Chapter 27: The Wider Economy and its Impact on Businesses

The broader economy can influence businesses either directly or indirectly

through their customers. Factors like the business cycle or government
policies, such as changes in interest rates, can cause external changes
that businesses have no control over. However, businesses can decide
how to respond to these changes.

Key Stages of the Business Cycle:

- Economic Growth: The economy doesn’t grow consistently every year.

There are periods where there is no growth or even a decrease in GDP
(Gross Domestic Product).

- GDP: Represents the total value of all goods and services produced in a
country within a year.

- Growth: Characterized by rising GDP, decreasing unemployment, and

improved living standards.

- Boom: Occurs when there is excessive spending, leading to rapidly rising

prices and a shortage of skilled workers.

- Recession: Caused by reduced spending, leading to a decline in GDP,

lower demand, and reduced profits for businesses.

- Slump: A prolonged and severe recession, with high unemployment and

possibly falling prices.

Impact on Businesses from Changes in Employment, Inflation, and GDP:

- Employment: Changes in employment levels can influence a business’s

ability to hire new employees and affect customer incomes. Higher
unemployment might make it easier to recruit employees, but also
reduces customer spending power, leading to lower sales.

- Inflation: Rising inflation increases business costs, potentially leading to

higher product prices and reduced sales, especially for non-essential
goods.
- GDP: An increasing GDP generally benefits businesses through higher
sales as more people have jobs and incomes rise. However, falling
unemployment might make hiring more difficult.

Definitions:

- Inflation: The ongoing increase in the average price of goods and

services.

- Unemployment: When people who are willing and able to work cannot
find jobs.

- Economic Growth: An increase in a country’s GDP, meaning more goods

and services are produced compared to the previous year.

- Balance of Payments: The difference between a country’s exports and

imports.

Government Economic Objectives:

- Low inflation

- Low unemployment

- Economic growth

- Balanced trade (exports vs. imports)

Low Inflation:

Inflation involves a general increase in prices over time, which can lead to
several problems:

- Wages may not keep up with rising prices, reducing real income.

- Goods produced domestically become more expensive.

- Businesses may be less inclined to expand and create jobs.

Low Unemployment:

Unemployment arises when people are willing to work but cannot find
jobs, leading to:

- A loss of potential goods and services.

- Government expenses for unemployment benefits.

Economic Growth:

Economic growth occurs when the total output of goods and services in a
country increases. Without growth, issues include:

- Unemployment due to reduced output.

- A decline in living standards, making people poorer.

- Business owners may avoid expanding due to lower consumer spending.

Balance of Payments:

This records the difference between a country’s exports (goods and

services sold abroad) and imports (goods bought from other countries). A
deficit, where imports exceed exports, can lead to:

- A shortage of foreign currency, necessitating borrowing from abroad.

- Depreciation of the country’s currency, making imports more expensive

and exports cheaper.

Government Economic Policies:

Governments influence the economy through:

- Fiscal Policy: Changes in tax rates or public spending.

- Monetary Policy: Adjustments in interest rates.

- Supply-Side Policies: Measures to increase competitiveness, such as

privatization and improved education.

Income Tax:

A tax on individual earnings, usually progressive, meaning higher earners

pay a higher percentage. An increase in income tax reduces disposable
income, leading to decreased spending and potentially lower sales for
businesses.

Profits/Corporation Tax:
Tax on business profits, which can reduce the funds available for
reinvestment and expansion, and decrease returns for business owners.

Indirect Taxes:

Taxes added to the price of goods (e.g., VAT). These can reduce demand
for certain products and increase production costs.

Import Tariffs and Quotas:

Governments may impose tariffs (taxes) on imports or set quotas (limits)

to protect domestic industries. These measures can increase costs for
businesses that rely on imported materials.

Government Spending:

Government revenue from taxes is often spent on sectors like education,

health, and infrastructure. Increased spending in these areas can boost
economic growth, create jobs, and increase GDP.

Monetary Policy – Interest Rates:

Interest rates, set by governments or central banks, affect the cost of

borrowing. Higher rates can:

- Increase business costs for those with loans.

- Reduce consumer spending due to higher loan payments.

- Attract foreign investment, leading to currency appreciation.

Supply-Side Policies:

These policies aim to increase national industry competitiveness by

promoting privatization, improving education, and encouraging
competition.

Chapter 28: Environmental and Ethical Issues

Impact of Business Activity on the Environment:

Businesses can affect the environment in various ways, such as:

- Emissions from jet engines.

- Factory pollution.

- Waste disposal contaminating water bodies.

- Fossil fuel consumption contributing to global warming.

Social Responsibility:

Businesses are encouraged to consider the broader impact of their

activities, not just focus on profits. Adopting environmentally friendly
practices can reduce profits but also address global issues like climate
change.

Pollution Control and Government Regulation:

Governments can regulate business activities to protect the environment

by:

- Banning operations in sensitive areas.

- Imposing pollution permits that limit allowable pollution levels.

- Levying additional taxes on polluting businesses.

Ethical Issues in Business:

Businesses may face ethical dilemmas such as:

- Offering or accepting bribes.

- Employing child labor.

- Sourcing from suppliers that harm the environment.

- Fixing prices with competitors.

- Paying large bonuses while laying off workers.

Responding to Ethical Issues:

Businesses may adopt ethical practices by:

- Avoiding child labor.

- Ensuring good working conditions.

- Balancing profitability with social responsibility.

Chapter 29: Globalization

Globalization:

Globalization refers to the increasing worldwide trade and movement of

people and capital. It is driven by:

- Free trade agreements.

- Improved transportation and communication.

- Rapid industrialization in emerging markets.

Opportunities and Threats of Globalization for Businesses:

- Opportunities: Businesses can expand into new markets, import goods

for local sale, or produce in countries with lower costs.

- Threats: Increased competition from imports and multinational

companies, and potential loss of employees to higher-paying international
competitors.

Import Tariffs and Quotas:

Governments may use tariffs and quotas to protect domestic businesses

from foreign competition, a practice known as protectionism.

Multinational Businesses:

A multinational business produces goods or services in more than one

country. Benefits include:

- Lower production costs.

- Access to raw materials.

- Avoiding trade barriers.

- Expanding market share.

Impact on Stakeholders and Countries:

- Stakeholders: May benefit from increased dividends, job opportunities,

and higher tax revenue for governments.

- Countries: Gain jobs, investment, and tax revenue, but may also face
drawbacks like reduced local business sales and profit repatriation.

Exchange Rates:

The exchange rate is the value of one currency compared to another.

Fluctuations in exchange rates can affect businesses by:

- Making exports cheaper or more expensive.

- Increasing or decreasing import costs.