External Influences The Macro-Economy

External Influences – The Macro-Economy The production and exchange process of the whole economy as opposed to individual markets within the economy Businesses affected by changes in the macro–economy and by government policies

External Influences – The Macro-Economy Government Macro-economic objectives: Control of inflation – 2.0% Maintain full employment – all who want a job can get one! Control of balance of payments Stability of exchange rate Maintain steady economic growth -> 2-2.5%?

External Influences – The Macro-Economy Inflation: a general rise in the price level over a period of time Measured by: RPI – Retail Price Index RPIX = RPI – mortgage interest payments RPIY = RPIX – indirect taxes and local authority tax HICP – Harmonised Index of Consumer Prices (From November 2003)

External Influences – The Macro-Economy HICP – Internationally comparable measure of inflation adopted by all EU countries Geometric rather than arithmetic mean Does not include: housing costs, buildings insurance, mortgage costs Does include: university accommodation fees, tuition fees, stock broker charges Weights determined by expenditure by private households AND all private visitors to UK, and residents of institutional households

External Influences – The Macro-Economy Full Employment: Policies designed to help those who want to work get work: Strong economy National Minimum Wage and changes to welfare benefits ‘New Deal’ and ‘Employment Zones’ Investing in education and training Investing in diversity Source: Adapted from ‘Towards full employment in a modern society’, Department for Work and Pensions, 2001 (http://www.dwp.gov.uk/fullemployment/pdf/NewDealall.pdf)

External Influences – The Macro-Economy Balance of Payments: A record of the trade between the UK and other countries Imports – visible and invisible – purchase of goods and services from other countries which result in payments being made abroad Exports – visible and invisible – the sale of goods and services to other countries which results in payments being received from those countries

External Influences – The Macro-Economy Balance of Payments: Ease with which businesses can sell products abroad Impact on business costs from imports Impact on competition from imports and exports

External Influences – The Macro-Economy Exchange Rates The rate at which one currency can be exchanged for another e.g. £1 = €1.72, £1 = $1.68 Influences the perceived prices of imports and exports and therefore costs and competitiveness

External Influences – The Macro-Economy Exchange Rates: Effects on Business: Appreciation – value of £ against other currencies rises, e.g. £1 = €1.72 to £1 = €1.75 Exports harder to sell abroad - foreign traders have to give up more of their currency to get same amount of £ - export prices appear to rise Imports appear to be cheaper – buyer in UK gets more foreign currency for every £

External Influences – The Macro-Economy Depreciation – value of £ against other currencies falls, e.g. £1 = $1.68 to £1 = $1.60 Exporters benefit – foreign traders get more £ for their currency – export prices appear to fall Importers – have to give up more £ to get same amount of foreign currency – appears import prices have risen Precise effect of both depends on Price Elasticity of demand for imports and exports

External Influences – The Macro-Economy Economic Growth: Measured by Gross Domestic Product (GDP) – the value of output of goods and services in the economy over a period of a year Measured by adding up total incomes (Y) or total expenditure (E) or total output of industry In theory all should be the same! Appropriate growth levels in UK too high - economy overheating, too low - economy stagnating, resources unemployed Actual growth of 2–2.5% seen as being sustainable

External Influences – The Macro-Economy Economic Growth Effects on business: Low growth – business sales low, profit margins tight, excess capacity, orders reduced, excess stock, redundancies High growth – business sales rising quickly, profits rising, skill shortages, inflationary pressure on prices, capacity squeezed, stocks running down

External Influences – The Macro-Economy The Business Cycle: Potential Growth Output Boom Growth Actual Growth Slowdown Excess capacity – Recession Time

External Influences – The Macro-Economy Government Policies: Fiscal Policy – influencing economic and non-economic objectives through variations in public income and expenditure (tax revenue, borrowing and government spending) Affects all aspects of business activity – regulations, infrastructure – roads, transport, etc, health and safety, support for industry, business taxation, employment laws and taxes – income tax and national insurance contributions, pension contributions, etc.

External Influences – The Macro-Economy Monetary Policy: Changes in the rate of interest to help control the level of expenditure in the economy and therefore the level of inflation In hands of the Monetary Policy Committee – (MPC) of the Bank of England Significant effects on business activity:

External Influences – The Macro-Economy Rising Interest Rates: Likely to depress consumer spending Increases the cost of borrowing – impacts on investment decisions Increases existing loan costs – the more highly geared the greater the impact Affects exchange rate – could impact on sales abroad (exports) or cost of imported resources Falling rates have the opposite effect