3.7.5 Analysing the external environment to asses opportunit

• Economic Factors include?

  • GDP
  • Taxation
  • Exchange Rates
  • Inflation
  • Fiscal and monetary policy
  • More open trade or protectionism
• Gross Domestic Product = a measure of economic activity (the total value of a countries output) over a given period of time, usually provided as quarterly or annual figures.
• Real GDP is just GDP but with inflation factored in.
• Direct and Indirect Tax = taxes that firms pay in the UK
• Corporation Tax = a form of direct taxation, which is a tax on the trading profits made by a business over the course of their financial year as well as any profit from investments and disposal of assets.
• Value Added Tax = this is a form of indirect taxation, collected by businesses for the government. It is a tax placed on the sale of goods and services in the UK - it is a type of 'consumption tax'
• Causes of the business cycle (economic cycle)?

  • Changes in firm confidence
  • Periods of inventory building and then de-building(due to seasonal factors)
  • Irregular patterns of expenditure
  • Confidence in the banking sector
• Injections in the economy?

  • Investments
  • Government Expenditure
  • Exports
• Withdrawals from the economy?

  • Savings
  • Taxes
  • Imports
• Exchange Rates = the rate between two distinct currencies
• Currency demand = demand for a currency comes from a need to purchase the currency of a particular economy
• Sources of currency demand include?

  • Exports of goods
  • Exports of services
  • Inflows of foreign investment
  • Speculative demand
  • Official buying of sterling by the BoE
• Currency Surplus = supply of currency comes from economic agents needing overseas currency in exchange for their own.
• Sources of currency supply?

  • Imports of goods
  • Imports of services
  • Outflows of foreign investment
  • Speculative selling
  • Official selling of sterling by the BoE
• Free floating exchange rates?

  • Rate determined purely by market demand and supply
  • No government intervention
  • If £ is weak then good for exporters but bad for importers
• Managed exchange rate?

  • Government may seek to influence the market value of the currency
  • Intervention is done by the BoE
  • Uses stocks of gold and other foreign currencies
  • May change short term interest to manage the external value of the pound
• Fully Fixed exchange rate?

  • Central target for the exchange rate
  • No fluctuations permitted
  • Occasional revaluation or devaluation when economic fundamentals demand on
  • Central bank intervention to maintain the currency

  E.g. eurozone countries locked their exchange rates until the euro was introduced
• Inflation = a measure of how much the price of goods and services have gone up over time
• Consumer Price Index (CPI)?

  • The main measure of inflation for the UK
  • The Government has set the BoE a target for inflation using CPI at 2%
  • Aim of the target is to achieve sustained period of low and stable inflation
  • Low inflation = price stability
• Effect of inflation on consumers?

  • As prices rise (inflation) money loses its value and people lose confidence in money as the value of savings is reduced
  • Inflation can get out of control - price increases lead to higher wage demands as people try to maintain living standards
  • Consumers on fixed incomes (pensions) lose out most
• Positive effects of inflation on firms?

  • Industry-wide price rises enable revenues to grow
  • Makes using debt as a source of finance cheaper in real terms
• Negative effects of inflation on firms?

  • If costs are rising then a business may not be able to pass costs onto customers (depends on PED)
  • Inflation can disrupt business planning and lead to lower investment
  • Rising inflation often leads to higher interest rates - reduces Econ. growth and can lead to a recession
• Government Policies = economic policies are the actions taken by the chancellor of exchequer and the government to meet their economic objectives
• Fiscal Policies?

  • Expansionary - aiming to increase Econ activity by borrowing more than gov receives in taxation
  • Contractionary - aiming to decrease Econ activity by spending less than the gov receives in taxation and using it to slow Econ growth
• Monetary Policies?

  • Refers to the availability of credit, money and the price of credit
  • In UK it is down through the BoE's Monetary Policy Committee (MPC)
  • MPC meets every month to decide on interest rates
• Quantitative Easing = a tool that central banks use to inject digital money directly from the economy should it be weak or failing - create digital money and use it to buy government debt In the form of bonds
• Supply-Side Policies?

  • Privatisation
  • Nationalisation
  • Deregulation
  • Freeing up labour laws
  • Incentives to work
  • Immigration
  • Education & Training
  • Transport infrastructure
• Protectionism = involves any attempt by a country to impose restrictions on the open trade of goods and services

  • main aim is to cushion domestic firms and industries from overseas competition
• Open Trade = involves the removal or reduction of barriers to international trade
• Main forms of protectionism?

  • Tariffs - tax or duty on imports
  • Quotas - volume limits on imports
  • Export Subsidies - incentivise domestic production
  • Domestic Subsidies - government help for domestic firms struggling financially
• Why governments protect?

  • Develops new trade advantages
  • Improves the balance of trade
  • Employment protection
  • Desire to increase gov revenue from taxes
• Globalisation = the process through which an increasingly free flow of ideas, people goods etc leads to the integration of economies and societies.
• Globalisation involves?

  • Expansion of trade in goods and services between countries
  • Increase in FDI by multinational countries (MNC)
  • Development of global brands
  • Shifts in production
  • Increased levels of labour migration
• Drivers of globalisation?

  • Rising living standards
  • Less protectionism
  • Lower transport costs
  • Digital communication
  • Diverging consumer culture
  • Market liberalisation
• Advantages of globalisation?

  • Opportunities for trade and investment overseas
  • Access to cheaper goods and services
  • Lifted millions out of poverty
  • More intense competition
  • Bigger export markets (economies of scale)
• Disadvantages of globalisation?

  • Increased unemployment for firms that lose demand due to lower cost competition
  • Rising income and wealth inequality
  • Surge of inward migration of labour can bring economic and social tensions
  • Loss of cultural diversity
  • Environmental damage