business 7.5

• GDP is the value of goods and services produced by a country during a certain period or total output of the economy
• GDP growth affects businesses decision making as coincides with increase in demand which business must respond to
• Boom – GDP increasing, consumer demand is strong therefore strong spending on products and services, companies benefiting in terms of sales and more importantly profits!
• in GDP boom business likely to make strategic decision to diversify and enter a new market
• Recession – GDP is declining, consumers are being more cautious about their spending therefore firms start losing business and some close down
• Taxation is the tax paid by businesses on any profits made
• changes in taxation can affect business' decision making e.g increased taxation will reduce profit after tax which can affect strategic investment decisions, if less money left over to invest then business has to prioritise better
• An exchange rate is the price of one currency in terms of another
• A strong pound is BAD for companies that

  export and GOOD for importers -If the value of the pound is rising, businesses

  might want to focus on their UK market as they

  will lose out to cheaper competition abroad, but

  they are also likely to see an influx of cheaper

  imports into the UK
• A weak pound is GOOD for companies that

  export but BAD for IMPORTERS
• Monetary Policy refers to the actions taken by a country’s central bank to influence the overall money supply and achieve broader economic objectives. Such as high employment and price stability, which is often interpreted as maintaining a low and stable rate of inflation.
• Monetary stability means stable prices - low inflation - and confidence in the currency. Stable prices are defined by the Government's inflation target
• inflation refers to the general increase in price levels and the reduction in the real value of money
• Fiscal policy refers to the use of government expenditure and taxation to influence demand
• Monetary policy refers to the controlling of money supply and interest rates to control economic activity e.g increase interest rates consumers may save thus decrease demand of business' products
• causes of inflation -

  Demand Pull – consumer demand pushes

  prices up (boom)

  Opposite deflation – in a recession but rare!

  Cost Push – cost of raw materials or wages

  increases (firms raise prices or…..risk cut in

  profits)
• Globalisation is the increasing trend for individual markets to become unified and worldwide
• advantages of Globalisation - offers businesses opportunities to expand and target international markets
• Disadvantages of Globalisation - increases competition for local businesses and this can reduce market share and sales revenue
• Fiscal Policy – Government Tax and

  Spending Plans

  Government collects taxes

  .Pays

  -Old Age Pension, public services (NHS), education,

  defence and law and order.

  Government usually runs a fiscal deficit

  .Spends more than it raises in taxes

  -Financed by borrowing

  Taxation

  .Income tax, NI, VAT, Excise duty, Corporation

  tax

  -Note excise duty is an addition to VAT on products

  such as petrol, alcohol and tobacco
• Monetary Policy

  .One of the Bank of England's two core purposes is

  monetary stability.

  Monetary stability means stable prices - low inflation - and

  confidence in the currency. Stable prices are defined by the

  Government's inflation target, which the Bank seeks to

  meet through the decisions on interest rates taken by the

  Monetary Policy Committee.

  .Current interest rate is 5.25%

  .Current inflation rate 3.2% (Actual Govt’s target IS 2%!)
• Recession – GDP is declining, consumers are being more cautious about

  their spending, firms start losing business and some close down
• Interest rates

  The cost of borrowing money
• Low interest rate

  • Cheaper to borrow money (less interest to be paid on loans for firms and consumers)
  • Borrowing increases, less is saved
  • Firm – higher profits
  • But….inflation may be a risk!
• High interest rate

  • Repayments on loans gets more expensive
  • Consumers have less disposable income to spend
  • Luxury good purchases decrease
  • Helps cut inflation
• .Inflation is rising

  -Customers more cautious with their money

  -Staff may demand higher wages

  -May lose out to overseas competition (where

  their rate of inflation is lower)

  -Firms will face higher production costs

  -Uncertainty

  -Inflation cannot be used alone
• Open Trade

  .International trade can create opportunities for

  companies

  -EG, lowering costs by replacing a domestic

  supplier with a cheap foreign one.

  -Expansion via exporting (e.g China population 1.4 billion)
• Protectionist Policies (opposite open trade)

  .Used to give a helping hand to domestic producers who without assistance, would not survive. --Tariffs – taxes on imported goods

  How does this effect businesses?

  -Quotas –physical limits on imported goods

  How does this effect businesses?
• Emerging market is use to describe a country in the process of rapid growth and industrialisation
• Opportunities in emerging economies - help business extend product life cycle for it's goods and services, growing numbers of educated middle class consumers=consumer spending, new markets e.g demand for infrastructure personal products education, high-skill low- cost labour (outsource/offshore), potential for joint venture/ acquisitions
• TNCs use localisation to help spread globalisation. They adapt their products to meet the needs of local customers e.g McDonalds menu different around the world