1. BUSINESS AND MANAGEMENT MODULE 1 BUSINESS ORGANIZATIONS & ENVIRONMENT

2. Economic Opportunities & Threats  Refers to large scale economic factors affecting the economy as a whole –Government policies –Attitudes and actions in foreign countries –Business and consumer confidence

3. Macroeconomic Objectives  Governments tend to have four objectives: –Control inflation –Economic growth –Reduce unemployment –Acceptable international trade balance

4. Controlled Rate of Inflation  A continual rise in the general prices of the economy  Most countries regard a low or sustainable inflation rate as a necessity for achieving the other economic objectives  There are two main causes of inflation

5. Demand Pull Inflation  Caused by excessive aggregate demand in the economy –Any factor that causes a rise in consumption, investment, government spending or trade will lead to an increase in aggregate demand  If consumer confidence is high, this encourages people to spend money, and firms to spend money on production

6. Cost Push Inflation  Caused by higher production costs leading to a rise in prices (assuming firms want to maintain their profit margins) –Union wage increases –Material costs –Affects of climate on crops

7. Controlling Inflation  By limiting demand-pull and cost-push factors –Domestic government might raise taxes to control the amount of consumption in the economy –It could subsidize local businesses to reduce costs of production –Could pursue “supply-side policies” that improve the productive capacity of the economy (investment in health care/education etc) –Exercise 10 – Zimbabwe’s Inflation Problems

8. Unemployment  Measures the proportion of a country’s workforce not in employment  Influenced by aggregate demand – as production is high, unemployment will be low  Economic costs of unemployment affect both the government and society

9. Unemployment Solutions  Demand-side policies –Directly target increasing the level of aggregate demand  Reducing taxes or increasing government spending  Reducing interest rates  Supply-side policies –Increase the level of aggregate supply –Tend to be more permanent policies

10. Types of Unemployment  Frictional – time lapse between leaving one and finding another  Seasonal – caused by seasonal change  Technological – losing a job to automation  Regional – analysis of different areas (urban vs rural)  Structural – a particular industry suffers  Cyclical – recessionary unemployment; affecting everyone

11. Economic Growth  Refers to an increase in a country’s economic activity over time  Measured by the change in total output known as the GDP  Changes in the economic pattern are typically known as cycles  There are several key phases

12. The Business Cycle Peak Slump Trend line Recession Recovery Economic Activity Time GDP ($)

13. Trading Cycle  Peak – economic activity is at its highest level –Consumer spending and investment is high; low unemployment; good cash flow  Recession – dip in level of economic activity for two successive quarters –Declining aggregate demand; falling exports and lower investment  Slump – bottom of a recession (last decline stage) –High unemployment and low levels of consumer spending; poor cash flow and high bankruptcy rates  Recovery – level of GDP starts to rise again –Consumption, spending and investment begin to rise

14. Mini Case Study Case Study Case Study – ASOS Source: Jones, Hall, Raffo, Business Studies 3 rd Edition, Unit 3, page 37

15. Coping with a Recession  Cost reduction –Efforts to cut utility bills; cheaper warehousing; staff reductions  Price reduction –Influence consumer spending  Non-pricing strategies –Repackaging, special offers, after-sales care  Branding –Consumers maintain loyalty to a brand even during recessionary times; price elasticity  Outsourcing –Lower production costs overseas can help maintain a businesses profit level

16. Barriers to Economic Growth  Lack of infrastructure –Basic electricity, roads, hospitals etc  Lack of technical knowledge  Rapid population growth –High net birth results in too many mouths to feed, which may hinder economic development  High foreign debt repayments –Countries are obliged to meet interest and debt repayments first leaving little for domestic growth

17. Balance of Payments  A record of a country’s money inflows and outflows (over a specific time)  Made up of a capital account and current account –Current  Export and import earnings and expenditures –Capital  Government services, foreign currency etc

18. Current Account  Visible trade balance –International trade in tangible goods (oil, steel cars etc)  Invisible trade balance –Intangible goods such as banking, distribution and insurance

19. Exchange Rates  Measures the value of one currency in terms of another foreign currency  A higher rate (appreciation of currency) means that export prices will be relatively higher, thereby reducing competitiveness  A lower rate (depreciation of currency) means that domestic firms that import raw materials will suffer from having to pay higher prices  Governments try to protect the balance of payments by adjusting exchange rates (through interest rate changes) –Exercise – Exchange rates

20. Protecting Against Currency Fluctuations  Large fluctuations in exchange rates can create difficulties for businesses  Cannot accurately forecast import requirements (costs)  International deals may be postponed until currency fluctuations are minimized  Protectionism –Government policy used to safeguard domestic business –Involves tariffs or quotas for example

21. Examples of Protectionism  Tariffs –Form of tax placed on imported products; gives domestic goods a slight advantage  Quotas –Quantitative limits that prevent too many foreign products entering a country  Subsidies –Payments made by government to a domestic business as a form of aid  Embargos –Physical bans on international trade with certain countries  Standards –Imposition on strict standards (health and safety) on certain imported products