External influences on business activites
Government economic objectives
Low inflation
Inflation occurs when prices rise. When prices rise rapidly it can be a problem for the whole country:
Inflation occurs when prices rise. When prices rise rapidly it can be a problem for the whole country:
- People's real incomes will fall - people will not be able to buy as many goods as before
- Production prices will increase, so people may buy foreign goods
- Business may not want to expand and create new jobs - living standards may fall
Low unemployment
Unemployment causes many problems, so low unemployment is an important objective:
Unemployment causes many problems, so low unemployment is an important objective:
- Unemployed people do not produce goods or services so total output will be lower
- Unemployed people cost the government money - the government pays them unemployment benefit, which could be spent on other things
Economic growth
An economy grows when the total output of goods and services in the country rises. The value of goods and services in one year is called the gross domestic product. The standard of living is likely to increase when a country is experiencing economic growth. There is no economic growth when a country's output is falling. This is likely to cause problems:
An economy grows when the total output of goods and services in the country rises. The value of goods and services in one year is called the gross domestic product. The standard of living is likely to increase when a country is experiencing economic growth. There is no economic growth when a country's output is falling. This is likely to cause problems:
- People will be unemployed because output is falling
- The average standard of living will fall
- Business may not want to expand and create new jobs
Balance of payments
Exports are the goods and services sold by one country to people and businesses in another country. These bring foreign currency into a country. Imports are goods bought in from other countries. Governments will aim to achieve balance between imports and exports. The difference between a country's exports and imports is called the balance of payments. If the value of a country's imports is greater than the value of its exports then it has a balance of payments deficit. This can cause problems:
Exports are the goods and services sold by one country to people and businesses in another country. These bring foreign currency into a country. Imports are goods bought in from other countries. Governments will aim to achieve balance between imports and exports. The difference between a country's exports and imports is called the balance of payments. If the value of a country's imports is greater than the value of its exports then it has a balance of payments deficit. This can cause problems:
- The country could run out of foreign currencies and may have to borrow from abroad
- The exchange rate will be likely to fall; this is called exchange rate depreciation
The business cycle
There are sometimes years when the economy does not grow or when GDP falls. This pattern can be shown on a business cycle diagram:
There are sometimes years when the economy does not grow or when GDP falls. This pattern can be shown on a business cycle diagram:
- Growth - this is when GDP is rising, unemployment is generally falling and the country is enjoying higher living standards. Most businesses will do well at this time.
- Boom - this is caused by too much spending. Prices start to rise quickly and there will be shortages of skilled workers. Business costs will be rising and firms will become uncertain about the future.
- Recession - often caused by too little spending. This is a period when GDP actually falls. Most businesses will experience falling demand and profits. Workers may lose their jobs.
- Slump - a serious and long-drawn-out recession. Unemployment will reach very high levels and prices may fall. Many businesses will fail to survive this period.
Government economic policies
Fiscal policy
All governments spend money on infrastructure. This money is very important for some businesses:
Governments raise this money largely from taxes on individuals and businesses: direct taxes on the income of businesses and individuals and indirect taxes on spending.
All governments spend money on infrastructure. This money is very important for some businesses:
- construction firms will benefit from a new road building scheme
- defense industries will gain if the government re-equips the army
- bus manufacturers will benefit from the government spending on public transport
Governments raise this money largely from taxes on individuals and businesses: direct taxes on the income of businesses and individuals and indirect taxes on spending.
Income tax
This is a tax on people's incomes. Income tax is set at a certain percentage of income. Higher taxes on individuals affect businesses because the higher the tax, the lower the disposable income of an individual. Businesses would be likely to see a fall in sales. Fewer goods will be produced and workers could lose their jobs. Businesses that produce luxury goods are more likely to be affected by high income tax than businesses that produce essential goods and services.
This is a tax on people's incomes. Income tax is set at a certain percentage of income. Higher taxes on individuals affect businesses because the higher the tax, the lower the disposable income of an individual. Businesses would be likely to see a fall in sales. Fewer goods will be produced and workers could lose their jobs. Businesses that produce luxury goods are more likely to be affected by high income tax than businesses that produce essential goods and services.
Profits tax
This is a tax on the profits made by businesses - usually companies. An increase in profits tax affects businesses:
This is a tax on the profits made by businesses - usually companies. An increase in profits tax affects businesses:
- Businesses would have lower profits after tax, so managers will have less finance to put back into the business. This will lead to difficulty expanding and new projects could be cancelled.
- There will be less money to pay back to the owners who originally invested in the business. Fewer people will want to start their own business if they consider that the government will take a large share of profits made. Companies' share prices will fall.
Indirect taxes
Indirect taxes are added to the prices of the products. They make goods and services more expensive, like Value Added Tax. Governments avoid putting these taxes on essential items. An increase in indirect taxes has two main effects:
Indirect taxes are added to the prices of the products. They make goods and services more expensive, like Value Added Tax. Governments avoid putting these taxes on essential items. An increase in indirect taxes has two main effects:
- Prices of goods rise and consumers buy fewer items. There will be a reduce in demand of non-essential goods.
- Businesses may be under pressure to increase wages so their workers can purchase goods and services. This will increase production costs.
Import tariffs
Many governments try to reduce imports by putting special taxes on them. These import tariffs raise money for the government. Businesses are affected if the government puts tariffs on imports:
Many governments try to reduce imports by putting special taxes on them. These import tariffs raise money for the government. Businesses are affected if the government puts tariffs on imports:
- Firms benefit if they are competing with imported goods because imported goods will become more expensive with import tariffs.
- Businesses will have a higher cost if they have to import raw materials.
- Other countries may also introduce import tariffs so businesses trying to export will sell fewer goods than before.
Import quotas
A government can limit imports using an import quota. This is a physical limit on the quantity of a product that can be brought in. Quotas can be used selectively to protect certain industries from foreign competition that may be seen as unfair or damaging to jobs.
A government can limit imports using an import quota. This is a physical limit on the quantity of a product that can be brought in. Quotas can be used selectively to protect certain industries from foreign competition that may be seen as unfair or damaging to jobs.
Changes in government spending
Governments in most countries spend tax revenue on essential services like education, health, defense, law enforcement and transport. Governments can increase their spending on these if they want to boost economic growth.
If governments want to save money, they must cut spending. These cuts could have a large impact on businesses which help produce this infrastructure.
Governments in most countries spend tax revenue on essential services like education, health, defense, law enforcement and transport. Governments can increase their spending on these if they want to boost economic growth.
If governments want to save money, they must cut spending. These cuts could have a large impact on businesses which help produce this infrastructure.
Interest rates
An interest rate is the cost of borrowing money. The level of interest rates can be fixed by the government or central bank via monetary policy. In most countries, businesses and individuals can borrow money and they will have to pay interest on the loan. Effects of higher interest rates include:
An interest rate is the cost of borrowing money. The level of interest rates can be fixed by the government or central bank via monetary policy. In most countries, businesses and individuals can borrow money and they will have to pay interest on the loan. Effects of higher interest rates include:
- Firms with existing variable asset interest loans may have to pay more interest to the banks, which will reduce profits.
- Managers may delay their decision to expand if they have to borrow money to do so.
- Consumers with mortgages will have reduced available income. Demand for goods and services will fall.
- Consumer demand for expensive goods will fall and businesses may have to reduce output and make workers redundant.
- Higher interest rates in one country will encourage foreign banks and individuals to deposit their capital in that country. They will be able to earn higher rates of interest on their capital. By switching their money to this country's currency they are increasing the demand for it. The exchange rate will rise and imported goods will appear to be cheaper and exports more expensive.
Supply side policies
Governments try to make the economy of their country more efficient by increasing competitiveness of their industries against those from other countries. Their business will expand, produce more, and employ more workers. Policies to achieve this include:
Governments try to make the economy of their country more efficient by increasing competitiveness of their industries against those from other countries. Their business will expand, produce more, and employ more workers. Policies to achieve this include:
- Privatization - to use the profit motive to improve business efficiency
- Improved training and education - improving the skills of workers will increase the number of staff that can be employed for skilled jobs
- Increased competition in all industries - reducing government controls over industry or by acting against monopolies
How business might react to changes in economic policy
If the government increases income tax, businesses may lower prices on existing products to increase demand or produce cheaper products to allow for lower prices. However, less profit will be made on each item sold and the brand image of a product might be damaged by using cheaper versions of it.
If the government increases tariffs on imports, businesses may focus more on the domestic market as locally produced goods now seem cheaper. They could also switch from buying imported materials and components to locally produced ones. However, it might still be more profitable to export and foreign materials and components may be of higher quality.
If the government increases interest rates, businesses may reduce investment so future growth may be less. They could also develop cheaper products that consumers will be better able to afford and sell assets for cash to reduce existing loans. However, other companies might still grow so market share will be lost. Also, the development of cheaper products depends on the product but consumers could start to think that the quality and brand image are lower. The assets that could be sold might be needed for future expansion.
If the government increases tariffs on imports, businesses may focus more on the domestic market as locally produced goods now seem cheaper. They could also switch from buying imported materials and components to locally produced ones. However, it might still be more profitable to export and foreign materials and components may be of higher quality.
If the government increases interest rates, businesses may reduce investment so future growth may be less. They could also develop cheaper products that consumers will be better able to afford and sell assets for cash to reduce existing loans. However, other companies might still grow so market share will be lost. Also, the development of cheaper products depends on the product but consumers could start to think that the quality and brand image are lower. The assets that could be sold might be needed for future expansion.
Environmental and ethical issues
Social responsibility is when a business decision benefits stakeholders other than shareholders, for example, a decision stop protect the environment by reducing pollution by using the latest and ‘greenest’ production equipment.
Environment is our natural world including, for example, our air, clean water, and undeveloped countryside.
Environment is our natural world including, for example, our air, clean water, and undeveloped countryside.
Business activity and the environment
Business activity aims to satisfy customers’ demand for goods and services - but it often has an impact on the environment. The environment means our natural world. The question is if negative impacts on the natural environment matter. Many people believe they do - but other people think that all business should be worried about is satisfying customer demand as cheaply as possible.
Business activity aims to satisfy customers’ demand for goods and services - but it often has an impact on the environment. The environment means our natural world. The question is if negative impacts on the natural environment matter. Many people believe they do - but other people think that all business should be worried about is satisfying customer demand as cheaply as possible.
Examples of ways business effects the environment
- Aircraft jet engine emissions damage the atmosphere
- Pollution from factory chimneys reduces air quality
- Waste disposal can pollute rivers and seas
- Transport of goods by ship and trucks burns fossil fuels such as soil which create carbon emissions and may be linked to ‘global warming’ and climate change
Sustainable development: what can business do?
- Use renewable energy - by fitting solar panels or buying energy that uses renewable sources such as wind or tidal power
- Recycle waste - by reusing water and other products that would otherwise by wasted or disposed of, total use of resources is reduced
- Use fewer resources - lean production is about managing production so efficiently that the minimum quantity of resources is used
- Develop new environmentally friendly products and production methods - for example, replacing drink cans and bottles with biodegradable packaging that will not damage the environment
Sustainable development is development which does not put at risk the living standards of future generations.
Ethical decisions are based on a moral code. Sometimes referred to as ‘doing the right thing’.
Ethical decisions are based on a moral code. Sometimes referred to as ‘doing the right thing’.
Business and the international economy
The concept of globalization
Globalization is the term widely used to describe increases in worldwide trade and movement of people and capital between countries. Free trade agreements exist when countries agree to trade imports and exports with barriers such as tariffs and quotas. Globalization occurs due to an increasing number of these free trade agreements and other economic unions between countries. Improved travel and communication links between countries have made it easier to transport products globally. Many emerging market countries are industrializing very rapidly so they can export in very large quantities.
Globalization is the term widely used to describe increases in worldwide trade and movement of people and capital between countries. Free trade agreements exist when countries agree to trade imports and exports with barriers such as tariffs and quotas. Globalization occurs due to an increasing number of these free trade agreements and other economic unions between countries. Improved travel and communication links between countries have made it easier to transport products globally. Many emerging market countries are industrializing very rapidly so they can export in very large quantities.
Opportunities of globalization
- Businesses can start selling exports to other countries, opening up foreign markets. This increases potential sales but it can be expensive to sell abroad and products may not be popular.
- Businesses can open operations in other countries. It could be cheaper to produce in other countries but the quality may not be as good, and it is expensive to set up operations in other countries.
- Businesses can import products from other countries to sell to customers in their 'home' country, which could be profitable due to lack of trade restrictions. However, products may need maintenance and repairs.
- Businesses can import materials and components but still produce in their 'home' country. It could be cheaper to purchase these supplies from overseas and this can reduce costs. However, the business does not know if the supplier is reliable and transport costs will affect the business as well.
Threats of globalization
- Increasing imports into home market from foreign competitors could offer cheaper products and sales of local businesses might fall. However, this could encourage local businesses to become more efficient.
- Increasing investment from multinationals to set up operations in home country could create further competition due to economies of scale. However, some local firms could become suppliers to these multinationals and their sales would increase.
- Employees may leave businesses that cannot pay the same or more than international competitors. Employees will have more choice about where they work and businesses will have to make an effort to keep their best employees. However, this might encourage businesses to use motivational methods to keep their workers.
Why some governments introduce tariffs and quotas
Governments introduce tariffs and quotas to protect domestic industries from competition that might otherwise close them down. Foreign competitors might be able to produce products much more cheaply and if they were allowed to import with any restriction then local firms might be forced out of business. This would reduce employment and incomes.
However, it could be better to allow local consumers to buy imported goods as cheaply as possible and for local businesses to produce and export goods and services in which they have a competitive advantage. This way, living standards across the globe can be increased.
Governments introduce tariffs and quotas to protect domestic industries from competition that might otherwise close them down. Foreign competitors might be able to produce products much more cheaply and if they were allowed to import with any restriction then local firms might be forced out of business. This would reduce employment and incomes.
However, it could be better to allow local consumers to buy imported goods as cheaply as possible and for local businesses to produce and export goods and services in which they have a competitive advantage. This way, living standards across the globe can be increased.
Multinational organizations
To be called multinational, a business must produce goods or services in more than one country. There are many reasons why firms become multinational organizations:
To be called multinational, a business must produce goods or services in more than one country. There are many reasons why firms become multinational organizations:
- to produce goods in countries with low costs, such as low wages.
- to extract raw materials which the firm may need for production or refining.
- to produce goods nearer to the market to reduce transport costs.
- to avoid barriers to trade put up by countries to reduce the imports of goods.
- to expand into different market areas to spread risks.
- to remain competitive with rival firms which may be expanding abroad.
Advantages of multinationals operating in a country
- Jobs are created, which reduces the level of unemployment
- New investment in buildings and machinery increases the output of goods and services in the country.
- Some of the extra output may be sold abroad, which will increase the exports of the country.
- Imports may be reduced as more goods are now made in the country.
- Taxes are paid by the multinationals, which increases government funding.
- There is more product choice for consumers and more competition.
Disadvantages of multinationals operating in a country
- The jobs created are often unskilled assembly-line tasks.
- Local firms may be forced out of business.
- Repatriation of profits - profits are often sent back to a multinational's 'home' country.
- Multinationals often use up scarce and non-renewable primary resources in the host country.
- Multinationals can have a large influence on the government and economy of the host country.
Exchange rates
Determination of exchange rates
The exchange rate is the price of one currency in terms of another. Most currencies are allowed to vary or float on the foreign exchange market according to the demand and supply of each currency. If the demand for £ was higher than the demand for $, then the price of £ would rise. Each £ now buys more $ than before. Changes int he exchange rate affect businesses in several different ways.
The exchange rate is the price of one currency in terms of another. Most currencies are allowed to vary or float on the foreign exchange market according to the demand and supply of each currency. If the demand for £ was higher than the demand for $, then the price of £ would rise. Each £ now buys more $ than before. Changes int he exchange rate affect businesses in several different ways.
Exporting businesses
Exchange rate appreciation is a serious problem for exporters because the amount that they earn in foreign currency will buy less local currency.
Exchange rate appreciation is a serious problem for exporters because the amount that they earn in foreign currency will buy less local currency.
Importing businesses
Exchange rate depreciation is a problem for importers because it leads to higher costs, but appreciation is good for them.
Exchange rate depreciation is a problem for importers because it leads to higher costs, but appreciation is good for them.