External Influences

1. External Influences The Macro-Economy

2. External Influences – The Macro-Economy • 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

3. 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%?

4. 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)

5. 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

6. 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)

7. 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

8. 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

9. 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

10. 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 £

11. 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

12. 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

13. 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

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

15. 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.

16. 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:

17. 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