment data exclude the effects of seasonal unemployment.
Frictional Unemployment (best kind)
• Unemployment that is always present in the economy, resulting from
temporary transitions made by workers and employers or from workers
and employers having inconsistent or incomplete information.
• For example, a first-time job seeker may lack the resources or efficiency for
finding the company that has the job that is available and suitable for him
or her. As a result this person does not take other work, temporarily
holding out for the better-paying job.
• Another example of when frictional employment occurs is when a
company abstains from hiring because it believes there are not enough
qualified individuals available for the job, when in actuality there is.
Underemployment
• People who want full-time work in their field but can find only part-time
work or work at jobs below their capability.
• They are counted as employed.
What can businesses do if there is low
unemployment?
• Periods of low unemployment creates a problem for businesses.
• Usually if there is a skill shortage businesses will invest in capital
intensive methods of production by using technology to replace labor.
• Business may relocate to take advantage of available workers
elsewhere.
• Businesses may invest in training schemes to develop their
employees.
20.5 The economic environment
© Malcolm Surridge and Andrew Gillespie 2016
Exchange Rates
• An exchange rate is the price of one currency expressed in terms of
another. For example, the US dollar might be worth only .78 euros.
• Most countries have their own currency that needs to be exchanged
to buy goods outside the home country.
• If I was to go to the United States I need to buy US dollars.
Why Do Firms Buy Foreign Currencies?
• The main reason is to pay for goods and services bought from
overseas.
• Tesco buys wine France the wine maker would expect Tesco to pay in
Euro’s not Thai Baht.
• Demand for foreign currencies may also arise because individuals and
businesses wish to invest in enterprises overseas.
Affects of Exchange Rate Changes
• Appreciation – a rise in the value of a currency
• Depreciation – a decline in its value
• Small increases and decreases in a currency usually have little effect
on trade or the countries economy.
Exchange rate changes can create uncertainty
• If business deals are done in foreign currencies they may receive
more or less revenue from a particular transaction.
• Price elasticity of demand - is a measure used in economics to show
the responsiveness, or elasticity, of the quantity demanded of a good
or service to a change in its price, ceteris paribus.
Business Strategy and Exchange Rates
• Businesses usually do not like so therefor they try to do business in
countries that have a stable currency exchange rate.
• Toyota has gone to the extreme in England by paying their UK
suppliers in Euro and not in Pounds.
20.6 The economic environment
© Malcolm Surridge and Andrew Gillespie 2016
Redistributing Income and Wealth
• Income – is a regular flow of money, including payments to
employees as a reward for labor services.
• Wealth – is a store of assets which may take a variety of forms
including savings, investments and property.
Types of Asset
• Shares
• Houses
• Bank deposits
• Land
• Building Society Accounts
• Currency holdings
• Buildings
• Machinery and Equipment
• Gold
• Etc.
Income Distribution
• Income represents a FLOW
• £x per week, month, year, etc.
• Income can be in the form of:
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Wages
Rents
Dividends
Interest
Pensions
Benefit payments
Income from self employment
Inheritance
The Scale of the Problem of Inequality
• Gini coefficient is the best way to measure equality of income
distribution in a country.
• Uses a scale of 0-1 where as 1 represents perfect equality and 0 is
total inequality. Look on page 242.
What Does the Government Do?
• TAXATION
• Costs
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Administrative Costs
Incentives
May not impact because some will not be paying tax
Can be avoided
May not be targeted at those who need the help
• Benefits
• Reduction in poverty levels
• Can be used to provide incentives
Cont. Legislation
• Minimum Wage – targets those on ‘low wages’ but what is the right level?
• Discrimination – reducing the impact of racial, sexual and disabled incidences of
discrimination
• Regulation – Employment related regulation
• One of the governments job is to try to eliminate poverty. Countries in the Middle
East such as United Arab Emirates have outlawed poverty and if you are a state
born citizen you are entitles to a job.
20.7 The economic environment
© Malcolm Surridge and Andrew Gillespie 2016
The Governments Economic Policy
• Monetary policy, fiscal policy and supply-side policies.
• Governments operate with these policies with the aim of providing
the best possible economic environment for businesses.
Monetary Policy
• This type of economic policy involves adjusting the amount of money
in circulation and hence the level of spending and economic activity.
• Three major tool for monetary policy.
• Adjusting interest rates
• Controlling money supply
• Manipulation the exchange rate
• Most popular technique is altering the interest rate.
Quantitative Easing (QE)
• QE - is an unconventional form of monetary policy where a Central
Bank (countries bank) creates new money electronically to buy
financial assets, like government bonds. This process aims to directly
increase private sector spending in the economy and return inflation
to target.
Fiscal Policy
• Fiscal policy is the means by which a government adjusts its spending
levels and tax rates to monitor and influence a nation's economy. It is the
sister strategy to monetary policy through which a central bank influences
a nation's money supply.
• Expansionary fiscal policy is designed to stimulate the economy during or
anticipation of a business-cycle contraction. This is accomplished by
increasing aggregate expenditures and aggregate demand through an
increase in government spending (both government purchases and transfer
payments) or a decrease in taxes.
• This is accomplished by decreasing aggregate expenditures and aggregate
demand through a decrease in government spending (both government
purchases and transfer payments) or an increase in taxes. Contractionary
fiscal policy leads to a smaller government budget deficit or a larger
budget surplus.
Direct Taxes and Indirect Taxes
• Direct taxes – are paid directly to the
government by the individual taxpayer
– usually through “pay as you earn”.
Tax liability cannot be passed onto
someone else
• Indirect taxes – include VAT and duties.
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.
Transfer Payments and The Infrastructure
• Government expenditures is the
other half of fiscal policy.
• In economics, a transfer payment (or
government transfer or
simply transfer) is a redistribution of
income in the market system.
• Infrastructure refers to the
fundamental facilities and systems
serving a country, city, or area,
including the services and facilities
necessary for its economy to
function.
Supply side policies
• Supply-side policies are mainly micro-economic policies aimed at making
markets and industries operate more efficiently and contribute to a faster
underlying-rate of growth of real national output
• Successful policies have the effect of shifting the supply curve to the right
leading to a rise in potential output
• Most governments believe that improved supply-side performance is the
key to achieving sustained growth without causing a rise in inflation.
• Supply-side reform on its own is not enough to achieve this growth.
There must also be a high enough level of AD so that the productive
capacity of an economy is actually brought into play.
• Supply-side policies can be implemented by the public or the private sector
Supply-side objectives
• Key concepts to focus on are incentives, enterprise, technology,
mobility, flexibility and efficiency.
• 1.Improve incentives to look for work and invest in people’s skills
• 2.Increase labor and capital productivity
• 3.Increase occupational and geographical mobility of labor to help
reduce the rate of unemployment
Supply-side objectives
• 4.Increase investment and research and development spending
• 5.Promoting more competition and stimulate a faster pace of
invention and innovation to improve competitiveness
• 6.Provide a platform for sustained non-inflationary growth
• 7.Encourage the start-up and expansion of new businesses /
enterprises especially those with export potential
• 8.Improve the trend rate of growth of real GDP
20.8 The economic environment
© Malcolm Surridge and Andrew Gillespie 2016
Market Failure
• Occurs when a market does not work properly and resources are not
allocated correctly.
• A cartel exists when two or more businesses collude to control prices
and/or output thereby limiting competition and increasing profit.
Why do Markets Fail?
• Monopolies and cartels.
• Damage to the environment.
• Consumers and producers possess insufficient information about
products.
• Poaching of skilled labor.
Who will be affected?
Responses to Market Failures
• Monopolies and cartels – strict laws prohibit companies from
controlling price.
• Damage to the environment – laws, fines and taxes are the three
main weapons that the government has to combat against businesses
harming the environment.
Responses to Market Failures
• Lack of information –
government always provides
information about the benefits
and drawbacks of products.
• Poaching of skilled labor –
governments can offer
incentives for workers to stay
such as tax benefits and free
training.