1. External Influences
The Macro-Economy

2. External Influences – The Macro-Economy
The production and exchange process of the whole economy as opposed to individual markets within the economy
Businesses affected by changes in the macro–economy and by government policies

3. External Influences – The Macro-Economy
Government Macro-economic objectives:
Control of inflation – 2.0%
Maintain full employment – all who want a job can get one!
Control of balance of payments
Stability of exchange rate
Maintain steady economic growth -> 2-2.5%?

4. External Influences – The Macro-Economy
Inflation: a general rise in the price level over a period of time
Measured by:
RPI – Retail Price Index
RPIX = RPI – mortgage interest payments
RPIY = RPIX – indirect taxes and local authority tax
HICP – Harmonised Index of Consumer Prices (From November 2003)

5. External Influences – The Macro-Economy
HICP – Internationally comparable measure of inflation adopted by all EU countries
Geometric rather than arithmetic mean
Does not include: housing costs, buildings insurance, mortgage costs
Does include: university accommodation fees, tuition fees, stock broker charges
Weights determined by expenditure by private households AND all private visitors to UK, and residents of institutional households

6. External Influences – The Macro-Economy
Full Employment:
Policies designed to help those who want to work get work:
Strong economy
National Minimum Wage and changes to welfare benefits
‘New Deal’ and ‘Employment Zones’
Investing in education and training
Investing in diversity
Source: Adapted from ‘Towards full employment in a modern society’, Department for Work and Pensions, 2001 (

7. External Influences – The Macro-Economy
Balance of Payments:
A record of the trade between the UK and other countries
Imports – visible and invisible – purchase of goods and services from other countries which result in payments being made abroad
Exports – visible and invisible – the sale of goods and services to other countries which results in payments being received from those countries

8. External Influences – The Macro-Economy
Balance of Payments:
Ease with which businesses can sell products abroad
Impact on business costs from imports
Impact on competition from imports and exports

9. External Influences – The Macro-Economy
Exchange Rates
The rate at which one currency can be exchanged for another
e.g. £1 = €1.72, £1 = $1.68
Influences the perceived prices of imports and exports and therefore costs and competitiveness

10. External Influences – The Macro-Economy
Exchange Rates:
Effects on Business:
Appreciation – value of £ against other currencies rises, e.g. £1 = €1.72 to £1 = €1.75
Exports harder to sell abroad - foreign traders have to give up more of their currency to get same amount of £ - export prices appear to rise
Imports appear to be cheaper – buyer in UK gets more foreign currency for every £

11. External Influences – The Macro-Economy
Depreciation – value of £ against other currencies falls, e.g. £1 = $1.68 to £1 = $1.60
Exporters benefit – foreign traders get more £ for their currency – export prices appear to fall
Importers – have to give up more £ to get same amount of foreign currency – appears import prices have risen
Precise effect of both depends on Price Elasticity of demand for imports and exports

12. External Influences – The Macro-Economy
Economic Growth:
Measured by Gross Domestic Product (GDP) – the value of output of goods and services in the economy over a period of a year
Measured by adding up total incomes (Y) or total expenditure (E) or total output of industry
In theory all should be the same!
Appropriate growth levels in UK
too high - economy overheating,
too low - economy stagnating, resources unemployed
Actual growth of 2–2.5% seen as being sustainable

13. External Influences – The Macro-Economy
Economic Growth
Effects on business:
Low growth – business sales low, profit margins tight, excess capacity, orders reduced, excess stock, redundancies
High growth – business sales rising quickly, profits rising, skill shortages, inflationary pressure on prices, capacity squeezed, stocks running down

14. External Influences – The Macro-Economy
The Business Cycle:
Potential Growth
Output
Boom
Growth
Actual Growth
Slowdown
Excess capacity –
Recession
Time

15. External Influences – The Macro-Economy
Government Policies:
Fiscal Policy – influencing economic and non-economic objectives through variations in public income and expenditure (tax revenue, borrowing and government spending)
Affects all aspects of business activity – regulations, infrastructure – roads, transport, etc, health and safety, support for industry, business taxation, employment laws and taxes – income tax and national insurance contributions, pension contributions, etc.

16. External Influences – The Macro-Economy
Monetary Policy:
Changes in the rate of interest to help control the level of expenditure in the economy and therefore the level of inflation
In hands of the Monetary Policy Committee – (MPC) of the Bank of England
Significant effects on business activity:

17. External Influences – The Macro-Economy
Rising Interest Rates:
Likely to depress consumer spending
Increases the cost of borrowing – impacts on investment decisions
Increases existing loan costs – the more highly geared the greater the impact
Affects exchange rate – could impact on sales abroad (exports) or cost of imported resources
Falling rates have the opposite effect