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External Economic influences on business behavior - Coggle Diagram
External Economic influences on business behavior
ECONOMIC OBJECTIVES OF GOVERNMENTS
all governments set targets for the whole economy and these are referred to as 'macro economic' objectives
for example:
Economic growth
– the annual % increase in a country’s total level of output (GDP)
Low price inflation
– the rate at which consumer prices on average, increase each year
Low rate of unemployment
L
ong term balance of payment
s between the imports and exports
Exchange rate stability
– gov try and prevent wild swings in external value of currency in terms of its price compared with other currencies
Wealth and income transfers to
reduce inequalitie
s. Some govs attempt to reduce extreme inequalities of personal income and wealth
some objectives may conflict - e.g. if there is high inflation rate, then policies might be followed to reduce spending. this will lower demand and may result in unemployment
ECONOMIC GROWTH
what is it: an increase in a country's productive potential measured by an increase in its GDP
GDP = the total value of goods and services produced in a country in one year. Real GDP has been adjusted for inflation
GDP is measured in monetary terms., and
inflation
will raise the value of GDP. such an increase is not true economic growth.
Economic growth in the economy occurs when the real level of GDP rises AS A RESULT OF INCREASES IN THE PHYSICAL OUTPUT OF GOODS AND SERVICES IN AN ECONOMY
every economy is striving to achieve consistent economic growth. E.g. USA annual real GDP growth varied from 3% to -2% between 2008 and 2013, and GDP rose
NEGATIVE ECONOMIC GROWTH is when GDP falls.
Economic growth is important to a country for several reasons:
higher real GDP = ++ average living standards if the population increases at a SLOWER rate
higher levels of output often lead to increased employment. which will increase consumer incomes
more resources can be devoted to desirable public sector projects e.g. health and education
absolute poverty can be reduced or even eliminated if growth is substantial enough
businesses shld experience rising demand for their products - this cld depend upon income elasticity of demand tho
higher GDP = more resources available for the government thru greater income from taxes and a decreased burden of social expenditure e.g. reduced unemployment benefits
THE FACTORS THAT LEAD TO ECONOMIC GROWTH
increases in output resulting from technological capacity: governments want to encourage this form of non-inflatioonary economic growth by encouraging business investment and innovation
increases in economic resources such as higher working population or discovery of new resources of oil and gas
increase in productivity: if existing resources can produce a higher level of output then total output will increase. ++ labour productivity with ++skilled and better qualified workforce and greater willingness by workers to accept and work with new tech
THE BUSINESS CYCLE
it is unusual for economic growth to be achieved at a steady, constant rate. instead, economies tend to grow at v diff rates over time. this leads to the business cycle.
four key stages
boom
= a prd of v fast growth with rising incomes and profits. Inflation rises due to v high demand, and shortages of key skilled workers lead to high wage increases. high inflation makes an economy's goods uncompetitive and business confidence falls as profits are hit by higher costs.
the Gov or central bank often increases int rates to reduce inflationary pressure
downturn or recession
= the effect of falling demand and higher int rates starts to bite. Real GDP growth slows and may start to fall. this is technically called a recession. incomes and consumer demand fall and profits reduced.
slump
= a v serious and prolonged downturn can lead to a slump where real GDP falls substantially and house and asset prices fall.
recovery and growth
= all downturns eventually lead to a recovery when real GDP starts to increase again. this is either cos corrective gov action starts to take effect or the rate of inflation falls so that the country's products become competitive once more and demand increases
IS RECESSION ALWAYS BAD?
recession = a period of 6 months or more of declining real GDP
it has serious consequences for most businesses and whole economy's
as output falls, fewer are needed to work.
unemployment increases and as income falls, demand for goods and services declines further.
government tax revenue will fall and less income tax and sales revenue tax will be recieved.
firms producing normal and income - elastic goods will experience reduced demand
however there are also opportunities that well-managed firms may take advantage of:
capital assets such as land and property may be relatively cheap and firms could invest in the expectation of an economic recovery
demand for inferior goods could increase
risk of retrenchment and job losses may encourage improved relations between employers and employees = ++ efficiency
hard decisions may need to be taken regarding closures of factories and offices. this could make the business 'leaner and fitter' and better able to take advantage of economic growth when this eventually starts again.