SECTION 6

Chapter 27 - Economic Issues

Main Stages of the Business Cycle:

1. Expansion/Growth:
● Characteristics:
○ Economic activity is increasing.
○ Rise in consumer spending and business investments.
○ Increased production and employment.
● Impact on Businesses:
○ Higher demand for goods and services.
○ Opportunities for business expansion.
○ Increased profits.

2. Boom:
● Characteristics:
○ Peak of economic activity.
○ High consumer and business confidence.
○ Maximum employment levels.
● Impact on Businesses:
○ High demand and strong sales.
○ Increased profitability.
○ Potential for expansion and innovation.

3. Recession:
● Characteristics:
○ Economic decline, negative growth.
○ Reduced consumer spending and business investment.
○ Rising unemployment rates.
● Impact on Businesses:
○ Decreased demand for goods/services.
○ Declining profits.
○ Potential for cost-cutting measures.
4. Slump:
● Characteristics:
○ Prolonged and severe recession.
○ High unemployment, reduced consumer confidence.
○ Businesses struggle to survive.
● Impact on Businesses:
○ Sharp decline in sales and profits.
○ Potential business closures.
○ Cost-cutting and layoffs.

Impact on businesses of changes in:

A. Employment Levels:

Positive Impact: Increased Employment

● Higher Consumer Spending - When more people are employed, there is an increase in
disposable income, leading to higher spending on goods and services.
● Improved Business Productivity - A larger workforce can enhance production efficiency,
contributing to increased output and potential business growth.
● Skilled Workforce Availability - Increased employment levels mean a wider pool of skilled
workers, which can benefit businesses requiring specific expertise.

Negative Impact: Unemployment

○ Reduced Consumer Spending - Unemployment often leads to lower consumer
confidence and spending, impacting businesses that rely on consumer
purchases.
○ Decline in Employee Morale - Existing employees may experience reduced
morale and productivity due to job insecurity and workplace stress.
○ Social and Economic Challenges - High unemployment rates can contribute to
social issues and economic instability, affecting the overall business environment.

B. Inflation:

Positive Impact: Moderate Inflation

○ Encourages Spending - Moderate inflation encourages consumers to spend
rather than save money, benefiting businesses as demand for goods and
services remains steady.
 ○ Helps Debtors (Borrowers) - Inflation can erode the real value of debt, providing
relief to businesses with outstanding loans by reducing the actual burden.

Negative Impact: High Inflation

○ Reduced Purchasing Power - High inflation can lead to a decrease in the
purchasing power of consumers, impacting businesses as customers may cut
back on non-essential spending.
○ Uncertainty for Businesses - Rapid price increases can create uncertainty for
businesses in terms of production costs and pricing strategies.
○ Interest Rate Increases - Central banks may raise interest rates to combat high
inflation, increasing borrowing costs for businesses.

C. Gross Domestic Product (GDP):

Positive Impact: GDP Growth

○ Increased Business Opportunities - Growing economies present new
opportunities for businesses to expand and explore new markets.
○ Higher Consumer Confidence - A growing GDP generally corresponds with
increased consumer confidence, leading to higher spending and potential
business growth.
○ Potential for Investment - Investors may be more inclined to invest in businesses
operating in a growing economy, providing capital for expansion.

Negative Impact: GDP Contraction

○ Reduced Consumer Spending - A shrinking GDP often means reduced consumer
spending, impacting businesses that rely on a robust market for their products
and services.
○ Business Revenue Decline - Contraction in economic activity may lead to a
decline in business revenue and profitability.
○ Increased Business Risks - Economic downturns can pose increased risks to
businesses, making it challenging to secure loans or investments.

Government economic objectives

Low inflation
Low unemployment
Economic growth
Balance of payments
Government economic policies

Fiscal Policy - any change by the government in tax rates or public sector spending

- Expansionary fiscal policy: rise in government expenditure and/or cut in taxation

designed to increase aggregate demand.

- Contractionary fiscal policy: cuts in government expenditure and/or rises in taxation

designed to reduce aggregate demand.

Monetary Policy - any change by the government or central bank in the rate of interest.

- Expansionary monetary policy: increase in money supply and/or cuts in the rate of
interest designed to increase aggregate demand.

- Contractionary monetary policy: cuts in the money supply and/or rises in the rate of
interest designed to reduce aggregate demand.

Supply Side Policy - policies to make the economy more efficient

- Training and education programmes for workers

- Privatisation
- Deregulation
- Labour market reforms
- Lower direct taxes
- Incentives to work
- Incentives to invest

How business might react to changes in economic policy

—————————————————————————————————————

Chapter 28: Environmental and ethical issues

How business activity can impact on the environment

- overuse a country’s natural resources

- Increase pollution through littering, air and noise pollution
- Construction of buildings can lead to soil erosion and loss of habitat for animals
- Transport of goods can create carbon emissions which may be linked to global warming
and climate change

Possible external costs and external benefits of business decisions

external costs external benefits

air pollution job creation

noise pollution technological advancements

water pollution infrastructure development

health impacts businesses may provide education and

training programs, enhancing the skill set of
workforce.

climate change
 resource depletion

traffic congestion

How businesses can contribute to sustainable development

- use renewable energy

- Recycle waste
- Use fewer resources
- Develop new ‘environmentally friendly’ products and production methods

How and why businesses might respond to environmental pressures

and opportunities

There are three main influences

-> consumer
-> pressure groups
-> government

Consumers
An increasing proportion of consumers are becoming concerned about the environment. If sales
of a product falls because consumers think it is harmful to nature, then the business may have
to quickly change its products or production methods.

Pressure groups
Pressure groups are becoming increasingly powerful. They can take some very effective actions
against businesses such as organizing consumer boycotts.

Why pressure group activity is likely to change business actions-

● has popular public support and receives much media coverage
● Consumer boycotts results in much reduced sales for business
● Group is well organised and financed

Why pressure group activity is unlikely to change business actions-

● What the business might be doing is unpopular but not illegal
● The cost of changing the production methods is more to the business then the cost of
bad image and lost sales
● The business might sell to other businesses so public pressure will be less effective

Government
Governments can make business activities illegal. For example-
● locating in environmentally sensitive areas
● Dumping waste products into rivers
 ● Making products that cannot be easily recycled

● Impose financial penalties on businesses, such as pollution permits)

● Charge a tax on commercial use of energy

Ethical issues a business might face

- false advertising of products
- Providing products that that are unsafe for use
- Non-disclosure of risks associated with products
- Unfair payment to employees
- Use of child labour
- Production in an environment where the working environment and hours do not meet
health and safety standards
- Discrimination against employees
- Dumping
- Exceeding pollution limits set by the Government

How business might respond to business regulations

- Change production methods

- Do not employ child workers
- Pay fair prices to suppliers on time
- Have safe working conditions
- Pay wait wages to employees

Benefits and limitations of ethical issues

benefits drawbacks

attract socially-conscious consumers increased costs

attract socially-conscious investors ethical decisions may be more complex and

time-consuming

foster positive workplace environment, reduce short-term profits

improving employee motivation

reduced risk of facing opposition from

pressure groups

USP

Chapter 29: Business and the international economy

Reasons for globalization
- Increasing number of free rate agreements
- Improved and cheaper travel links and communications
- Reduced or removal of trade barriers

Characteristics of globalisation
- Increased dependency on global economy
- Growth in international trade
- Greater movement of product, services, people and money
- Companies operating in more than one country
- Global recognition of brands

Opportunities and threats of globalisation

opportunities threats

businesses can access more markets, which local businesses may suffer as foreign
may lead to increased sales companies start to sell at lower prices

can become a MNC and produce in other exchange rate fluctuation may cause lowering
countries which might be cheaper than ‘at of profits
home’

due to increases competition, business increased competition

operate more effectively and reduce costs as
it can take advantage of economies of scale
by operating in a global market

import products from other countries and sell employees may leave is there are not paid in
it in home country as there are now no trade line with international competitors
barriers and this may be profitable

import raw matters as it old be cheaper to marketing and distribution cost will rise for
purchase supplies from other countries international competitors

What government might introduce import tariff and import quota

1. Safeguard Infant Industries:

○ Protect emerging industries in their early stages by imposing tariffs or quotas,
allowing them to grow and become competitive.
2. Safeguard Declining Industries:
 ○ Provide temporary protection for industries facing decline, giving them time to
restructure and adapt to changing market conditions.
3. Safeguard Domestic Jobs:
○ Imposing tariffs or quotas can prevent the loss of domestic jobs by making
imported goods less competitive, encouraging consumers to buy
domestically-produced goods.
4. Prevent Foreign Countries from Dumping:
○ Combat the practice of foreign countries selling goods below cost to gain market
share, protecting domestic industries from unfair competition.
5. Source of Government Revenue:
○ Import tariffs serve as a revenue source for governments, contributing to public
funds and financing various government activities.
6. Overcome a Balance of Payment Deficit:
○ By restricting imports through tariffs or quotas, a country can reduce its trade
deficit, helping to balance its international payments.
7. Safeguard the Country from Overdependence:
○ Import restrictions can prevent a country from becoming overly dependent on
foreign goods, ensuring a degree of self-sufficiency.

Multinational Businesses

Impact on the stakeholder of MNCs

○ Shareholders will receive higher dividends

○ Employees will have increased opportunities to gain promotion
○ Suppliers may have increased/decreased sales dependant on where the MNC
decides to operate
○ Government may gain higher tax revenue if a MNC decided to operate in the
country

Advantages to the business

1. New Markets:
○ Accessing new markets allows an MNC to tap into diverse consumer bases,
fostering business growth and revenue expansion.
2. Obtain Raw Materials:
○ Securing direct access to raw materials ensures a stable and cost-effective
supply chain, reducing production costs and enhancing product competitiveness.
3. Avoid Trade Barriers:
○ Overcoming trade barriers enables the MNC to navigate international markets
more efficiently, fostering increased global market share and competitiveness.
 4. Low Labor Costs:
○ Exploiting lower labor costs in different regions enhances cost-efficiency,
enabling the MNC to maintain competitive pricing and potentially increase profit
margins.
5. Spread Risk:
○ Operating in multiple markets helps mitigate risks associated with economic
downturns or geopolitical instability in any single location, providing a buffer for
the overall business.
6. Economies of Scale:
○ Achieving economies of scale through large-scale production allows the MNC to
lower average costs per unit, optimizing operational efficiency and potentially
increasing profitability.

Disadvantages to business

1. Lack of Info about Local Market:

○ Inadequate understanding of the local market may lead to poor strategic
decisions, ineffective marketing, and challenges in meeting the specific needs
and preferences of the target audience.
2. Language Barrier:
○ Make it harder to communicate with the local workforce in the host country, which
may lead to mistakes, resulting in reduced efficiency.
3. Hostile Business Environment:
○ A hostile business environment characterised by unfavorable regulations,
corruption, or legal complexities can increase operational costs, create
uncertainty, and hinder the overall success of the business.
4. Local Opposition or Threat from Pressure Groups:
○ Facing opposition or threats from local pressure groups can damage the
reputation of the business, resulting in negative public relations.
5. Currency Fluctuations:
○ Exposure to currency fluctuations can impact the cost of imports and exports,
leading to financial uncertainties and affecting the profitability of the business in
the host country.
6. Political Instability:
○ Political instability poses a risk of sudden policy changes, government instability,
and potential disruptions to business operations, jeopardizing long-term
investments and the overall business environment.

Advantages to the country

 1. New Investment:
○ Attracting new investments from multinational companies stimulates economic
growth, enhances infrastructure, and fosters innovation in the host country.
2. More Exports:
○ Some of the extra output may be sold abroad increasing the exports of the
country.
3. Increased customer choice:
○ More variety of products will be available.
4. Jobs Created:
○ The establishment of multinational operations generates employment
opportunities, reducing unemployment rates of the host country.
5. More Competition:
○ Increased competition from multinational firms stimulates domestic industries to
enhance efficiency, innovation, and product quality.

Disadvantages to the country

1. Existing Firms in Danger:

○ The entry of multinational companies may pose a threat to local businesses that
are uncompetitive, causing them to close down
2. Profits Flow Out of the Country:
○ Profits are sent back to the multinational company's home country and not kept
where they are earned.
3. Use of Scarce Resources:
○ Multinational operations may use up the scarce or non-renewable resources,
potentially leading to overexploitation and environmental degradation in the host
country.
4. Shortage of Labor:
○ The demand for skilled labor by multinational firms may create a shortage of
qualified workers in the local job market, potentially leading to wage inflation and
workforce imbalances.
5. Cultural Differences:
○ Cultural clashes between the multinational company's practices and local norms
can lead to tensions, misunderstandings, and challenges in fostering a
harmonious work environment.
Impact of exchange rate changes

Exchange rate is the value of a currency in terms of another

● Appreciation
When the value of currency rises against other currencies
=> export prices rise
=> import prices fall

● Depreciation
When the value of currency falls against other currencies
=> import prices rise
=> export prices fall