Unit 6: External Business Influences

What does the economy consist of?

• Households/consumers: buy things and produce labour

• Business: create products and provide jobs

• Government: Controls the public sector, sets tax levels, provides infrastructure

• Banks: provide loans and stores money

Government objectives

• Low inflation

• Low unemployment

• Healthy balance of payments

• Economic growth in terms of GDP

Low inflation

• The lowering in value of money, if inflation is high, people’s savings become worth less

• Makes people poorer and damages their confidence to buy goods and services

Inflation

Increase in price of products over time

Low unemployment

• Governments want everyone to have a job

• People will have money to spend on goods and services

• Employed people pay taxes which helps develop infrastructure

• Creates better environment for business

Healthy balance of payments

• Increased exports enriches businesses e.g more jobs, higher tax

• Importing gives consumers more choice and satisfies them

Imports

Buying from another country

Exports

Selling to other countries

Economic growth in terms of GDP

Good GDP means healthy economy

GDP

Value of all combined goods and services consumed and sold/produced in a country

The business cycle

The economy’s development through recession and recovery over time

Growing economy

• Unemployment goes down

• People spend more as they have more jobs that provide money

• Business revenue goes up → more profits

• Causes inflation

• Tax revenue collection goes up

• Government can spend more on services for citizens

• Consumer confidence is high

Recession/shrinking economies

• Some businesses earn less/fail/close down

• Unemployment

• Consumer confidence decreases

• Government tax revenues decreases

• Services get worse and less infrastructure

• Less jobs are provided by the government

How can government help an economy grow?

• Offer cash grants to citizens

• Government spending on infrastructure

  • provides jobs and gets them spending again

• Lower tax

  • people have more disposable income → boosts demand

• Encourage foreign direct investment

  • look for global businesses to set up in their country

Foreign direct investment

Money invested in one country by a company or government in another country

Fiscal policy

A government policy where they tax businesses and people, and spend money on projects within the country

Advantages of fiscal policy

• Consumer confidence increases

• Decreasing taxes give people more disposable income to spend in the economy

• Building infrastructure leads to short-term employment

  • but in the long-run, it becomes better for business to utilise the infrastructure

  • encourages FDI

Disadvantages of fiscal policy

• They receive less money from tax and have less to spend on other things

• Need to find other sources of finance to fund other projects

• Infrastructure is very expensive

  • tax may need to go up or borrowing money is needed

Income tax

• Being taxed on the amount you earn

• If we increase income tax, people will have less to spend

• When reduced, people will be richer

Corporation tax

Taxing businesses based on how much profit they make

Value added tax

• Adding tax onto every product/service sold

• Lowering sales tax gives more disposable income

Import tariffs and quotas

Taxes placed on importing goods and services from other countries

Advantages of tariffs

• Encourages people to buy local

  • local businesses will be more successful

  • higher tax revenue as local businesses makes more profit

  • more job employment

• Generate revenue from sales of foreign goods

Disadvantages of tariffs

• Reduces choice for local people as foreign goods become too expensive

• Drives inflation, makes country poorer

Quotas

Limits the number of something that can be imported into a country, has similar effects as tariffs

Advantages of quotas

• Limits sales opportunities of foreign companies

• Local businesses don’t need to compete

  • keeps market shares and limits competition

Disadvantage of quotas

Consumers have less choice over products

Direct tax

Business and individuals pay from their income and profits

• corporation/profits tax and income tax

Indirect tax

Placed on goods, products and services

• sales tax/VAT, import tariffs

Monetary policy

A government policy that adjusts bank interest rates

Interest rates

Rewards you for saving or the cost of borrowing

What happens during low interest rates?

• People are encouraged to save less and spend more

  • creates demand

• Encourages to borrow money

  • borrowing is cheap, encourages people/businesses to borrow and spend

What happens during high interest rates?

• Encourages saving and discourages borrowing as it is expensive

  • reduces demand to control inflation

• Also encourages businesses not to take loans/invest

  • less investments → less demand → makes inflation fall

Supply side policies

Policies that increase competitiveness of the economy

• improve infrastructure, spend more on education, cut business taxes, remove regulations that restrict businesses

Advantages of supply side policy

• Makes country more competitive, this encourages FDI

• Good for growing GDP and reduces unemployment

Disadvantages of supply side policy

• May reduce tax revenue

• High costs to implement

  • only rich countries can afford large scale infrastructure improvements

• Usually takes years for benefits to show

  • but benefits will be long term

Environmental impacts from business activity

Pollution, landfills, deforestation, extinction, global warming, water usage, shipping

Externalities

When businesses locate in areas that create both costs and benefits to the local community and environment (the external costs and benefits of business activity)

Private benefits

Benefits enjoyed by the business

• Increase sales and potentially profit

• Improves brand reputation

• Creates loyal customers

Private costs

Costs a business has to pay for (not always monetary)

• Set-up costs

• Cost of labour/salaries

• Advertising costs

External benefits

Gains to the rest of society

• More choice of options

• Job opportunities

• Service is provided

• Attracts people closer to the business location

• Builds foot traffic and benefits local community/other businesses

External costs

Costs to the wider society

• Noise pollution

• More traffic

• Public disruptions

• Environment impact

Sustainable development

Development which does not put at risk the living standards of future generations

Unsustainable practices

Nuclear power, single-use plastics, pollution, use of fossil fuels, overfishing

Sustainable development

Circular economy, renewable energy sources, bio-created products, reducing carbon emissions

Pressure groups

Made up of people who what to change unsustainable business decisions and take action to force them through boycotts or protests

Ways pressure groups change business behaviour

• Educate the public so they can make better decisions

• Protests, petitions to publicise something

• Boycotts of products/services

• Publicity

Positive business reaction to pressure groups

• Changes behaviour or the better

• Low sales from boycott

• Amount of criticism

• Staff may have minds changed

• Business will change to improve public image

Negative business reaction to pressure groups

• Behaviour will not change

• Cost of change is too high

• Most of the public don’t care

• If demand does not change, they won’t change

Greenwashing

Pretending to be sustainable and to lead better practices, while not actually changing their methods

What can governments do to protect the environment?

• Create laws and restrictions

• Fines for breach of rules

• Bans on specific materials/ingredients

• Extra taxes for polluting

• Giving subsidies for green alternatives

• International cooperation

• Carbon trading

Carbon trading

Buying and selling of credits that allow a business to emit a certain amount of CO2

Government subsidies

Where the government pays for a portion of the fee consumers pay to reduce their costs

Ethics

The difference between right and wrong

Ethics in pricing

• Price gouging: charging too high for products

• Pricing very low for unhealthy products

Ethics in products

Making unhealthy products or dangerous ones

Ethics in production

• Child labour or low cost labour

• Animal testing

Ethics in promotion

• Misleading information

• Promotion to children

Ethics in human resources

• Discrimination

• Bribery

• Low wages

Costs of acting ethically for businesses

• Business have to spend more

  • paying for ethically sourced supplies

  • treat workers better

  • invest in green technology

  • more safety equipment

• Competition is always high but towards less ethical business

  • they will be cheaper

• Less profitability

Benefits of being ethical for businesses

• Better reputation

  • can charge more for quality

  • loyal customers

• May attract ethical investors

• Help attract better employment who will be more motivated

  • less staff turnover

• Unique selling point

  • competitive advantage

Globalisation

Interconnectedness/Interdependence of national economies

Why has the world become more globalised?

• Technology and media

• Transportation overseas

• Migration

• Colonisation

• Government policies

Advantage of globalisation for businesses

• Wider market

  • higher potential sales

• Better access to raw materials/global resources

• Employ people from around the world

  • more likely to find specialists

• Access low-wage labour in developing countries → less costs → higher profits

Advantage of globalisation to people

• Access to goods and services has expanded

  • more choice

  • prices go down and quality goes up as competition is higher

• Travel opportunities

• Work/migration opportunities

• More FDI → more jobs in home country

Disadvantages of globalisation to businesses

• More competition from abroad

  • for all markets mass and niche

• Quotas and tariffs may disrupt businesses

• Recession in other countries can disrupt businesses

Disadvantages of globalisation to people

• Loss of culture

• Possible exploitation of low wage labour

• Loss of specific types of jobs in some countries (deindustrialisation)

• Loss of jobs to business that are able to move nations

Protectionism

When governments favour local businesses and protect them from foreign firms with quotas and tariffs

Protectionism advantages

• Protects local jobs

• Potentially boosts economy: local business will make more sales and will provide more jobs

• Higher tax revenue for government

• Lowers competition

Protectionism disadvantages

• Reduces choice for consumers

• Drives inflation, foreign goods are more expensive

Multinational businesses

Business that sells goods/services in more than one country and generate revenue from more than one country

Why are multinational businesses so strong?

• Globalisation

• Well-known/good reputation due to large market budgets

• Can afford to be high quality

• Benefit from economies of scale

Benefits of multinational businesses to host nation

• Increased tax revenues

• Lots of chance for consumers in the country

• FDI - inflow of money and reinvest in local economy

• Lower price due to increased competition

Drawbacks of multinational businesses to host nation

• Expatriation of profits

• Loss of culture

• Competition

• Exploitation of natural resources

Expatriation of profits

Sending profits back to their original country rather than to the host country

Exchange rates

The price of one currency in the terms of another

Depreciation

When currency falls in value vs other countries

Appreciation

When currency gains value over other countries

Effects of depreciation on people

• Decreases confidence as inflation occurs

• People will try to buy local

• Drives inflation

• Makes holidays to other countries more expensive

Effects of depreciation to businesses

• Pay more for imports → higher costs

• Inflation

• Will consider local supplies

• Some businesses benefit such as businesses that target foreigners or exports

Effects of appreciation for people

• Lowers inflation

• More consumer confidence

• Gives people more choice

Effects of appreciation for businesses

• Imports are cheaper

• More difficult to export

  • as it is more expensive for foreign customers