EXCHANGE RATES IS THE VALUE OF ONE CURRENCY IN TERMS OF ANOTHER CURRENCY
Affects the amount of foreign trade
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HIGH ECHANGE RATES (MORE euros to the pound) = UK EXPORTS are expensive... IMPORTS are cheap. HIGH EXCHANGE RATES are bad for exporters as their products are not competitively priced aboard
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LOW EXHANGE RATES (MORE pounds to the euro) = UK EXPORTS are cheap for foreigners... IMPORTS are expensive
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Strong pound and cheaper imports means lower costs for UK businesses importing raw materials from abroad, but bad for UK exporters
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IF a rise in the pound is predicted, businesses can move production abroad to take advantage of low costs
- Cheaper exports = increase demand = more output = more revenue
Exchange rates change all the time!!!!
TAXATION RATES affect economical activity
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People are taxed on income, businesses are taxed on profits, sole traders and partnerships pay income tax and companies pay corporations tax. All these are direct taxes
- Indirect taxes like spending (VAT)
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High taxes = less spending and less expansion of businesses. High taxes affect luxury goods but not required items like bread
LABOUR MARKET
An important resource needed for production. Costs the business in the form of wages
DEMAND for labour - is the firms willingness to employ labour
INCREASE WAGES = INCREASE PRODUCTION COSTS = RAISE IN PRICES = REDUCED DEMAND = REDUCED DEMAND FOR LABOUR
Demand for labour can fall if they can be replaced by machinery
SUPPLY of labour - is the employees willingness to work
INCREASED WAGES = INCREASED SUPPLY OF LABOUR = HIGHER WAGES ATTRACT WORKERS FROM OTHER INDUSTRIES AND UNEMPLOYED PEOPLE
If wages fall, supply of labour will fall
UNEMPLOYMENT is measured by the number of people seeking work
4 types of unemployment:
STRUCTURAL – unemployment due to changes in economy – such as a decline in a major industry e.g. coal mining. Usually concentrated in regional areas.
FRICTIONAL – temporary unemployment due to the worker moving between one job to another
CYCLICAL – Unemployment due to a down turn in the business cycle (lack of demand for labour)
SEASONAL – Unemployment due to seasons (ice cream sellers in the winter for example)
High unemployment affects sales. (Less people in work = people having less disposable income = loss of sales for a business)
ALL OF THE ECONOMICAL VARAIABLES ARE LINKED!!!
Increase in business activity = increase in employment and inflation. Government controls inflation and unemployment through interest rates
High interest rates attract overseas investors (who want a good return on their investment)
This increases demand for sterling and causes the exchange rate to rise
As exchange rates rise, imports become cheaper = price drops so lower inflation
Interest rates rise = more expensive to borrow = less expansion plans for businesses + reduced spending by people = lower demand = reduces inflation
Inflation rates fall due to lack of demand = businesses get smaller and lay off staff
Businesses have to predict economical variables
- So that they can make plans for the future. They need to analyse the economical situation to make predictions for the future.
BUT
The fluctuation of the variables (e.g. inflation, interest rates and exchange rates) makes prediction difficult!
TECHNOLOGICAL CHANGE IS ANOTHER EXTERNAL INFLUENCE
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New technology gets made everyday.
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It’s an opportunity and a threat.
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The technology can increase productivity = opportunity
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A threat would be if the business doesn’t invest in the technology, its competitors might do and therefore causes the business to lose out to rivals
INTERNATIONAL MARKETS
Foreign markets present opportunities and threats
OPPORTUNITIES
- Selling to a larger market is a opportunity of more sales revenue and grow your business
- Allows economies of scale
THREAT
- Foreign businesses may undercut domestic businesses on domestic markets and abroad
BUSINESSES TRADING ABROAD NEED TO BE INTERNATIONALLY COMPETITIVE
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INTERNATIONAL COMPETITIVNESS means the ability to compete with businesses abroad
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The business has to be competitive in terms of price. The business has to keep costs and prices down – this can be done by a productive workforce and efficiency
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Have to also compete in terms of quality
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A good public image is useful – e.g. BP tries to show its environmentally friendly by researching into sustainable fuels
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Businesses need to market their ideas properly and understand the culture of the country they are trading in. Overseas markets have different tastes and values. The market plan has to account for this otherwise the business may not be successful.
- When exporting, firms usually use an agent in the target country to handle distribution. The agent gets the product into wholesalers and retailers
THE E.U
THE EU IS A SINGLE MARKET SO TRADE BETWEEN MEMBER STATES IS EASY!
- No trade barriers between EU member states – this is called a single market.
- No tax to pay when importing goods from other EU countries
- EU has a customers union, so the same custom duties apply in all EU countries
- Single market smoothes out price differences between EU members
- Freedom of movement for all factors of production within the EU. Factors of production = raw materials, finished goods and workers.
- EU citizens can work anywhere in the EU
- EU competition laws prevent monopolies occurring
OPPORTUNITES
- Increase in EU size means more potential for more sales revenue and chance for economies of scales
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All of the EU states together can negotiate far better then the states by themselves = more competitiveness
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Low production costs in the new EU countries such as Poland. Businesses can locate production there to gain competitiveness and cheap labour
THREATS
- Increase in EU sizes means more competitors
- Increased competition when these new EU states join. A new country may have competitive advantage to the rest of the EU states, e.g. Polish farmers can produce products cheaper which threatens British farmers
PAN-EUROPEAN STRATEGIES are DIFFICULT to come up with!!!
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A Pan-European strategy is a strategy that works all over Europe
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The reason for this is because there are cultural differences between countries and different languages (synoptic link to barriers of communication?). The business has to market products in different ways to suit different countries
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Lots of marketing campaigns for one product reduces the economies of scale
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Legal differences exist between the countries
EU INSTITUTIONS PASS LAWS WHICH AFFECT A BUSINESS
1) REGULATIONS – laws that apply to all EU citizens when passed
2) DIRECTIVES – tells member state governments to pass laws that meet specific objectives
3) DECISIONS – laws which apply to a specific country or business
4) RECCOMENDATIONS – not really laws, because they are not binding
GOVERNEMENT POLICY
GOVERNMENT POLICY ALTERS ECONOMIC VARIABLES TO CHANGE THE LEVEL OF ECONOMICAL ACTIVITY.
MONETARY POLICY
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Monetary policy controls the interest rates
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Changing the interest rate to control inflation and exchange rates
- Main objectives of the monetary policy is to:
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Control inflation
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Control economic growth
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Manage the level of unemployment
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Influencing exchange rates
FISCAL POLICY
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Fiscal policy changes taxes and spending to control the economy
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Fiscal policy does TWO things:
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Set tax rates and amount of government spending
- Raising taxes = slows economy down – people spending less and businesses making less profit
- Cutting taxes = increases economy – people spending more + businesses keep more profit
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Expansionary fiscal policy – cut taxes or raise spending = govt borrowing increases
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Contractionary fiscal policy – raise taxes or cut spending = govt borrowing decreases
Example of Expansionary fiscal policy – during high unemployment and economical slow down, the govt may borrow money to spend to increase demand and production of goods
Example of Contractionary fiscal policy - when high demand of goods has pushed production to the limit and a threat of excessive inflation is imminent.
NATIONALISATION IS GOVERNMENT OWNERSHIP AND CONTROL OF BUSINESSES
- Means taking businesses into government ownership. E.g. Northern Rock
PRIVATISATION IS WHEN STATE OWNED BUSINESSES ARE SOLE TO PRIVATE INVESTORS
- During the 1980/1990s a lot of state owned companies were sold off to private investors, e.g. British Telecom, British Gas, British Steel, the water companies and the electricity distribution companies
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The govt sold these businesses to make profit and to improve efficiency of the business
THE GOVT CAN INTRODUCE REGUALTIONS TO CONTROL THE PRIVATISED COMPANIES TO PREVENT THEM RIPPING OFF THE CONSUMER BY LOWERING QUALITY AND RAISING PRICES. THIS IS WORSER IF A MONOPOLY IS CREATED
(A MONOPOLY BUSINESS IS ONE BUSINESS THAT HAS ALL THE POWER – IT CAN AFFORD TO CUT QUALITY AND RAISE PRICES AS THERE ARE NO OTHER COMPETITIORS FOR THE CUSTOMER TO GO TO!)
SOCIAL AND ENVIRONMENTAL INFLUENCES
Social responsibility means being responsible towards the whole of society
Corporate social responsibility is the voluntary role of a business in looking after society and the environment
Businesses have a special responsibility to their stakeholders (everyone affected by the business). They are employees, suppliers, creditors, customers, shareholders and local communities.
EMPLOYEES
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Legal responsibilities to staff (E.g. provide a safe working environment, no discrimination based on race and gender, giving lunch breaks, holidays etc)
- Responsibility to train employees
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Can choose to give a better wage than minimum wage
SUPPLIERS
- Treat the suppliers fairly – by paying on time and being honest
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Build a long term relationship with suppliers by offering long term contracts. Grants loyalty
CUSTOMERS
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Treating them fairly will build up customer goodwill. Good customer service, good quality products and reasonably prices goods will ensure them coming back
LOCAL COMMUNTIY
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Can be responsible by keeping jobs secure and using local suppliers
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Avoid noise pollution, air pollution and excess traffic on local roads
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Earn goodwill and a good reputation by supporting the local community e.g. through sponsoring schools or charity donations
HOWEVER – some people think the business should only be responsible to their shareholders and no one else!
BUSINESS ETHICS HELPS BUSINESSES MAKE SOCIALLY RESPONSIBLE DECSIONS
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Ethics are a shared set of attitudes and morals
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It’s about doing the right thing
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Corporate culture affects the businesses ethics
SOCIAL AUDITS accounts for social and ethical performance of a business
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Assess the social impact and ethical behaviour of a business in relation to its aims and those of its stakeholders.
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Before a social audit is done, the business needs clear social objectives
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The actual audit is done by an external organisation.
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The results are then put into the businesses strategic review and planning processes so the business can make changes to improve social performance
Environmental issues create cost and opportunities
Opportunities
- Increased awareness of green issues creates demand for environmentally friendly products
- Possible USP over competitors
Costs
- Fines for businesses who pollute more than a certain level – done by taxation
- Has to follow Environment Act 1995 – businesses cant pollute waterways or land without a permit
- Most costs are external costs (they affect society, not the business itself like air pollution)
Environment audit shows how a business is affecting the environment
Shows if the business is meeting environment targets
Shows where they need to change their waste management process
PRESSURE GROUPS TRY TO INFLUENCE GOVERNMENT POLICIES AND BUSINESS DECISIONS
Their aim is to influence the people who have the power to make decisions
They use different methods:
ACTION DESCRIPTION
LOBBYING takes time!
- The pressure group wants the politician on their side, but it takes time
- Usually politicians give the people what they want, so the pressure group has to show the politician that the people agree with the group then the politician will change their minds
DIRECT ACITON is a very powerful tool against a business
- Businesses hate negative publicity. It can lead to lower sales and loss of reputation
- Can take in the form of picketing protest outside the factory, a boycott or illegal violent action against a businesses property
- Same thing with politicians! If the business thinks the people agree with the pressure group, it may have to give into its demands otherwise it could be bad for the business (loss of sales to competitors, bad public image)