External Influences on Business

Activity
Economic Issues
Main Stages of the Business Cycle and Trade Cycle

 Gross Domestic Product (GDP): the total value of the output of goods and services in

a country in one year.

 Recession: too little spending, falling GDP, demand and prices, workers lose jobs.

 Slump: long-drawn-out recession. Unemployment is higher, and prices fall; many

businesses fail to survive this point.

 Growth: GDP is rising, unemployment is falling, and living standards are higher. (Firms

are doing well at this point).

 Boom: too much spending, inflation, shortage of workers, and businesses uncertain

about the future.

Impact on Business from Changes in Economic Indicators

 Changes in employment levels will affect the ability of the business to recruit new

employees and also the income of customers.

 Rising inflation may increase business costs, leading to higher product prices. The

effect of increasing inflation depends on the type of product sold.

 An increase in GDP means the economy is growing. Increase sales, higher income, but

recruitment of employees hard.

Government Economic Objectives

Low inflation

 Low Inflation: Low prices of goods & services so that people will buy more money in

the economy.

o Inflation: The increase in average prices of goods & services.

 Rapid inflation may lead to:

o A fall in the value of money falls in real incomes.

o Wage price spiral.

o Fall in international competitiveness as prices will be high.

o Businesses may not want to expand and create jobs.

o Living standards will fall.

 Low inflation rates will act as an incentive for firms to produce and encourage them to

expand.

Low Unemployment

 Low Unemployment: A high % of people work so that they don’t rely on government

funds.
o When people want to and have the ability to work but can’t work, then they are said to

be unemployed.

o The country's output will be lower if unemployed people don’t produce goods and

services.

o It involves an opportunity cost as the government has to pay greater unemployment

benefits, which could be used to improve education and increase living standards.

Economic Growth

 Economic Growth: growth of a country's GDP (Gross Domestic Product) – more goods

and services being produced and sold.

o If an economy’s total output rises, it is said to be experiencing economic growth.

o GDP is the total value of goods and services produced in an economy.

o Economic growth may cause employment to rise, increasing living standards and

reducing poverty.

o A fall in GDP can lead to:

 Unemployment

 Fall in average living standards as poverty rises

 Less investment

Balance of Payment

 Balance of Payment (of Imports & Exports): the difference between a country's value

of imports and exports of goods and service over a year.(BoP = Exports – Imports).

o Exports: Goods and services sold from one country to another.

o Imports: Goods and services bought by one country from another.

 Balance of payments is a record of one country’s financial transactions internationally.

 Governments will aim for an equal balance of payments: exports equal imports.

 Higher imports than exports lead to a budget deficit.

 Higher exports than imports lead to a budget surplus.

 Problems of Budget Deficit:

o The government can run out of foreign currency reserves and will have to borrow.

o The exchange rate depreciates – the price of our currency falls as compared to the

other currency.

 Exchange Rate: the price of a currency in terms of another.

Government Economic Policies

Fiscal Policy

 Fiscal Policy: any changes by the government income from tax or public sector

spending.

Spending by the Government:

 Government spending decisions can have a great impact on certain business decisions.

 If the government decides to increase its spending:

o Increase subsidies and grants (to encourage businesses to set up in high-

unemployment areas).

o Increase in welfare benefits, meaning consumers will have a higher portion of income to

spend.

o Stimulation of economic growth.

 If the government decides to decrease spending:

o Increased competition (mainly if privation is used)

o Disinflation (the reduction in the rate of inflation)

 Tax

 Direct Tax

o Income tax reduces consumer disposable income.

o Corporation tax on comparing profit.

 Indirect Tax

o Expenditure taxes, e.g. VAT

o Import tariffs/quotas to reduce imports from abroad.

 Import Tariffs: tax on imported goods.

 Import Quota: a physical limit on the quantity of a product to be imported.

 Governments and spending decisions include a tax measure according to the effect

they want to achieve.

 Governments will reduce spending and increase tax rates to reduce inflation.

 Governments will increase spending and decrease tax rates to stimulate economic

growth.

Monetary Policy

 Monetary Policy: change in interest rate by the government and/or the central bank.

 Governments will have a set of objectives they would like to achieve and present them

to the central bank, which will set the interest rate based on these objectives.

 If these objectives seek to increase the overall demand in the economy, the central

bank will lower interest rates, which will lead to -

o More consumer spending than borrowing.

o More risk of inflation (Decreases confidence consumers/Businesses have).

o There is more incentive to expand because loans are cheaper, so firms are more likely

to take out a loan to fund for expansion.

o Depreciation of the exchange rate (Fall in value of the country’s currency) will make for

costlier imports.

 If these objectives seek to decrease the overall demand in the economy, the central

bank will raise the interest rate; this will lead to -

o Less consumer spending than borrowing.

o Less risk of inflation (Increases confidence consumers/Businesses have).

o The incentive to expand will decrease because taking out a loan will be more

expensive, so firms are likely to delay any plans of expansion.

o Appreciation of the exchange rate (Rise in value of the country’s currency) will make for

cheaper imports.

Supply-Side Policies

 Supply-Side Policies: try to increase the competitiveness of industries in an economy

against those from other countries. Make the economy more efficient and increase

supply.

 These supply policies focus on more long-term objectives, unlike fiscal/monetary, which

are more short-term and demand-focused. They have three main categories:

o Encouraging Competition: through privatisation/deregulations.

o Labour Market Reforms: through trade unions, minimum wage, and labour

legislations.

o Incentive-related Policies: through reduced tax rates and increased subsidies.

Environmental and Ethical Issues

 Social Responsibility

 Social Responsibility: when a business decision benefits stakeholders other than

shareholders.

 Examples of business activity impacting the environment:

o Emission from transport vehicles.

o Pollution from factories.

o Waste disposal

o Transportation of goods by ship or track burns fossil fuels such as oil, creating carbon

emissions, which link to global warming and climate change.

Arguments against being mindful Argument with being mindful of the

of the environment: environment:
Pollution and global warming affect all, so
It can be expensive and reduce profit. social responsibility helps reduce this
problem.
Increase prices to pay for Using non-renewable resources leaves less
‘environmentally friendly‘ policies. for the future and raises prices.
It can make firms unproductive,
Scientists and environmentalists believe that
reduce salaries and relocate to
business activity can do permanent damage.
places without such policies.
Consumers are becoming more socially
Consumers buy less if the price is
aware, so environmentally friendly products
high.
have become a market advantage.
The government should pay to clean Pressure groups can take action to harm the
it up. business's reputation and sales.
Owners can claim there isn’t proof
that the activity is causing damage.
 Pressure Groups: people who want to change business (or government) decisions by

taking actions, such as consumer boycotts.

The Concept of Externalities

 Private Costs: costs paid for by a business or the consumer of a product.

 Private Benefits: gains to a business or the consumer of a product.

 External Costs: costs paid for by the rest of society, other than the business.

 External Benefits: gains to the rest of society, other than the business.

 Social Costs = External costs + Private costs.

 Social Benefits = External benefits + Private benefits.

 If the social benefit exceeds social costs, the scheme will likely be accepted; the

government/local community will probably refuse permission.

Sustainable Development

 Sustainable Development: Development which does not risk future generations' living

standards.

 Business can be sustainable by:

o Use of renewable energy

o Recycle waste

o use fewer resources

o Develop new ‘environmentally friendly‘ products and production methods.

Main Reasons Why Businesses Respond to Environmental Pressure

Consumers

 Bad publicity can cause them not to buy; if consumers think the products harm the

environment, they will stop buying, resulting in the business changing the product or

production method.

Pressure groups

 Can take actions towards businesses like consumer boycotts.

 The impact of the actions depends on:

o Public support and media coverage.

o Consumer boycotts result in a decrease in sales.

o The group is well-financed and organised.

o Whether the action is unpopular but not illegal

o Cost damage methods by the business.

o If a business sells to another business - public pressure is less effective.

Government through legal contracts

 By making certain activities illegal:

o Locating in an environmentally sensitive area.

o Producing non-recyclable products.

o Dumping waste in nearby rivers/seas.

 Pollution permits - licences that allow businesses to pollute to a certain level. If the

business exceeds the account, it must buy from a ‘cleaner‘ business or pay large fines.

 Additional taxes on goods or factories resulting in pollution.

Ethical Issues

Ethical Decision: based on a moral code of conduct, sometimes called ‘doing the right

thing‘.

 Offering or taking business from government officials or people working for other

businesses.

 Employ child labour, even if it is illegal in some countries.

 Buy supplies that lead to damage to the environment.

 Agree to ‘fix high prices‘with competitors.

 Pay high to the top of the hierarchy and poorly to the lower levels.

Two main extreme views to the ethical standards:

 If the law is not broken, businesses can do whatever to gain profit.

 Even if it is not illegal, therefore wrong even if it may increase profit.

Potential benefits of ethical

Potential limitation of ethical decision
decision
Customers may be more inclined to
Adults paid higher costs, especially if good
buy products not made by child
workers’ conditions were involved.
labour.
Good publicity about ethical
Prices may be set higher due to higher costs.
decisions provides ‘free promotion‘.
If consumers are not interested in how it’s
Long-term profit increases
made and care only for price - then profits fall.
Some workers and investors may
want to link an ‘Ethical business‘,
Short-term profit may fall.
making recruiting and raising capital
easier.
It could be argued that some countries employ
Less risk of legal actions being taken children as they may be the only source of
against the company. income for the family, and may cause them to
fall to low levels.

Business and the International Economy

 Globalisation: the world is becoming more interconnected, leading to increasing

worldwide trade & people moving.

 The reasons for globalisation include:

o More Free-Trade Agreements and economic unions between countries have replaced

protection for industries. Consumers can purchase with few or no import controls.

o Improved and cheaper travel links and communication between countries made it

easier to transport goods globally. Interest also allows easy price comparisons, and

online/e-commerce allows orders to be placed anywhere.

o Many ‘Emerging market countries‘ are industrialising very rapidly. They can sell

globally at cheaper prices because of the loss of growth of the firms and industries.

The Opportunities and Threats of Globalisation to a Business include:

Potential Opportunities for

Effect 1 Effect 2
Business
They are expensive to
Start selling exports to other sell abroad, and foreign
Increase potential sales,
countries -opening up foreign consumers buy the
especially online sales.
markets. products even if they are
popular at ‘home‘.
Quality good? Ethical
Open factories/operations in Cheaper to make goods issues? Expensive or
other countries (become a outside than difficult to set up
multinational) domestically. operations in other
countries?
Products need
Import products from other No trade restrictions, maintenance and partly
countries to sell to customers more profitable to buy, repairs. Will the needed
in ‘home‘ country. could sell domestically. parts be available from
the foreign producer?
Cheaper purchases of
Import materials and
supplies from other Are suppliers reliable?
components from other
countries will free trade Does greater distance
countries. But still produce
and reduce costs. add too much transport
final goods in the ‘home‘
Materials can be supplied costs?
country.
‘online‘.

Potential Threats to
Effect 1 Effect 2
Businesses
Increase imports into the Increased competition
If competitors offer cheaper
home market from forces local firms to be
products, domestic sales fall.
foreign competitors. more efficient.
Increase investment from Create further competition - Local firms become
multinationals to set up Multinationals that afford the suppliers to
operations in the home best employees may have multinationals, and their
country. economies of scale. sales could increase.
Employees may leave In some professions, It might encourage local
businesses that cannot employees have more businesses to use
 Potential Threats to
Effect 1 Effect 2
Businesses
choices about where they
pay the same or more various motivational
work - businesses will have to
than international methods to keep their
make more effort to retain
competitors. workers.
them.
Why Government Might Introduce Import Tariffs and Import Quotas

 Import Tariffs: tax placed on imported goods in the country.

 Import Quota: a restriction on the quantity of a product that can be imported.

 Protectionism: when a government protects domestic businesses from Foreign

competition using tariffs and quotas. This reduces employment incomes.

 Import tariffs increase the prices of imported goods, making them less competitive than

locally produced goods.

 Import quotas decrease the quantity of imported goods; increasing the price means less

availability, thus increasing sales for domestic products.

Multinational Companies (MNCs)

 Multinational (Transnational) Company: a company that has factories or service

operations in more than one country

 It is not just selling products abroad; it is having operations abroad

 The benefits of a business and its impact on becoming international:

Benefits to business Impact to stakeholders

New market Higher dividends
Easier to obtain raw materials as they can be
Opportunity to live and work abroad
closer
Suppliers increase/decrease
Avoid trade barriers and import taxes
depending on the location
Low Labour costs Government gains higher/lower taxes
 Benefits to business Impact to stakeholders
Spread risk (if there are low sales in one
country and high sales in another)

Benefits to the business Benefits to the country

Producing goods at lower costs Jobs are created
Investments in the development
Closer to resources (i.e. oil)
of infrastructure in the country
Closer to market More exports
Avoid expensive taxes on the import of goods (i.e.
Tax – more money to the
Korean cars (KIA) being produced in the EU to
government
benefit from free trade)
Spread risks (if there are low sales in one country Increased product choice for
and high sales in another) consumers

Advantages to Host Country Disadvantages to Host Country

Influence the government and economy
New investment
(bringing outside influences and culture).
Due to MNCs ' expertise and activity,
More export increases the international
existing firms will likely be pushed out of
competitiveness of the country
the market.
Fewer imports keep domestic businesses Depletion of scarce resources and
active and prevent the BoP deficit. endangerment of natural sites.
Jobs created reduced unemployment. Profits flow out of the country.
Increase tax paid to the government. Often, unskilled work is created.
More competition helps increase the
productivity and efficiency of domestic
businesses.

Exchange Rates
 Exchange Rate: the price of one currency in terms of another currency.

 For example, 1 Euro is equivalent to 1.2 Dollars

 Currency Appreciation: when the value of a currency increases.

o It can buy more of another currency

o 1 euro = 1.2 dollars, to 1 euro = 1.5 dollars.

 Currency Depreciation: when the value of a currency decreases.

o It can buy less of another currency.

o 1 euro = 1.2 dollars, to 1 euro = 1 dollar.

 2 things influence the exchange rate of a currency:

o Demand for the Currency: if many people want to buy the currency, the price will

increase because there is a ‘limited’ number of currencies (so it leads to appreciation).

o Supply of Currency: if the central bank prints more money, the supply increases, but

the demand is still the same, so the value is lower (leading to depreciation).

Exchange Rates Can Affect Businesses By:

If it Appreciates If it Depreciates
Import prices rise: your currency is
Import prices fall: since your currency
worth less, so you need more to buy
can buy more of the other currency.
other currencies.
Export prices rise: your currency is worth Export prices fall: it is worth less, so
more, so it is more expensive for other other currencies can buy your currency
currencies to buy it. for less than theirs.
 This means that if the currency appreciates:

o The product’s price in other countries will increase

o The business will make more profit

o Businesses can lower the price and still make the same amount of money as before – it

is more competitive.

 If the currency depreciates:

o The product’s price in other countries will decrease

o less profit will be made

o Businesses need to raise the price to make the same amount of money as before

– less competitive.