CIE IGCSE Business Studies Topic 6 – Economic Issues

Economic Issues Key Terms:
GDP: Gross Domestic Product is the total value of output of goods and services in one country in one year
Unemployment: When people want to find work but cannot find a job, they’re unemployed
Inflation: The increase in the average price levels of goods and services over time
Real income: The value of income, and it falls when prices rise faster than money income
Exports: Goods and services sold from, one country to other countries
Imports: Goods and services bought in by one country from other countries
Direct taxes: Paid directly from incomes- e.g income tax or profit tax
Indirect taxes: Added to the prices of goods and taxpayers pay the tax as they purchase the goods – e.g
VAT
Disposable income: The level of income a taxpayer has after paying income tax
Monetary policy: Change in interest rates by the government, or central bank – e.g European Central Bank
Fiscal policy: Any change by the government in tax rates or public-sector spending
Import tariff: The tax on an imported product
Import quota: The physical limit to the quantity of a products that can be imported
: The term now widely used to describe increases in worldwide trade and movement of
people and capital between countries
Exchange rate: The price of one currency, in terms of another – e.g £1: $1.50
Multinational business: Those with factories, production, or service operations in more than one country.
These are sometimes known as TRANSNATIONAL BUSINESSES
Unemployment:
We want unemployment to be low and falling, with more people in jobs earning a wage,
because there will be more of a demand for goods and services. However, high
unemployment can also be good because people are willing to accept a lower wage to get a
job, and so as a result labour costs fall.
Direct Taxes:
Businesses want income tax to be low because people will have more disposable income
and therefore can spend more on their products and services.
Corporation Tax:
Businesses want corporation tax to be low as they can give their shareholders more
dividends and/or get more retained profit and reinvest it in the business.
Interest Rates:
If interest rates rise, then the business will have to pay more in interest from the loans they
are repaying, therefore meaning less loans being taken out, and as a result less products
bought.
If interest rates fall, then the business will have to pay less in interest from the loans they
are repaying, which is more beneficial for the business.
Economic Issues
Inflation• Inflation is the rise in the average price level
• If the UK inflation rate goes up consumers will feel poorer as their earned income will
not go as far – real incomes have fallen
• The Bank of England have a target of 2%+/-1% inflation
When inflation rises the prices of goods and services rises for households but also the price of raw
materials and components rises for firms, so a firms profit margins don’t necessarily rise just
because they are now charging a higher price.
2010
Inflation Rates 5%
2011
2012
3%
1%
– Prices are not falling.
They are rising at a
slower rate.
The Business Cycle/Economic Cycle Graph
The Business Cycle
– GDP in an economy fluctuates over time
1. Growth – GDP is rising, and unemployment is falling
2. Boom – too much spending, the economy is growing quickly – sharp rise in inflation
3. Recession- negative economic growth (two consecutive quarters) – unemployment
rises as spending and confidence falls)
4. Slump- serious and drawn-out recession unemployment will be high and prices may
fall
Government Intervention
Business Cycle: GDP fluctuation over time
Interest rates and taxes:
– High or rising interest rates are bad for businesses because they reduce
consumers/households’ disposable income, and so they have less to spend on the
businesses products.
o Also, if your product is normally bought using a loan (e.g., a car) then it is likely
that less loans will be taken out and so demand for your product falls.
o The costs of business loans also increase so firms are less likely to borrow
money to expand their business.
▪ High or higher taxes have similar negative effects
Interest rates are the cost of borrowing but they are also the rewards for saving.
Impact of higher taxes:
1. Higher income tax reduces workers disposable income
2. Higher corporation tax reduces firms retained profits
3. Higher VAT increases a firms cost of production and leads to price rises depending on
the PED of the product or service
PED- Price Elasticity of demand
VAT- Value added tax
Ethical Issues – Plan for 6-mark PPQ
1. JNK makes pottery including plates and bowls for the mass market, using batch production. Quality control is
important. JNK has 30 unskilled employees, who are all paid the legal minimum wage. JNK uses job
enrichment to keep workers motivated. Due to an increase in demand, JNK is planning to replace its old
machines with new technology. The Managing Director thinks that some of the low-cost materials purchased
by JNK are produced using child labour. One of JNK’s competitors has recently introduced a new ethical
policy.
A) Do you think JNK should become more ethical? Justify your answer.
PLAN –
–
K1
Ap 1
An 2
Eval 2
One reason why
One reason why not
Use data
Impact on business
YES
–
With an increased in demand, it gives JNK a chance to redefine the market
If they kept using child labour, then consumers may object and therefore lead to a loss in profit
Employees may leave and go to a competitor which may mean that JNK would have to increase pay, so
the employees stay.
Customers may boycott the business [k] leading to lower brand image / reputation [an] which may
decrease market share [an]
Many customers want to support ethical businesses [k] so may be willing to pay higher prices [an] for its
pottery [app] leading to higher revenue [an]
NO
–
Could lose sales to competitor [k]
Materials purchased from unethical sources may be cheaper [k]
May not be able to find suitable (ethical) suppliers [k]
Shareholders OR owners may want higher profit [k]
Ethical Issues – 6-mark PPQ
1. JNK makes pottery including plates and bowls for the mass market, using batch production. Quality control is
important. JNK has 30 unskilled employees, who are all paid the legal minimum wage. JNK uses job enrichment to
keep workers motivated. Due to an increase in demand, JNK is planning to replace its old machines with new
technology. The Managing Director thinks that some of the low-cost materials purchased by JNK are produced
using child labour. One of JNK’s competitors has recently introduced a new ethical policy.
(a) Do you think JNK should become more ethical? Justify your answer.
JNK should become more ethical because if they JNK keep using child labour, then consumers may object and that
would therefore lead to a loss in profit from the sales of the pottery for the business. On the other hand, I think that
JNK should consider the benefits it has when using the low-cost materials because the materials purchased from
unethical sources may be cheaper which is particularly important as the ability to have low prices is very important
in the mass market compared to a niche market. On the whole as JNK produces for a mass market the customers can
easily purchase pottery from a competitor. Consequently, customers may boycott the business leading to lower
brand image and reputation which may decrease market share for JNK.
Environmental Issues – Oil Spills
External Costs:
–
Loss of habitat/ sea life meaning fewer fishing reserves
Loss of Life meaning
Loss of food
Loss to local businesses
Loss of Oil that could be used to heat and maintain the running of a country
Pollution
Money lost in clean-up
Tourism effected as beaches are destroyed
House prices go down as there isn’t an attraction to that area
Government Action:
– Introduce legislations and regulations
o Such as quotas
Pressure Groups:
– Corporate Watch a “not-for-profit co-operative providing critical information on the
social and environmental impacts of corporations and capitalism.”
– Purpose –
o They investigate exploitative bosses, landlords and property developers,
companies profiting from prisons, deportation flights, animal exploitation and
more, as well as the mega-corporations devastating our planet – and the wider
systems of power and profit they work within.
– They investigate and share unethical decisions and policies within businesses and
publish them on their websites. Scandals include, Astro-Zeneca, Pfizer, Barcelo.
Business and the International Economy
Globalisation – the world is becoming increasingly connected because of trade and working
practices.
It has resulted in:
– More multinational companies
– Greater movement of employees, goods, and services between countries.
Globalisation has meant increased competition from overseas for UK businesses.
– This may mean demand falls for the UK goods and services
+ UK businesses can benefit by buying imports from overseas and selling them on to
the UK consumers (e.g., supermarkets) or importing cheaper raw materials and
components so reducing their costs of production
UK businesses can access new overseas markets and increase their revenue by offering:
– Better designs, well respected and luxury brands
– Higher quality products – high added value
– Lower prices
Tariff- tax on imports – Increase the price of the product, lowering demand for imports.
Quotas- a limit of the amount of a product that can be imported to the UK – increases demand for UK
products.
Exchange Rate – The price of one currency, in terms of another – e.g., £1: $1.50
– The price for a currency can rises or fall. For example, the new exchange rate might
be £1; £1.6. This would be referred to as the £ getting stronger or appreciating in
value.
– The opposite of this would be known as a weak £ or the value of the £ depreciating.
Globalisation
The world’s economies working together to provide and produce goods and services.
– Opportunity for companies to produce goods and services cheaper using lower
labour costs of less developed countries
+ Less jobs in UK because of manufacturing moving overseas.
Exchange Rates:
An importing firm will have higher costs if the exchange rate of its currency is
weak/depreciates – meaning its prices may increase making it less competitive.
But will have lower costs if its currency is strong/appreciates meaning it can decrease prices
making it more competitive.
An exporting firm will be able to reduce its prices if its currency appreciates/strengthens
which may make it more competitive but may have to raise prices if its currency
depreciates or accept a lower profit margin.
How to remember!!- SPICED
Stronger
Pound
Imports
Cheaper
Exports
Dearer
Multinational Companies
A MNC is a company that has operations in more than one company.
If a business, simply exports to other countries this doesn’t make it an MNC. It needs to
have shops, factories etc in other companies.
Impact on the host country:
+ Provision of significant employment and training to the labour force in the host
country
+ Transfer of skills and expertise, helping to develop the quality of the host labour force
+ MNCs add to the host country GDP through their spending, for example with local
suppliers and through capital investment
– Domestic businesses may not be able to compete with MNCs and some will fail
– MNCs may not feel that they need to meet the host country expectations for acting
ethically and/or in a socially responsible way
– MNCs may be accused of imposing their culture on the host country, perhaps at the
expense of the richness of local culture. Might MNCs reduce cultural diversity around
the world as they continue to expand, particularly into less developed or developing
countries?
…